10-K

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)
ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                             to

Commission File Number 000-30469

deCODE genetics, Inc.
(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)	04-3326704 (I.R.S. Employer Identification No.)
Sturlugata 8, Reykjavik, Iceland (Address of principal executive offices)
+ 354-570-1900 (Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
None	None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of Class)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

        Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Act). Yes ý    No o

        The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the closing price of the common stock ($3.15 per share), as of June 30, 2003, was $168,635,779.

        Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of March 1, 2004.

Class	Number of Shares
Common Stock, $.001 par value	54,492,195

PART I

Item 1. Business

Overview

        Based in Reykjavik, Iceland, deCODE is a population genetics company developing drugs and DNA-based diagnostics based upon its discoveries in the inherited causes of common diseases. Our population approach and resources have enabled us to identify genes directly involved in the development of many of the diseases that pose the biggest challenges to public health. We are focused on turning these findings into a pipeline of products which we believe will be able to combat the causes of disease, not just the signs and symptoms.

        Our primary focus is on the discovery and commercialization of novel therapeutics based on genetic information identified in our population-based gene discovery work. Through the acquisition in 2002 of MediChem Life Sciences and its subsidiary, Emerald BioStructures, now our pharmaceuticals and biostructures groups, we have integrated capabilities for applying genetics findings to the development of drugs, both through our own programs and in alliance with corporate partners. We are also applying the links we have identified between genetic factors and disease to create genetic diagnostic tests that can be used to identify patients with increased risk of developing a disease or to predict which patients will respond well to a given drug therapy. We believe that such tests will become a standard part of healthcare within the coming decade, making it possible to gauge individual predisposition to particular illnesses and to design effective prevention strategies; to complement traditional clinical diagnosis; and to aid in the selection of appropriate therapeutics for patients. We are also marketing software systems we have developed for making correlations between genetic variation and disease and drug response.

        The products we are developing include drugs, genetic diagnostic tests designed to identify genetic markers associated with elevated risk of developing a disease, and pharmacogenomic tests, which measure factors associated with differences in how individuals respond to a given drug therapy. Our drug and diagnostic development programs are based upon genes and related targets we have identified through our population genetics research. We believe that these diseases represent large market opportunities for therapeutic and diagnostic products because their causes are not fully understood; current treatments are of limited effectiveness; there are currently no approaches to tailor treatment to cause; and large numbers of individuals are affected by these diseases.

        Utilizing our integrated population data and genotyping capabilities, we are able to efficiently conduct genome- and population-wide scans for the inherited causes of disease. Through the discovery of the principal genetic factors that predispose certain people to disease, we are able to gain an understanding of the key biological mechanisms involved in disease processes. These discoveries can also be used to develop DNA-based diagnostics for gauging disease predisposition, and to discover therapeutic compounds that may be able to disrupt the disease process by counteracting the basic mechanisms of disease.

        Our strategy is to apply our own resources to turn discoveries from our internal projects into therapeutic or diagnostic products; to license our discoveries to others who will be required to pay us royalties on sales of any products developed using the results of our gene discovery programs; and to enter into collaborative arrangements for the development and marketing of products from these programs. While we work with partners to develop drugs in some of our programs, we also have the capacity to develop novel drug compounds internally utilizing our drug development capacity in Reykjavik and Chicago. Moreover, in our discovery programs we have identified proteins associated with elevated risk of developing a disease against which drugs have already been developed for other conditions by other companies. We expect to seek to license these compounds from the companies that developed them. If we can do this successfully, we would be able to eliminate the customarily lengthy process of developing new compounds and instead enter directly into clinical trials to test for the

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efficacy of compounds in treating these conditions. This strategy has already been implemented with respect to our drug development program in myocardial infarction, where we have licensed worldwide rights to a compound originally developed by Bayer HealthCare AG for a different indication. The compound is now referred to as DG031. A further description of the myocardial infarction genetics program and our drug discovery and clinical development efforts are provided in the section "An Example of our Approach: Myocardial Infarction."

        In addition to conducting work on our targets in our collaborative and internal programs, our pharmaceuticals group provides drug discovery work for our fee-for-service customers. Our other service offerings include protein crystallization products and protein structure analysis contract services, through our Seattle-based biostructures group; pharmacogenomics and clinical trials services through our wholly owned subsidiary Encode; and DNA analysis services through our genotyping laboratory in Reykjavik.

        In Iceland, we have comprehensive population resources that enable our scientists to efficiently conduct genome- and population-wide scans to identify key genes and gene variations contributing to complex diseases. These include a computerized genealogy database covering the entire Icelandic population and going back as far as 1,100 years to the settlement of the country; genotypic and disease data from more than 100,000 volunteer participants in more than 50 different disease programs; one of the highest-throughput DNA analysis facilities in the world; and in-house developed statistical algorithms and associated computer programs for rapidly analyzing data from large numbers of individuals to identify genetic factors that correlate with specific diseases.

        As of the end of 2003, we had identified fifteen genes involved in eleven common diseases and located genes involved in almost thirty common diseases. A disease gene is said to be located when we have discovered the approximate location in the human genome of a DNA sequence encoding a gene that seems to confer significantly increased risk of developing a particular disease. A gene is said to be identified when we have pinpointed the gene sequence accurately and found evidence of variations in the gene or a DNA sequence linked to this gene, which potentially influence the production of a protein that the gene encodes. The protein produced by transcription of the disease gene interacts with multiple other proteins, which form a so-called "pathway". The term "disease pathway" is used to describe the cascade of protein interactions that lead to development of the disease in the body. Our goal is to develop therapeutic drugs which can be administered orally, often referred to as small molecule drugs, which are capable of binding with molecules on the surface of human cells or of penetrating cells and binding with proteins, impacting the disease pathway to protect the patient against effects of the disease. In all of the diseases for which we have identified genes, we have identified "druggable targets", i.e., proteins for which medicinal chemists have shown that small molecule drugs can be made which either increase or decrease—as needed—the activity of the target protein. These drug targets are either products of the disease genes themselves or are located within the disease pathway.

        We are applying our discovery of disease genes, disease pathways and drug targets to the development of drugs and diagnostics in many of the common complex diseases. Unlike the rare "Mendelian" diseases, often caused by a single variant of a single gene, the common complex diseases impact at least 1-2% of the population and show a complex inheritance pattern, which can only be identified by looking at large volumes of patient data and extended genealogies.

        Along with our in-house programs in drug discovery and DNA-based diagnostic development, we have formed corporate alliances across our business. Our partners include Roche, Merck, IBM and Affymetrix.

        In this report, references to we or us refer to deCODE genetics, Inc., our wholly owned subsidiary, Islensk erfdagreining ehf., and its wholly-owned subsidiaries, including Encode ehf., an Icelandic private limited company. After the closing of the acquisition of MediChem Life Sciences Inc. (MediChem) on March 18th 2002 we or us also refers to MediChem, a wholly owned subsidiary of deCODE

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genetics, Inc., and to MediChem's wholly owned subsidiaries, including Emerald BioStructures. Dollar amounts are in thousands except share and per share amounts, unless otherwise noted.

        deCODE was incorporated in Delaware in 1996. Our internet address is www.decode.com. We make available free of charge through our internet website our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with the Securities and Exchange Commission.

Gene Discovery

        Our product development begins with gene discovery. Through our identification of the inherited components of common diseases, we are identifying novel markers for diagnostics and targets for drug development. A description of the scientific background to our work can be found below in the section captioned "Scientific Background." A description of our population approach to gene discovery can be found below in the section captioned "Population Approach and Resources." A brief description of some of our discovery programs and achievements follows here.

        Cardiopulmonary Diseases.    We are studying the genetic basis for a variety of common cardiovascular conditions, and have identified novel genes that we believe contribute to increased risk of developing stroke, myocardial infarction (heart attack), hypertension (high blood pressure), PAOD, and asthma. We have located genes in chronic obstructive pulmonary disease (COPD).

        Metabolic and Other Diseases and Conditions.    We have identified genes that we believe increase disease susceptibility in obesity, osteoarthritis, osteoporosis and non-insulin-dependent diabetes, and have located genes in familial combined hyperlipidemia and longevity. We are also studying nocturnal enuresis.

        Autoimmune Diseases.    We are currently studying the genetic basis of autoimmune diseases such as atopy, inflammatory bowel disease (Crohn's and ulcerative colitis), insulin-dependent diabetes, psoriasis, rheumatoid arthritis and ankylosing spondilytis. We have located genes in atopy, psoriasis and psoriatic arthritis, and rheumatoid arthritis.

        Central Nervous System Diseases.    We are studying the genetic basis for psychiatric and central nervous system diseases including Alzheimer's disease, anxiety, bipolar disease/depression, familial essential tremor, multiple sclerosis, Parkinson's disease, schizophrenia, autism, attention deficit and hyperactivity disorder, dyslexia, restless leg syndrome, and migraine. We have identified a strong link between schizophrenia and the Neuregulin 1 gene and confirmed this link in association studies in other populations. We have located genes in Alzheimer's disease, Parkinson's disease, anxiety disorder and depression, and familial essential tremor.

        Eye Disease.    We are studying the genetic basis of a range of eye diseases, including macular degeneration, glaucoma, cataracts, retinitis and myopia. We have located a gene linked to macular degeneration.

        Women's Health.    We are studying the genetic causes of women's health problems including endometriosis and pre-eclampsia. We have located a susceptibility gene for pre-eclampsia on the short arm of chromosome 2.

        Cancer.    We are conducting research on the genetic basis of many forms of cancer, including breast cancer, lung cancer, melanoma, renal cancer, colon cancer, testicular cancer, thyroid cancer, and prostate cancer. We have identified a gene linked to prostate cancer.

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An Example of our Approach: Myocardial Infarction

        Our work in myocardial infarction offers one concrete example of how our population genetics approach is pointing the way towards the development of new, more effective drugs targeting the root biological causes of disease. In this case deCODE discovered a disease gene and acquired a worldwide exclusive license for a drug which targets the disease pathwaybut was developed to treat a different disease. Based on the fact that this drug has already been tested in Phase I and Phase II clinical trials we will thus be able to bypass several stages of drug discovery and development and enter directly into Phase II clinical trials for myocardial infarction.

        Cardiovascular diseases are the leading cause of death and disability in the developed world, with an increasing prevalence due to the aging of the population and increased incidence of obesity. Two of the most common cardiovascular diseases are myocardial infarction—or heart attacks—and stroke. More than 1 million deaths in the U.S. alone were caused by myocardial infarction and stroke in 2003. The process underlying myocardial infarction and stroke is generally attributed to atherosclerosis, which is literally a hardening of the interior of the arteries due to a buildup of different fatty substances on the arterial wall, often referred to as plaque.

        The chronic inflammation of the arterial wall with corresponding buildup of plaque may constrict blood flow through the artery and sometimes lead to ruptures or erosion of the plaque. The rupture causes formation of blood clots that can break off and travel to another part of the body. If the blood clot blocks a blood vessel that feeds the heart, it causes myocardial infarction. If it blocks a blood vessel that feeds the brain, it causes a stroke. If blood supply to the arms or legs is reduced, it can lead to PAOD, which causes difficulty in walking and can eventually result in gangrene. Not only are these diseases mechanistically related, but we have shown by our genetic research that they also have common genetic factors. Our studies on the genetic basis of these cardiovascular diseases has however led to the identification of three different disease pathways and the discovery of different drug targets. As a result we now have a separate drug development program for each disease.

        Our scientists established the link between myocardial infarction and a gene called ALOX5AP (encoding 5-lipoxigenase activating protein or FLAP) located on the long arm of chromosome 13, through the analysis of detailed measurements of DNA from volunteers in almost 300 extended Icelandic families, including over 700 individuals with myocardial infarction. The family relationships between the often distantly related patients were identified using our nationwide computerized genealogy database.

        We initially confirmed the location of a disease gene by showing that patients with myocardial infarction were much more likely to share a particular segment of DNA on chromosome 13 than expected based on relatedness of the individuals. This result was derived from analysis of DNA genotypes or polymorphic segments of DNA selected across the entire human genome sequence. We initially measured over 1,100 such variants in the DNA from each individual.

        Through more detailed analysis of the segment of DNA that we had identified, which contained more than 40 different genes, we showed that a particular set of variations in the sequence of the gene encoding FLAP conferred almost two times greater risk of myocardial infarction in Iceland and also almost two times greater risk of stroke. These variations consist of changes in four separate nucleotides, corresponding to a haplotype—i.e. a small segment of DNA inherited as a unit. The four single nucleotide polymorphisms (SNPs) are separately found within a sequence containing over 33,000 nucleotides spanning the first four exons—or coding segments—of the FLAP gene.

        In an independent study of almost 1,500 British individuals, we have also shown that while the Icelandic haplotype does not show statistically significant association with myocardial infarction in the British cohort, another haplotype in the FLAP gene almost doubles the risk of myocardial infarction in those patients. The existence of different haplotypes of the disease gene is not unexpected. A common disease like myocardial infarction is likely to be associated with many different mutations or sequence

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variations in the same disease pathway and the frequency of these variations may differ among populations. deCODE's population genetics approach is however designed to identify key disease pathways, which will impact patients of different origin in a similar manner In the case of myocardial infarction the haplotypes found in Iceland and Britain impact the same disease gene and disease pathway and the two patient groups suffer from the same symptoms. The British data thus underscores the key role of the FLAP pathway in myocardial infarction, and we expect the therapeutic benefit of DG031 to be the same for patients irrespective of their nationality.

        The FLAP protein is a key element in the pathway for production of leukotrienes. Leukotrienes are small lipids that act to cause inflammation, hence the leukotrienes are known as inflammatory mediators. Thus, our studies of the FLAP gene provide a genetic link between inflammation, heart disease and stroke. Our subsequent measurements of leukotrienes produced by the FLAP pathway in blood cells from Icelandic myocardial infarction patients showed a greater production of certain leukotrienes in patients who had had a heart attack than in otherwise healthy volunteers who had never had heart disease. Moreover the observed difference in release of leukotrienes was largely accounted for by carriers of the disease haplotype. This observation combined with knowledge about the FLAP pathway and atherosclerosis, suggests that the disease associated variants of the gene increase inflammation in the arterial walls.

        The importance of the FLAP pathway is well established in asthma, and drugs inhibiting this pathway have been developed for treating asthma. The role of the pathway in the development of atherosclerosis has only recently received attention. Studies of tissue from deceased patients have shown that proteins in the FLAP pathway are more strongly expressed in inflamed tissue from corroded arteries, and these proteins are more likely to be found in cells which are known to be involved in atherosclerotic plaque formation.

        Based on the combined evidence from our genetic and functional studies we concluded that the FLAP protein presented an extremely promising drug target for myocardial infarction. Our data indicates that a drug targeting the FLAP protein could provide significant therapeutic benefit to a large population of patients.

        In November 2003 we acquired an exclusive worldwide license from Bayer to develop and commercialize DG031, a small molecule compound that inhibits the FLAP and decreases production of leukotrienes. DG031 has been shown in previous clinical work in asthma to be generally safe and well tolerated with no significant safety issues. We expect to initiate a Phase II clinical trial in Iceland to measure the effects of DG031 on key markers of inflammation in cardiovascular disease. The clinical trial will be based on deCODE's information-rich clinical trials design, in which the genetic information derived from our previous discovery work in cardiovascular disease will provide strong guidance in the selection of an optimal patient cohort and the markers to be measured in the trial.

        deCODE's studies in stroke and PAOD, which are strongly related to myocardial infarction, have followed a similar pattern of discovery. In stroke we located and identified a different disease gene and drug target. Our drug target in PAOD, identified through the same genetic discovery method, is also distinct from the targets in stroke and myocardial infarction. In the case of PAOD our Chicago based pharmaceuticals group has developed a series of promising drug compounds that are proprietary to deCODE. We expect to file an investigational new drug (IND) application for a new compound in this program in 2004 or early 2005.

Drug Discovery and Development Pipeline

        The principal goal of our gene discovery work and the main focus of our business strategy is to discover, develop and commercialize new drugs to treat common diseases. In all of the diseases for which we have identified genes, we have, based on investigation of the disease pathway, identified potential druggable targets, that is, targets against which medicinal chemists have proven that therapeutic molecules can be made. These drug targets are either products of the disease genes themselves or are located within the disease pathways we have identified through our functional analyses of these genes.

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        The following table sets forth the current status of our gene discovery and drug discovery and development programs.

Disease Category	Disease	Analyzing DNA	Disease gene located	Disease gene identified	Drug discovery or development
CARDIOPULMONARY	Asthma	X	X	X	X
	Chronic obstructive pulmonary disorder	X	X
	Hypertension	X	X	X	X
	Myocardial infarction	X	X	X	X
	Obstructive sleep apnea	X
	Peripheral arterial occlusive disease	X	X	X	X
METABOLIC/OTHER	Familial combined hyperlipidemia	X	X
	Nocturnal enuresis	X
	Non-insulin-dependent diabetes	X	X	X	X
	Obesity	X	X	X	X
	Osteoarthritis	X	X	X
	Osteoporosis	X	X	X
AUTOIMMUNE	Ankylosing spondilytis	X
	Atopy/Allergy	X	X
	Inflammatory bowel disease	X
	Insulin-dependent diabetes	X
	Psoriasis	X	X
	Rheumatoid arthritis	X	X
	Stroke	X	X	X	X
CENTRAL NERVOUS SYSTEM	Alzheimer's disease	X	X
	Anxiety disorder	X	X
	Attention deficit hyperactivity disorder	X
	Autism	X
	Bipolar disease/depression	X
	Dyslexia	X
	Familial essential tremor	X	X
	Migraine	X	X
	Multiple sclerosis	X	X
	Narcolepsy	X	X
	Parkinson's disease	X	X
	Restless leg syndrome	X
	Schizophrenia	X	X	X	X
EYE	Cataracts	X
	Glaucoma	X
	Macular degeneration	X	X
	Myopia	X
	Retinitis pigmentosa	X
WOMEN'S HEALTH	Endometriosis	X
	Pre-eclampsia	X	X
CANCER	Benign prostatic hypertropy	X	X
	Breast cancer	X
	Colon cancer	X
	Lung cancer	X
	Melanoma	X
	Prostate cancer	X	X	X
	Renal cancer	X
	Testicular cancer	X
	Thyroid cancer	X
OTHER RESEARCH	Longevity	X	X

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        Our most advanced drug discovery and development programs are in myocardial infarction and PAOD, which are both proprietary to deCODE. In each case we have identified key disease genes through our population genetics research, conducted extensive functional work on our findings and identified drug targets within the disease pathways.

        In PAOD, our drug discovery group has developed new compounds that targets the disease pathway. We expect to file our first investigational new drug (IND) application for PAOD in 2004 or early 2005.

        In myocardial infarction we in-licensed from Bayer a compound that had been developed and tested as a potential treatment for asthma. Bayer transferred ownership of its IND associated with this compound to us. As a result, we will be able to use the data which Bayer compiled and submitted in support of its IND in connection with our IND for clinical testing in the U.S. During the previous clinical testing of the compound, now named DG031, more than 1,000 people were dosed with the drug, without any significant safety or tolerability issues. We are preparing to begin a Phase II clinical trial in Iceland of this compound for the reduction of serum indicators of cardiovascular inflammation. This trial will test the effect of three different doses of the drug on a total of about 180 patients. The Phase II trial is designed to select the best doses of DG031 for use in a subsequent Phase III outcome trial. Together with the Bayer clinical trial data indicating that DG031 is likely to be well tolerated, we may have sufficient data to be able to proceed immediately to a Phase III trial. The Phase III outcome trial will assess if DG031 decreases the number of heart attacks or strokes for the group of patients taking the drug compared to patients not receiving the drug. The Phase III trial will be a larger international multi-center trial, in which multiple groups of patients at different sites receive the drug on a trial basis. As one or more of these groups will be based in the U.S., the Phase III trial will be subject to prior approval by the Food and Drug Administration. We may seek partners to share in the development cost and commercialization of DG031 before or after commencing a Phase III trial.

Diagnostics

        DNA-based diagnostic tests represent a key element in the development of personalized medicine and a key additional avenue for creating value from our gene discoveries. Since pinpointing genetic variations linked to disease involves the identification of genetic markers of disease susceptibility, we can apply the same findings we employ in our drug discovery efforts to the development of diagnostics tests.

        We believe that such tests will become an integral part of health care within the next ten years. In the clinic, physicians may be able to use these tests to diagnose disease susceptibility as early and as accurately as possible, making it possible to implement more timely and effective treatment. Moreover, by understanding which individuals are highly predisposed towards a certain disease, doctors may be able to assist patients in developing effective disease prevention strategies that can help them reduce the risk of developing the disease. For example, a DNA- based diagnostic test for stroke would enable individuals to find out if they are at a particularly high risk of developing a stroke. Those who were could work with their doctors to develop prevention strategies that could reduce the risk of the predisposition ever developing into disease. These strategies could include changes in diet and lifestyle, as well as the use of effective available treatments for leading risk factors such as high blood pressure and high cholesterol.

        In 2001, we established a partnership with Roche Diagnostics to develop and market DNA-based diagnostics tests. One of our most advanced programs is in osteoporosis, where we have identified a small number of SNPs (genetic variations known as single nucleotide polymorphisms) within the BMP2 gene that can be used to identify individuals who are at a nearly threefold average increased risk of developing osteoporosis. We are also advancing in our programs in stroke, myocardial infarction, PAOD, non-insulin-dependent diabetes and other major diseases. We expect that our first DNA-based diagnostic product under this alliance, which will be for osteoporosis, will be offered in 2004.

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Pharmacogenomics

        We are developing and plan to market pharmacogenomic tests that can, by analyzing genetic markers (i.e. genotypes) or gene expression, identify individuals who are likely to respond well to specific drugs. We believe that such tests will become another important element in the realization of more personalized medicine and a standard part of the prescription process. The potential applications and benefits of this technology are many. It may lead to tailor-made treatments, maximizing efficacy and minimizing side effects. The use of pharmacogenomic tests may also lead to faster and more successful clinical trials, which may reduce the time and cost involved in developing new drugs. Similarly, such tests may enable pharmaceutical companies to explore the use of existing compounds that may have been abandoned as investigational drugs because they were only effective for a small subgroup of patients.

        We have two capabilities for identifying the genetic basis of drug response. Through our wholly owned pharmacogenomics and clinical trials subsidiary Encode, we are working prospectively to identify responders and non-responders. In this process, known as in vitro expression profiling, we establish clinical drug response baselines by administering a drug of interest to patients in a small clinical trial. Specimens such as certain types of white blood cells are obtained and tested with and without the presence of a drug to detect the different expression pattern of genes in the samples. (For further description of the technology used to measure gene expression please refer to the section captioned "Scientific Background" below). We then apply proprietary statistical algorithms to select a panel of differentially expressed genes that most accurately predicts the clinical response to the drug under investigation. We are further able to examine these genes for genetic markers such as SNPs, which correlate with responsiveness to a given drug and which can thus be used to design a DNA-based predictive test.

        We can complement this approach by using our population resources in the same way that we would in our gene studies, but using drug response, rather than disease, as the trait we wish to analyze. We utilize our genealogical database and proprietary bioinformatics tools to cluster drug responders and non-responders into extended families. Patients are genotyped to identify the linkage between genetic variations and drug response. These results can be combined with the results of in vitro profiling to contribute to the selection of the most informative gene expression patterns.

        In our pharmacogenomics work, we have identified expression levels for a set of eight genes that can be used to predict responsiveness to leading classes of treatments for asthma with an accuracy of approximately 90%. We have also identified sets of genes that can predict with similar rates of accuracy individual responsiveness to leading classes of drugs used to treat hypertension. In both of these diseases we are working on the development of pharmacogenomics tests with Roche Diagnostics, where we are seeking to develop a method to measure expression of the genes identified by deCODE and turning the results of this work into a marketable test or testing procedure. In partnership with Affymetrix, we have also developed methods based on gene array technology, for identifying responders and non-responders to several popular brand-name drugs used in treating many common conditions.

Clinical Trial Services

        Our subsidiary Encode provides services relating to pharmacogenomics and clinical trials. Encode provides three types of services: clinical trials on new and existing therapeutics for pharmaceutical companies, information-rich clinical trial studies for contract customers, and pharmacogenomics work and information-rich clinical trials for our proprietary programs. Information-rich clinical trials refers to a novel concept based on deCODE's expertise in human genetics studies and Encode's expertise in clinical trials and pharmacogenomics. In an information-rich clinical trial we utilize our extensive databases of genetic and clinical data to provide guidance in the selection of an optimal patient cohort and to select genetic markers and biomarkers to be measured in the trial.

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        We believe that one of Encode's most unique and valuable capabilities is that for conducting pharmacogenomic and biomarker analyses in parallel with clinical trials. The ability to understand which patients are best suited for a given drug will, in our view, provide several important potential benefits to our pharmaceutical and biotechnology customers. These include the ability to stratify and thus speed clinical trials, and to aid in capturing significant market share for new products entering competitive therapeutic areas.

        In our pharmacogenomics and clinical trials alliances we negotiate both for the right to participate in potential sales of tests and, in some cases, drugs developed using our capabilities in this field.

        A case in point is our most recent alliance with Merck, Inc. where deCODE and Encode will conduct information-rich clinical trials on a range of Merck's developmental compounds. Under the alliance deCODE will use its population genetics capabilities and expertise in pharmacogenomic analysis to enhance and complement Merck's on-going clinical development process. Based on the information-rich clinical trials concept, deCODE will use its population genetics resources to select optimal cohorts for clinical trials and choose which phenotypes or genetic markers are the best measures of patient responsiveness to the drugs being tested.

Informatics

        We have developed statistical and data mining tools to generate, assemble and analyze our vast sets of genealogical, disease and genotypic information. We believe we have unique informatics tools for utilizing large datasets to identify correlations between genetic variation and disease, and we are now attempting to capture additional value from our investments in informatics by commercializing these tools for use by other research organizations, such as government and academic laboratories, and research consortia.

        Our principal informatics products are the Clinical Genome Miner Discovery™ system and the Identity Protection System™, which we are marketing in alliance with IBM. CGM Discovery™ is a computer based application and which can be used for isolating and analyzing genes and gene variations associated with particular diseases. It includes the same interfaces and statistical analysis tools that we use in our gene discovery programs. The system enables users to input their own data on disease, genotypes and genealogy and to mine this data, in real time, for correlations. The Identity Protection System™incorporates technology developed by deCODE and employed in Iceland under the auspices of the Icelandic Data Protection Authority to securely and automatically anonymize clinical and genetic data. In 2003 we adapted the CGM Discovery™ and the Identity Protection System™ to run on IBM operating systems, software and servers, and the products are now available to customers.

        In January 2000, our wholly owned Icelandic subsidiary Islensk erfdagreining ehf., received from the Icelandic Ministry of Health a twelve-year license to create and operate an Icelandic Health Sector Database (IHD). The IHD was conceived to be a centralized database of personally non-identifiable and encrypted copies of health information from medical records in Iceland's national health system. Such a system would enable users to conduct statistical, population-based analyses of healthcare data and trends.

        As of March 2004, a government-mandated review of the IHD's data encryption and protection protocols, which began in April 2000, had not been completed. When and if this review and issuance of related security certification is completed, we will evaluate whether and when, if at all, to proceed with the development of the IHD in light of our priorities and resources at that time. In light of our current business plans and priorities, we do not expect the IHD to be a material aspect of our business in the near future.

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Drug Discovery and Development Services

        Our drug discovery and development services business is built upon the demand by pharmaceutical and biotechnology companies and patient organizations for contract chemistry services. Recent advances in genomics have resulted in rapid growth in the number of novel biological targets that can be exploited for drug discovery. This has created a significant demand by pharmaceutical and biotechnology companies for the synthesis of small molecule drugs. Our pharmaceuticals group provides a full range of drug discovery technology and services using multiple integrated high-throughput technologies to streamline drug discovery and development. The group is focused on chemistry-based drug discovery and development ranging from early-stage lead discovery and optimization to the identification of viable synthetic routes required to manufacture clinical good manufacturing practices (cGMP) materials in quantities for pre-clinical and clinical studies. It provides us, our partners and our contract customers with substantial expertise in the field of drug discovery and development.

Genotyping

        We are taking advantage of our assets and expertise to create an additional contract service business. Our population research into the genetic factors that contribute to common diseases involves, in the first stage, the gathering, management and genotyping of thousands of biological samples. At our main research facility in Reykjavik, we have one of the highest-throughput genotyping laboratories in the world, capable of generating tens of millions of genotypes per month. We have developed high-density genetic maps that enable us to accurately locate thousands of genetic markers across the human genome. We also have in place efficient, automated systems for all stages of the genotyping process, from DNA isolation to plate preparation and the generation, storage and analysis of genotypic data.

        Our customers for these services include pharmaceutical companies, research consortia and academic institutions. We believe that our speed, accuracy, quality assurance and competitive pricing has proven to be attractive given the high overhead costs involved in setting up a genotyping facility and the continued growth of applied genetics.

Scientific Background

        The blueprint of all biological activity, which consists of deoxyribonucleic acid, or DNA, is located within the nucleus of every cell and is commonly referred to as the genome. The genome is the total DNA content of an organism. DNA is composed of four bases. The sequence or order of these bases is the code that ultimately determines structure and function in all organisms. The human genome is broken up into 23 pairs of chromosomes and every individual inherits a set of 23 chromosomes from each parent. Genes are segments of DNA located throughout the genome. The human genome consists of approximately three billion bases and is estimated to contain 30-40,000 protein encoding genes. Each cell uses or "expresses" only those genes necessary for its specific role. Accordingly, different types of cells express different sets of genes.

        When a gene is turned on or expressed, it produces a derivative copy of its DNA sequence called messenger RNA, which is used as a template to direct the production of a protein. Proteins are large molecules composed of amino acids and control all biological processes. The order of the bases in DNA determines the order of amino acids in a protein. Proteins in turn make up molecular pathways, which cells use to carry out their specific functions. Diseases can occur when a mutated or a defective gene upsets or blocks a molecular pathway in a normal biological function. The ability to detect a mutation and to understand the process by which it contributes to disease is crucial to understanding the fundamental mechanisms of a disease. In the simplest form, genetic diseases result from a mutation in only one gene and the disease is usually passed from generation to generation. Common diseases are thought to have a complex genetic basis; they generally skip one or more generations and may result from interactions between genes or from the interaction between genetic and environmental factors.

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        DNA sequencing, i.e. the measurement of the sequence of nucleotides found in a part of an individual's DNA, is an expensive process and is infrequently used to measure variations in a large number of individuals. For the preliminary location and identification of genes and variations in these genes we rely on the measurement of genetic markers, which are either measurements of single nucleotides (SNPs), repeated sequences of nucleotides (microsatellites) or the deletion of a sequence of nucleotides (indels). The markers act as signposts in the human genome, and provide indirect information about variation in the sequence surrounding the marker. deCODE has developed extensive expertise and resources in this field and has developed one of the largest repositories of marker data. We operate the highest throughput DNA analysis (or genotyping) facility in the world. Our capacity is 30 million genotypes (that is measurements of individual markers) per month, and in 2003 the average output was about 10 million genotypes per month. This is over ten times larger than the output of each of the largest genotyping facilities in the US, at the Marshfield Center for Medical Genetics in Marshfield, Wisconsin and the Center for Inherited Disease Research (CIDR) in Baltimore, Maryland. This comparison is based on public data from the Marshfield center website (that reports approximately 7.5 million genotypes completed in 2003) and the CIDR website (that reports a capacity of 11 million genotypes in 2003).

        Another common form of analysis is the measurement of gene expression. This term is usually used to refer to detection of the presence and amount of one or more gene products in a particular cell or tissue, such as certain types of white blood cells. These measurements can be made using gene array (a.k.a. or microarray) technology, where a specifically designed glass slide, microchip or other substrate covered with different nucleic acid probes is employed. The probes on the array are designed to link to the specific gene products being measured and this coupling of the sample with the probe can be detected by a microscope or other instrument. The output from the gene array analysis are measurements which indicate the expression of single genes or a contemporaneous expression of multiple genes in a particular configuration, often referred to as gene expression profiles.

        Virtually the entire human genome sequence has now been discovered. We believe that by itself, this knowledge is of limited value and that the importance of this discovery will only reach its full potential if this sequence data is explored along with detailed knowledge about health history, genetic profile and genealogy.

Population Genomics

        Population genomics is a field of genomics that applies modern genetic and molecular biology techniques to an entire population to discover how genetic factors contribute to the cause of diseases. Since almost all common diseases have a genetic component, the discovery of the cause of disease can often be reduced to finding the gene or genes mutated in patients who have the disease as compared to those who do not. Since this approach does not require a preconceived notion or "hypothesis' about which tissues or proteins or genes are important in the disease, it represents a systematic strategy for creating specific knowledge about disease. The challenge is to find a population which is small enough to allow the necessary cooperation but large enough to deliver meaningful results.

Functional Genomics

        Functional genomics is a field of genomics that attempts to determine the manner in which disease genes specifically impact the disease process. It is the study of the function of genes, including how expression of a particular gene is regulated and the function of the protein that the gene encodes. Researchers employing functional genomics techniques may analyze large numbers of genes to compare patterns of gene expression in diseased and healthy tissues or may compare genes in humans to those in other species, in each case in an effort to determine the molecular pathways that cause disease.

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Population Approach and Resources

Population Genetics and Common Diseases

        We believe that human population genetics offers a means of discovering powerful new methods for preventing and treating common diseases.

        Most of the medical care that we have today has developed through a focus on the diagnosis of disease according to broadly accepted criteria of signs and symptoms, and the prescription of drugs that have been shown to alleviate the manifestations of disease once a patient has already become ill. The obvious shortcomings of this approach are due in large measure to the fact that relatively little has been known about the underlying biology of most of the common diseases. These conditions—such as stroke, heart attack, Alzheimer's disease, asthma, osteoarthritis, to name but a few—are common precisely because they are complex. These diseases arise from the confluence of various inherited and environmental factors which are present in large segments of most societies and which, taken independently, do not generally pose any particular risk to public health.

        Genetics offers a means of unraveling this complexity and of gaining a foothold in the biology of disease. Once the key genes and mutations that underlie a predisposition to develop a given illness are identified, it is possible to identify the proteins they encode, the function of these proteins or gene products in the body, and their interaction with other proteins. In short, it is possible to tease out the biological mechanisms and pathways of disease. Using genetic markers and biological targets within these pathways, we believe it is possible to develop DNA-based diagnostics that can measure predisposition to disease and drugs that can disrupt the disease process.

        We believe that deCODE's advantage in identifying genetic variations linked to disease arises from the complexity of the task. Unlike the rarer, "simple" genetic disorders, in which specific mutations lead directly to the development of disease, the complexity of the common diseases means that the correlation between any single genetic factor and the occurrence of the disease will be statistically significant but not direct.

        The fundamental question for applying genetics to improve healthcare is: what genetic factors do people who have a given disease tend to share that people who do not develop the disease do not? Because the genome is in essence composed of serial bits of information, we have always approached this as an information challenge. In order to meet this challenge it is necessary to assemble large and detailed datasets on disease and genetic variation from as large a group as possible—ideally an entire population. It is also critical to have accurate and comprehensive genealogical records. Genealogy is the only means for systematically tracking the genetic components as they have been passed from one generation to the next across a population.

The Icelandic Advantage

        We believe that the scarce resource in genetics is a population with all three sets of data—genealogical, genetic, and phenotypic (i.e. clinical data, measurements and observations). In Iceland, we have brought these resources together with advanced data mining tools to create what we believe is the world's leading gene-discovery organization for common complex diseases. The success of this organization can be comparatively measured by the number of disease genes located, genes that have been further identified and validated and number of patents and scientific publications based on these findings. We believe that no other human genetics group has been able to match this output since deCODE's inception.

        Iceland offers several advantages for conducting population genetics research. These include:

        Extensive Genealogies.    There exist genealogical records for almost the entire population, stretching from the present day back to the settlement of the country in the ninth century. Genealogical

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data can facilitate the identification of genes that cause a specific disease by enabling researchers to find families with a large number of distantly related patients, and compare the genes of family members with and without the disease.

        Relative Homogeneity.    We believe that in a small and historically isolated population such as Iceland's, the variety of genetic factors involved in any given disease is likely to be smaller than in larger and more diverse populations. Iceland also presents many instances of "founder" effects, in which the principal inherited factors in a disease affecting many present day patients can be traced back to a single individual or "founder" ancestor. These factors reduce the amount of variation in the genetic factors involved and thus simplify the task of finding and subsequently understanding the disease genes and mutations causing common diseases. It has been demonstrated that the disease genes found in Iceland are, in general, also found in other populations. Even if the disease genes in Iceland are different from those found in other populations, the identification of any disease gene can lead to discovery of a key molecular pathway likely to be involved in the disease and, consequently, to the discovery of disease genes in other populations which cause anomalies in the particular pathway. Therefore, we believe the discovery of a disease gene in Iceland will enhance the identification of drug targets for any population. In addition, the incidence of the common complex diseases in Iceland is virtually identical to the incidence in Western Europe and in the Caucasian population in the US.

        Sufficient but Manageable Size.    The Icelandic population, which numbers approximately 290,000, is small enough to make feasible population-wide studies of the genetics of common diseases with a minimum of sampling bias. At the same time, it is large enough to deliver meaningful results without an increased incidence of recessive genetic conditions that can arise as a result of intermarriage. The prevalence of the common diseases in Iceland is very similar to that seen elsewhere in the industrialized world, and the genes we have identified in Iceland have been shown to be key genes in the same conditions in larger and more diverse populations.

        Centralized Healthcare System.    Iceland has had a universal, single-payer national healthcare system since 1915. It presently consists of a base of 55 primary care centers; a large teaching and research hospital in Reykjavik formed through the merger of the country's two largest hospitals; one central hospital in the country's second-largest city, Akureyri; and several smaller regional hospitals. Outside the primary care centers, the healthcare system is highly specialized. Specialty clinics care for most of the patients with major illnesses. Our clinical collaborators work at these specialty clinics, as well as in the major hospitals. This system makes both patient care and medical data universal, standardized and easily accessible for scientific research.

        High Participation Rate in Medical Research.    The level of public education is high in Iceland. Historically, the Icelandic population has been willing to participate in biomedical research in the Icelandic community. Approximately 95% of all those who are asked to take part in our genetic studies agree to do so, as do over 99% of those asked to participate in a second study.

Our Population Resources

        deCODE has utilized these advantages to develop its gene discovery engine. Our key resources include a computerized genealogy database that can in real time draw the familial connections of any group of present-day Icelanders; genotypic and detailed medical data from more than 100,000 volunteers in our research in approximately 50 common diseases; one of the world's highest-throughput genotyping facilities; and statistical algorithms and software systems we have developed for storing this data and mining it for correlations between genetic variation and disease.

        The success of our gene research is due in large part to the participation of tens of thousands of Icelanders in our research programs. We believe that participation is encouraged by the fact that we have one of the most advanced privacy and data protection systems anywhere in the world. All data on

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individuals used in our research is made personally non-identifiable and held under encrypted identifiers generated by the Icelandic government's Data Protection Authority. All genetic and medical data being used in the company's gene research has been obtained under the strictest standards of informed consent.

Our Gene Discovery Process

        Using our population approach, we can efficiently conduct genome-and population-wide scans to identify the key genetic factors involved in virtually any common disease. In the study of any particular disease, we first define the disease classification broadly but rigorously. For example, in our research on stroke we first defined patients using the broad classification of the disease, including the principal subtypes, hemorrhagic and ischemic stroke, as well as less serious "mini-strokes" known as transitory ischemic events. In every disease we work with a group of general practitioners and specialist physicians who see patients with a given disease or group of diseases. Once the National Bioethics Committee has approved a research protocol for a given disease project, our clinical collaborators compile a list of all patients in Iceland who have been diagnosed with the disease. This list is encrypted by the Data Protection Authority, which also encrypts our genealogy database using the same key. We then run the list of patients through the genealogy database, yielding very large extended families of patients, frequently encompassing hundreds of individuals.

        The genealogy links together both closely and distantly related patients; by definition, these families will tend to share inherited risk factors for the disease. Our statisticians examine these large pedigrees and determine which patients would provide the maximum statistical power for genotypic analysis. We then send the encrypted IDs for this group of patients back through the Data Protection Authority, which decrypts the list and sends the names of the patients on to the collaborating physicians. The physicians then contact the patients, explain the nature of the gene discovery project and ask patients if they have close relatives who do not have the disease who might also be willing to participate. All those who wish to participate must sign an informed consent form, and are then asked to go to a special center located in Reykjavik where they can give blood from which DNA will be isolated. All blood samples are likewise labeled with encrypted IDs by the Data Protection Authority before being sent to deCODE. Those who give blood are also usually asked to meet with their doctor for a clinical examination to provide detailed information on health factors relevant to the disease or group of diseases under study. This information is likewise made personally non-identifiable by the Data Protection Authority before being sent to deCODE.

        We genotype all DNA samples with a framework set of approximately 1,100 microsatellite markers spread across the entire genome. Using the genealogies and our datamining algorithms we can then determine which small segments of the genome related patients share to a statistically much higher degree than one would expect given their relatedness. We are thus able to "map" to small segments of particular chromosomes the genetic factors that correlate with the disease. Through detailed analysis of these regions using denser sets of microsatellite and SNP markers, we are able to efficiently indentify the key disease genes and disease-linked haplotypes and mutations.

        We validate our findings by conducting association studies in other, more heterogeneous populations. For example in our study on schizophrenia, where we have identified the Neuregulin-1 gene which doubles the risk of developing schizophrenia in Iceland, we have published a study on samples from a Scottish population in which the association to the disease haplotype matches the association in Iceland quite closely. As described above, in myocardial infarction we have matched our results in the Icelandic population by confirming association to a different haplotype in the same gene in a British population. In other studies we have also found that the genes we have identified in Iceland also play a critical role in the same diseases in other populations, although the variety of mutations or haplotypes we find outside of Iceland is frequently greater. Understanding the range of

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mutations or haplotypes contributing to disease is particularly vital for the development of DNA-based diagnostic tests suitable for use around the world.

From Gene to Targets

        Our approach thus allows for a virtually hypothesis-free discovery process that homes in directly on the inherited components of human disease. This provides us with population-validated drug targets and diagnostic markers that are directly involved in the disease process.

        In a majority of cases where we have isolated disease genes, the products of the genes themselves have provided "druggable" targets—that is, classes of proteins against which chemists have previously been successful in designing compounds. However, once we have succeeded in identifying a disease gene, we also seek to define molecular pathways in which the disease gene plays a role. This is essential information both for understanding the biology of the disease and also for identifying additional drug targets that interact with the disease genes.

        We have established complementary systems to isolate specific drug targets from pathways that may be involved in the disease process. These approaches can expand the number of potential drug targets that can be used to identify compounds for disrupting the disease process.

        Our pathway analysis identifies proteins that physically interact with the disease-gene product. As very few proteins work alone in the body, these partner proteins are likely to be involved in the normal biology of the disease gene. We carry out the screening in yeast cells, using methods that involve increasing stringency in order to eliminate false positive protein-protein interactions. We are also able to cross match the genes identified as partners of the first disease gene with additional population genomics data, as these genes may also be mutated in the same disease.

        Potential drug targets upstream in the disease pathways include proteins that control the expression level of the disease gene (i.e., those gene products that are responsible for turning the disease gene "on" or "off" in particular tissues or under particular conditions). We can link the sequence that governs expression of the newly identified disease genes to specific binding proteins that are responsible for turning the disease gene "on." Finally, we perform gene arrays to validate our conclusions and to identify other genes that are regulated in tandem with the disease gene.

        Our analysis of genes in the downstream pathway is designed to uncover genes that are influenced by the overexpression, underexpression or misexpression of the disease gene. We have established efficient systems to turn genes "on" or "off" in cells, as well as to express mutated versions revealed in the course of gene discovery. We employ gene array technology in our efforts to find expression patterns of genes that are altered by the differential expression of the disease gene under study. Some of these genes may interact with the disease gene product in disrupting normal biology and leading to disease.

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Comparison to Other Approaches

        Our approach has been designed to minimize 'hypothesis bias', i.e. we approach the search for disease genes without a preconceived notion about the identity or features of those genes. We believe that this approach provides us with targets of a uniquely high quality for drug and diagnostic development.

        Some other companies are using an approach to locate disease genes that relies on associating specific, predetermined variations in DNA, whether scattered throughout the genome or in particular genes, with a propensity to develop a disease. We believe that this is an effective means of validating discoveries, but that as the basis for a discovery process it is analogous to searching for a single needle that is present in one of a hundred haystacks. We believe that our population genomics approach will allow us to find the haystack using our large families before we begin searching for the needle using genetic markers to isolate genes and haplotypes.

        Other companies are using functional genomics to help select potential drug targets. Most of these approaches depend on expression analysis using DNA chips that compare the genes turned "on" or "off" in diseased tissue with those in normal tissue. We, on the other hand, apply functional genomics more selectively, focusing on the disease genes identified through our population genomics approach to more specifically define their molecular pathways.

        There may be some limitations to our population genomics approach because disease genes found in Iceland may not always be directly relevant in other populations, although there is much overlap in disease genes that have been found in Iceland over the last 15 years and the rest of the world. The Icelandic population is probably too small to study diseases that are not common. However, our aim is to continue to focus on the diseases in Iceland that have the greatest public health prevalence worldwide.

Collaborations

F. Hoffmann-La Roche (Roche)

        Therapeutics.    In 1998 we entered into a research collaboration and cross-license agreement with Roche, which terminated in 2002, under which we identified key genetic factors involved in ten common diseases: osteoarthritis, Alzheimer's disease, schizophrenia, PAOD, stroke, osteoporosis, obesity, anxiety, non-insulin-dependent diabetes and rheumatoid arthritis. In January 2002, we entered into a new three-year agreement with Roche focused on turning the achievements of our 1998 gene discovery collaboration into novel therapeutics. The 2002 agreement provided that we would collaborate with respect to four diseases that had been the subject of the 1998 agreement. We are currently collaborating on two of those diseases. Under the 2002 agreement we have received $16,000,000 in research funding and may receive an additional $4,000,000 in research funding during the remainder of the term of the agreement. The agreement provides that upon the development of specified compounds during the term of the agreement and for a specified period thereafter we may receive milestone payments, the amount of which will depend on the type of compound developed. In addition, we will be entitled to receive royalties on the sales of drugs that are developed. Proprietary rights to discoveries relating to the other diseases that we worked on with Roche under the 1998 agreement have reverted back to us subject to limited rights retained by Roche with respect to certain compounds that we may develop for treatment of these diseases. We expect that we will not receive research funding under the 2002 agreement after February 1, 2005, when the research term ends, unless Roche and we decide to extend the collaboration beyond that time.

        Diagnostics.    In June 2001, we signed a five-year alliance with Roche's diagnostics division to develop and market DNA-based diagnostics for major diseases. More recently we have added research programs aimed at developing diagnostics to predict drug response for major therapeutics used to treat

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those diseases, in order to help select the most effective treatment of those available. The alliance represents an important element in our strategy of turning our research achievements into products for the market. The alliance brings together what we believe are important deCODE and Roche assets: our comprehensive population genomics resources and bioinformatics expertise, and Roche's prominence in the development and marketing of molecular diagnostics. Under the agreement we have received $28,625,000 in research funding, up-front fees and milestone payments. We may receive $15,625,000 in additional research funding over the remainder of the term of the agreement as well as milestone payments upon the achievement of research and development milestones and royalties on the sales of diagnostic products developed.

Merck & Co, Inc. (Merck)

        Obesity.    In September 2002, we entered into an alliance with Merck aimed at developing new treatments for obesity. Under the alliance, we are combining our research efforts in the genetics of obesity to identify, validate and prioritize a series of drug targets to take into development. The goal of the alliance is to accelerate the discovery of new drugs to fight obesity, a condition that now represents one of the fastest-growing public health challenges in the industrialized world. Under the terms of the three-year agreement, which can be extended on a year-to-year basis upon the consent of the parties, we have received research funding, technology access fees and milestone payments in the aggregate amount of $13,750,000 and may receive research funding and technology access in the future of $10,750,000. In addition, we may receive further research milestone payments and we may receive milestone payments as compounds developed under the alliance advance in the development process and royalties on successfully marketed drugs. Merck may terminate the agreement at any time upon 90 days' notice or after September 26, 2004 upon 30 days' notice in the event that the research program fails to achieve certain specified goals.

        Information Rich Clinical Trials.    In February 2004, we entered into an agreement with Merck under which we will conduct information-rich clinical trials on a range of Merck's developmental compounds. The term of the alliance is seven years, subject to termination by Merck after five years. We will at any given point over the course of the alliance be conducting concurrent trials on as many as five Merck compounds. The alliance will employ our population genetics capabilities and expertise in pharmacogenomic analysis to enhance and complement Merck's on-going clinical development process. Under the terms of the agreement, we will receive royalties on sales of drugs and diagnostics developed as part of the alliance. We will receive a one-time technology access fee, will share research funding for the clinical development of compounds and pharmacogenomic analysis, and will receive milestone payments as compounds or pharmacogenomic tests reach the market. In addition, Merck has purchased 689,703 shares of our common stock at a price of $14.50 per share, and has received a warrant to purchase up to 1,724,257 of additional shares of our common stock at $29.00 per share over the next five years.

Bayer HealthCare AG (Bayer)

        In 2003 we received from Bayer an exclusive worldwide license to develop, make and sell a compound that had been developed and tested against a drug target that we had discovered might play a role in myocardial infarction. The compound had been developed as a potential treatment for asthma and subjected to substantial clinical development work on behalf of Bayer. During the previous clinical testing of the compound, now named DG031, more than 1,000 people were dosed with the drug, without any significant safety or tolerability issues. In connection with the license, Bayer transferred ownership of its IND associated with this compound to us. As a result, we will be able to use the data which Bayer compiled and submitted in support of its IND in connection with the IND we will be required to file in the U.S. before we can conduct clinical trials there. Under the agreement, we have paid Bayer a license fee and will pay milestone payments upon the achievement of specified

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developmental milestones and royalties on sales of the drug. The agreement gives Bayer the right of first negotiation to be our manufacturer of the compound.

Patents and Proprietary Rights

        Patents and other proprietary rights protections are an essential element of our business. We currently rely on patents, trade secret law and contractual non-disclosure and confidentiality arrangements to protect our proprietary information. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary rights are covered by valid and enforceable patents or are effectively maintained as trade secrets.

        Accordingly, we actively seek patent protection in the United States and other jurisdictions to protect technology, inventions and improvements to inventions that are commercially important to the development of our business. These include, among other things, genes we discover; mutations of genes and related processes and inventions; technologies which may be used to discover and characterize genes; therapeutic or diagnostic processes and other inventions based on these genes as well as methods developed in our biostructures and pharmaceutical groups for the discovery and development of drugs. As of year-end 2003, we had 24 issued U.S. patents and eight issued patents in non-US jurisdictions. We also had 65 pending patent applications in the US and 81 pending patent applications in non-US jurisdictions. We claim priority under the Patent Cooperation Treaty for those of our U.S. applications that we consider to be of significant commercial value. We also intend to seek patent protection or rely upon trade secret rights to protect other technologies that may be used to develop databases and healthcare informatics products and services.

        We have licensed from Bayer a composition of matter patent and a manufacturing process patent for DG031. The acquired patents expire in 2009 and 2012 respectively.

        We have also applied for additional patents on our own, claiming specific uses of DG031 and for other compounds with similar mode of action for those patients most likely to benefit from administration of those compounds, due to their specific genetic makeup. However, it is not certain that we will ultimately be issued such use patents, and even if issued, that they will be enforceable in infringement proceedings before the courts.

        The United States Drug Price Competition and Patent Term Restoration Act of 1984, known as the Hatch-Waxman Act, provides for the return of up to 5 years of patent term for a patent that covers a new product or its use, to compensate for time lost during the regulatory review process. An application for patent term extension is subject to approval by the U.S. Patent and Trademark Office in conjunction with the FDA. If our clinical trials of DG031 are successful and we ultimately receive the FDA's approval to market the drug, we expect to seek to extend the term of one of the patents we licensed from Bayer. However, there can be no assurance that we will receive a patent term extension.

        The Hatch-Waxman Act also establishes a five-year period of marketing exclusivity from the date of NDA approval for new chemical entities approved after September 24, 1984. We believe that DG031 is a new chemical entity and expect to seek such market exclusivity if we receive NDA approval for the drug. During this Hatch-Waxman marketing exclusivity period, no third-party may submit an "abbreviated NDA" or "paper NDA" to the FDA. Finally, any abbreviated or paper NDA applicant will be subject to the notification provisions of the Hatch-Waxman Act, which should facilitate our notification about potential infringement of our patent rights. The abbreviated or paper NDA applicant must notify the NDA holder and the owner of any patent applicable to the abbreviated or paper NDA product, of the application and intent to market the drug that is the subject of the NDA.

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Competition

        We face, and will continue to face, intense competition in our gene discovery programs from organizations such as major pharmaceutical companies, specialized biotechnology companies, pharmacogenomics companies, universities and other research institutions, the Human Genome Project and other government-sponsored entities. A number of entities are attempting to rapidly identify and patent genes responsible for causing diseases or an increased susceptibility to diseases and to develop products based on these discoveries.

        Many of our competitors, either alone or together with their collaborative partners, have substantially greater financial resources and larger research and development operations than we do. These competitors may discover, characterize or develop important genes, drug targets or drug leads before we or our collaborators do or may obtain regulatory approvals of their drugs more rapidly than we or our collaborators do. They may develop healthcare informatics and database products before we do or which are technically superior to ours or prove to be more useful to our potential customers.

        Developments by others may render pharmaceutical product candidates or technologies that we or our collaborators develop obsolete or non-competitive. Any product candidate that we or our collaborators successfully develop may compete with existing therapies that have long histories of safe and effective use.

        Our competitors may obtain patent protection or other intellectual property rights that could limit our rights, or our customers' ability, to use our technologies or databases, or commercialize therapeutic or diagnostics products. In addition, we face, and will continue to face, intense competition from other companies for collaborative arrangements with pharmaceutical and biotechnology companies, for establishing relationships with academic and research institutions and for licenses to proprietary technology.

        Our ability to compete successfully will depend, in part, on our ability, and that of our collaborators, to: develop proprietary products; develop and maintain products that reach the market first, and are technologically superior to and more cost effective than other products on the market; obtain patent or other proprietary protection for our products and technologies; attract and retain scientific and product development personnel; obtain required regulatory approvals; and manufacture, market and sell products that we develop.

Government Regulation

        Regulation by governmental authorities will be a significant factor in our ongoing research and development activities. In addition, the development, production and marketing of any pharmaceutical and diagnostic products which we or a partner may develop is subject to regulation by governmental authorities. Strict regulatory controls on the clinical testing, manufacture, labeling, supply and marketing of the products will influence our and our partners' ability to successfully manufacture and market therapeutic or diagnostic products.

        Our success will depend, in part, on the development and marketing of products based on our research and development. Strict regulatory controls on the clinical testing, manufacture, labeling, supply and marketing of the products will influence our and our partners' ability to successfully manufacture and market therapeutic or diagnostic products. Most countries require a company to obtain and maintain regulatory approval for a product from the relevant regulatory authority to enable the product to be marketed. Obtaining regulatory approval and complying with appropriate statutes and regulations is time-consuming and requires the expenditure of substantial resources.

        In the United States we and our products are subject to comprehensive regulation by the United States Food and Drug Administration (FDA). The process required by the FDA before our products may be approved for marketing in the United States generally involves (i) pre-clinical new drug

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laboratory and animal tests, (ii) submission to the FDA of an investigational new drug (IND) application, which must become effective before clinical trials may begin, (iii) adequate and well-controlled human clinical trials to establish the safety and efficacy of the drug for its intended indication, (iv) submission to the FDA of a new drug application (NDA) and (v) FDA review of the NDA in order to determine, among other things, whether the drug is safe and effective for its intended uses. There is no assurance that the FDA review process will result in product approval on a timely basis, if at all.

        Pre-clinical tests include laboratory evaluation of product chemistry and formulation, as well as animal studies to assess the potential safety and efficacy of the product. Certain pre-clinical tests are subject to FDA regulations regarding current Good Laboratory Practices. The results of the pre-clinical tests are submitted to the FDA as part of an IND and are reviewed by the FDA prior to the commencement of clinical trials or during the conduct of the clinical trials, as appropriate.

        Clinical trials are conducted under protocols that detail such matters as the objectives of the study, the parameters to be used to monitor safety and the efficacy criteria to be evaluated. Each protocol must be submitted to the FDA as part of the IND. Further, each protocol must be reviewed and approved by an institutional review board.

        Clinical trials are typically conducted in three sequential phases, which may overlap. During Phase I, when the drug is initially given to human subjects, the product is tested for safety, dosage tolerance, absorption, metabolism, distribution and excretion. Phase II involves studies in a limited patient population to (i) evaluate preliminarily the efficacy of the product for specific targeted indications, (ii) determine dosage tolerance and optimal dosage and (iii) identify possible adverse effects and safety risks. Phase III trials are undertaken in order to further evaluate clinical efficacy and to further test for safety within an expanded patient population. The FDA may suspend clinical trials at any point in this process if it concludes that clinical subjects are being exposed to an unacceptable health risk.

        We will need FDA approval of our products, including a review of the manufacturing processes and facilities used to produce such products before such products may be marketed in the United States. The process of obtaining approvals from the FDA can be costly, time-consuming and subject to unanticipated delays. There can be no assurance that the FDA will grant approvals of our proposed products, processes or facilities on a timely basis, if at all. Any delay or failure to obtain such approvals would have a material adverse effect on our business, financial condition and results of operations. Moreover, even if regulatory approval is granted, such approval may include significant limitations on indicated uses for which a product could be marketed.

        Among the conditions for NDA approval is the requirement that the prospective manufacturer's operating procedures conform to cGMP requirements, which must be followed at all times. In complying with those requirements, manufacturers (including a drug sponsor's third-party contract manufacturers) must continue to expend time, money and effort in the area of production and quality control to ensure compliance. Domestic manufacturing establishments are subject to periodic inspections by the FDA in order to assess, among other things, cGMP compliance. To supply a product for use in the United States, foreign manufacturing establishments also must comply with cGMP and are subject to periodic inspection by the FDA or by regulatory authorities in certain of such countries under reciprocal agreements with the FDA.

        Both before and after approval is obtained, a product, its manufacturer and the holder of the NDA for the product are subject to comprehensive regulatory oversight. Violations of regulatory requirements at any stage, including the pre-clinical and clinical testing process, the approval process, or thereafter (including after approval) may result in various adverse consequences, including the FDA's delay in approving or refusal to approve a product, withdrawal of an approved product from the market and/or the imposition of criminal penalties against the manufacturer and/or NDA holder. In addition, later discovery of previously unknown problems may result in restrictions on such product,

21

manufacturer or NDA holder, including withdrawal of the product from the market. Also, new government requirements may be established that could delay or prevent regulatory approval of our products under development.

        The FDA has implemented accelerated approval procedures for certain pharmaceutical agents that treat serious or life-threatening diseases and conditions, especially where no satisfactory alternative therapy exists. We cannot predict the ultimate impact, however, of the FDA's accelerated approval of procedures on the timing or likelihood of approval of any of our potential products or those of any competitor. In addition, the approval of a product under the accelerated approval procedures may be subject to various conditions, including the requirement to verify clinical benefit in post-marketing studies, and the authority on the part of the FDA to withdraw approval under streamlined procedures if such studies do not verify clinical benefit.

        Most European countries have similarly high standards of technical appraisal and consequently, in most cases, a lengthy approval process for pharmaceutical products.

        The regulatory approval processes can take many years and require the expenditure of substantial resources. Data obtained from pre-clinical and clinical studies is susceptible to varying interpretations that could delay, limit or prevent regulatory approval. Delays or rejections may also be encountered based upon changes in drug approval policies in applicable jurisdictions. There can be no assurance that we or our collaborative customers will obtain regulatory approval for any drugs or diagnostic products developed as the result of our gene discovery programs.

        Because many of the products which may result from our research and development programs are likely to involve the application of new technologies, various governmental regulatory authorities may subject such products to a greater degree of review. As a result, regulatory approvals for such products may require more time than for products using more conventional technologies. In addition, ethical concerns about the use of genetic predisposition testing, and in particular about the risk that such testing could lead to discrimination by insurance providers or employers, may lead to poor market acceptance or to regulatory controls that would adversely affect the development of or demand for diagnostic products based on our research.

Environmental

        deCODE's primary research facilities and laboratory are located in Reykjavik, Iceland. We operate under applicable Icelandic and European Union laws and standards, with which we believe that we comply, relating to environmental, hazardous materials and other safety matters. Our research and manufacturing activities involve the generation, use and disposal of hazardous materials and wastes, including various chemicals and radioactive compounds. These activities are subject to standards prescribed by Iceland and the EU. We do not believe that compliance with these laws and standards will have any material effect upon our capital expenditures, earnings or competitive position, nor that we will have any material capital expenditures in relation to environmental control facilities for the remainder of this fiscal year or any succeeding fiscal year.

        The activities of our pharmaceuticals group involve the controlled use of hazardous materials. We are subject to U.S. federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of such materials and certain waste products. Although we believe that our pharmaceuticals group's activities currently comply with the standards prescribed by such laws and regulations, the risk of accidental contamination or injury from these materials cannot be eliminated. In the event of such an accident, we could be held liable for any damages that result and any such liability could exceed our resources. In addition, there can be no assurance that we will not be required to incur significant costs to comply with environmental laws and regulations in the future.

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Employees

        As of December 31, 2003, deCODE and all of its subsidiaries employed 414 full-time staff. Of the total number at the end of 2003, approximately 109 were employed in the US, and 305 in Iceland. More than 90 held PhD or M.D. degrees and approximately 250 held college degrees. 338 employees were engaged in, or directly supported, research and development activities, of which 267 worked within the laboratory facilities and 71 held positions associated with the development and support of informatics. 38 employees were engaged in various professional support functions such as Finance, Business Development, Legal, Communications, Human Resources and Clinical Collaborations, and some 36 were employed in administrative support, facilities management, cleaning and security. In addition, we utilized part-time employees and outside contractors and consultants as needed and plan to continue to do so.

Certain Financial Information

Research and Development Expenses

        Our research and development expenses were $63.5 million, $89.6 million and $71.0 million in the years ended December 31, 2003, 2002 and 2001, respectively. Of these research and development expense amounts, we estimate that approximately $44 million, $48 million and $30 million were spent with respect to customer-sponsored research and development activities for 2003, 2002 and 2001, respectively. We do not generally track fully burdened research and development expenses by project. These estimates of expenses incurred relating to customer-sponsored research and development activities are approximated based upon full-time equivalent efforts (FTEs) together with those research and development expense that are kept by project. These estimates are not necessarily fully burdened costs of revenue for the respective years in accordance with generally accepted accounting principles.

Geographic Information

        Long-lived assets located in the United States and Iceland were $32,553,000 and $69,861,000, respectively as December 31, 2003 and $36,089,000 and $75,182,000, respectively, at December 31, 2002.

        Revenues attributed to the United States and to Iceland were $13,744,000 and $33,067,000, respectively, for 2003 and $14,485,000 and $26,580,000, respectively, for 2002 and were all attributed to Iceland in 2001.

Significant Customers

        Historically, a substantial portion of deCODE's revenue has been derived from contracts with a limited number of significant customers. deCODE's largest customer, Roche, accounted for approximately 43% of the company's consolidated revenue in 2003 and 41% of consolidated revenue in 2002. Merck accounted for approximately 19% of the company's consolidated revenue in 2003 and 4% of consolidated revenue in 2002. Revenues under the joint development and commercialization agreement with ABG, which was terminated in the fourth quarter of 2002, accounted for 15% of consolidated revenue in the year ended December 31, 2002. The loss of any significant customer may significantly lower deCODE's revenues and affect deCODE's progression to profitability.

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RISK FACTORS, FORWARD-LOOKING STATEMENTS, AND CAUTIONARY FACTORS
THAT MAY AFFECT FUTURE RESULTS

        This annual report on Form 10-K contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, forward-looking statements can be identified by terminology such as "may," "will," "should," "could," "expect," "plan," "anticipate," "believe," "estimate," "predict," "intend," "potential" or "continue" or the negative of such terms or other comparable terminology. These statements are only predictions. We cannot assure our investors that our expectations and assumptions will prove to have been correct. We undertake no intention or obligation to update or revise any forward-looking statements, whether as a result of future events, new information or otherwise. Actual events or results may differ materially due to a number of factors, including those set forth in this section and elsewhere in this Form 10-K. These factors include, but are not limited to, the risks set forth below. Dollar amounts are in thousands, except share and per share amounts unless otherwise noted.

Risks Related to Our Business

We may not successfully develop or derive revenues from any products or services.

        We use our technology and research capabilities primarily to identify genes or gene fragments that are responsible for certain diseases, indicate the presence of certain diseases or cause or predispose individuals to certain complex diseases. Although we have identified some genes that we believe are likely to cause certain diseases, we may not be correct and may not be successful in identifying any other similar genes. Many experts believe that some of the diseases we are targeting are caused by both genetic and environmental factors. Even if we identify specific genes that are partly responsible for causing diseases, any gene-based therapeutic or diagnostic products may not detect, prevent, treat or cure a particular disease. Accordingly, even if deCODE is successful in identifying specific genes, its discoveries may not lead to the development of commercial therapeutic or diagnostic products.

        Any pharmaceutical or diagnostic products that we or our collaborators are able to develop will fail to produce revenues unless we:

•

establishes that they are safe and effective;



•

successfully competes with other technologies and products;



•

ensures that they do not infringe on the proprietary rights of others;



•

establishes that they can be manufactured in sufficient quantities at reasonable costs; and



•

can market them successfully.

        We may not be able to meet these conditions. We expect that it will be years, if ever, before we will recognize revenue from the development of therapeutic or diagnostic products.

        Our informatics products may not meet the needs of potential customers. We have generated little revenues from sales or licenses of informatics products. We cannot assure you that we can successfully develop or commercialize, or that there will be a market for, our informatics products.

If we continue to incur operating losses longer than anticipated, or in amounts greater than anticipated, we may be unable to continue our operations.

        We incurred a net loss of $35.1 million for the year ended December 31, 2003, and had an accumulated deficit of $330.2 million at December 31, 2003. We have never generated a profit and we have not generated revenues except for payments received in connection with our research and development collaborations with Roche, Merck and other collaborations, and from contract services and interest income. Our research and development expenditures and general and administrative costs

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have exceeded our revenue to date, and we expect to spend significant additional amounts to fund research and development in order to enhance our core technologies and undertake product development (including drug development and related clinical trials) and to prepare our informatics products. We do not expect to receive royalties or other revenues from commercial sales of products developed using our technology in the near term. It may be several years before product revenues materialize, if they do at all. As a result, we expect to incur net losses for several years. If the time required to generate product revenues and achieve profitability is longer than we currently anticipate or the level of losses is greater than we currently anticipate, we may not be able to continue our operations.

If our assumption about the role of genes in disease is wrong, we may not be able to develop useful products.

        The products we hope to develop involve new and unproven approaches. They are based on the assumption that information about genes may help scientists to better understand complex disease processes. Scientists generally have a limited understanding of the role of genes in diseases, and few products based on gene discoveries have been developed. Of the products that exist, all are diagnostic products. To date, we know of no therapeutic products based on disease-gene discoveries. If ours assumption about the role of genes in the disease process is wrong, our gene discovery programs may not result in products, the genetic data included in our database and informatics products may not be useful to our customers and those products may lose any competitive advantage.

Clinical trials required for our product candidates are expensive and time-consuming, and their outcome is uncertain.

        Before obtaining regulatory approvals for the commercial sale of any of our products under development, we must demonstrate through pre-clinical studies and clinical trials that the product is safe and effective for use in each target indication. Pre-clinical testing and clinical development are long, expensive and uncertain processes. It may take several years to complete testing for a product and failure can occur at any stage of testing. The length of time necessary to complete clinical trials varies significantly and may be difficult to predict. Factors that can cause delay or termination of our clinical trials include:

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slower than expected patient enrollment due to the nature of the protocol, the proximity of patients to clinical sites, the eligibility criteria for the study, competition with clinical trials for other drug candidates or other factors;



•

lower than expected retention rates of patients in a clinical trial;



•

inadequately trained or insufficient personnel at the study site to assist in overseeing and monitoring clinical trials;



•

delays in approvals from a study site's review board;



•

longer treatment time required to demonstrate effectiveness or determine the appropriate product dose; and



•

lack of sufficient supplies of the product candidate; (vii) adverse medical events or side effects in treated patients; (viii) lack of effectiveness of the product candidate being tested and (ix) regulatory changes.

        Even if we obtain positive results from pre-clinical or clinical trials for a particular product, we may not achieve the same success in future trials of that product. In addition, some or all of the clinical trials we undertake may not demonstrate sufficient safety and efficacy to obtain the requisite regulatory approvals, which could prevent the creation of marketable products. Our product development costs will increase if we have delays in testing or approvals, if we need to perform more or larger clinical

25

trials than planned or if our trials are not successful. Delays in our clinical trials may harm our financial results and the commercial prospects for our products.

Because revenues are concentrated, the loss of a significant customer would harm our business.

        Historically, a substantial portion of our revenue has been derived from contracts with a limited number of significant customers. Our largest customer, Roche, accounted for approximately 43% of our consolidated revenue in 2003 and 41% of consolidated revenue in 2002. Revenue under our alliance with Merck accounted for approximately 19% of consolidated revenue in 2003 and 4% of consolidated revenue in 2002. Revenues under the joint development and commercialization agreement with ABG, which was terminated in the fourth quarter of 2002, accounted for 15% of consolidated revenue in the year ended December 31, 2002. The loss of any significant customer may significantly lower our revenues and affect our progression to profitability.

If we are not able to obtain sufficient additional funding to meet our capital requirements, we may be forced to reduce or terminate ours research programs and product development.

        We have spent substantial amounts of cash to fund our research and development activities and expect to continue to spend substantial amounts for these activities over the next several years. We expect to use cash to collect, generate and analyze genotypic and disease data from volunteers in our disease-gene research programs; to conduct drug discovery and development activities; to continue to develop database and healthcare informatics products; and to continue other research and development activities. Many factors will influence our future capital needs, including:

•

the number, breadth and progress of our discovery and research programs;



•

our ability to attract customers;



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our ability to commercialize our discoveries and the resources we devote to commercialization;



•

the amount we spend to enforce patent claims and other intellectual property rights; and



•

the costs and timing of regulatory approvals.

        We intend to rely on Roche, Merck and other existing and future collaborators for significant funding of our research efforts. In addition, we may seek additional funding through public or private equity offerings and debt financings. We may not be able to obtain additional financing when we need it or the financing may not be on terms favorable to us or our stockholders. Stockholders' ownership will be diluted if we raise additional capital by issuing equity securities.

        If we raise additional funds through collaborations and licensing arrangements, we may have to relinquish rights to some of our technologies or product candidates, or grant licenses on unfavorable terms. If adequate funds are not available, we would have to scale back or terminate our discovery and research programs and product development.

        The Icelandic parliament has enacted legislation authorizing the Minister of Finance to provide an Icelandic government guarantee of a convertible bond offering of up to $200 million by deCODE for the purpose of financing new activities of deCODE in the area of drug development. To become effective, this legislation must be approved by the European Free Trade Association Surveillance Authority, or ESA for compatibility with the state aid stipulations of the agreement on the European Economic Area, to which Iceland is a signatory. The measure is still under review by ESA, which announced on July 16, 2003 that it would conduct a formal investigation procedure with regard to the proposed state guarantee. We cannot be certain that ESA will approve the legislation, that the Icelandic government will make use of the authorization and offer the guarantee to us for any or all of the permitted amount, that such offer to us by the Icelandic Government, if effectuated, will be on

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terms acceptable to us, or that even with such an authorization we will be able to find a market for such an offering of convertible bonds.

If we cannot successfully develop a marketing and sales force or maintain suitable arrangements with third parties to market and sell our products, our ability to deliver products may be impaired.

        We currently have no experience in marketing or selling pharmaceutical products. In order to achieve commercial success for any approved product, we must either develop a marketing and sales force, which will require substantial additional funds and personnel, or, where appropriate or permissible, enter into arrangements with third parties to market and sell our products. We might not be successful in developing marketing and sales capabilities. Further, we may not be able to enter into marketing and sales agreements with others on acceptable terms, and any such arrangements, if entered into, may be terminated. If we develop our own marketing and sales capability, it will compete with other companies that currently have experienced, well funded and larger marketing and sales operations. To the extent that we enter into co-promotion or other sales and marketing arrangements with other companies, revenues will depend on the efforts of others, which may not be successful.

If we cannot successfully form and maintain suitable arrangements with third parties for the manufacturing of the products we may develop, our ability to develop or deliver products may be impaired.

        We have no experience in manufacturing products for commercial purposes and do not have manufacturing facilities. We must either develop such facilities, which will require substantial additional funds, or rely on contract manufacturers for the production of products for development and commercial purposes. The manufacture of our products for clinical trials and commercial purposes is subject to cGMP regulations promulgated by the FDA. In the event that we are unable to develop satisfactory manufacturing facilities or obtain or retain third-party manufacturing for our products, we will not be able to commercialize such products as planned. We may not be able to enter into agreements for the manufacture of future products with manufacturers whose facilities and procedures comply with cGMP and other regulatory requirements. Our current dependence upon others for the manufacture of our products may adversely affect our profit margin, if any, on the sale of future products and our ability to develop and deliver such products on a timely and competitive basis.

Our reliance on the Icelandic population may limit the applicability of our discoveries to certain populations.

        The genetic make-up and prevalence of disease generally varies across populations around the world. Common complex diseases generally occur with a similar frequency in Iceland and other European populations. However, the populations of other nations may be genetically predisposed to certain diseases because of mutations not present in the Icelandic population. As a result, we and our partners may be unable to develop diagnostic and therapeutic products that are effective on all or a portion of people with such diseases. Any difference between the Icelandic population and other populations may have an effect on the usefulness of the Clinical Genome Miner in studying populations outside of Iceland. For our business to succeed, we must be able to apply discoveries that we make on the basis of the Icelandic population to other markets.

If we fail to protect confidential data adequately, we could incur a liability or lose the Icelandic Health Sector Database license.

        Under laws and regulations in force in Iceland, including applicable European laws, directives and regulations, all information on individuals that is used in our population research is anonymized under the protocols and supervision of the Data Protection Authority of Iceland. If any of this data held or generated by us were to become personally identifiable, we would risk losing public support for participation in its research, and could be liable to legal action. Any failure to comply fully with all confidentiality requirements could lead to liability for damages incurred by individuals whose privacy is

27

violated, the loss of our customers and reputation and the loss of the goodwill and participation of the Icelandic population, including healthcare professionals. These eventualities could materially adversely affect our work in Iceland.

        The same general privacy and data protection laws and regulations as well as specific laws and regulations apply to our license to build and operate the Icelandic Health Sector Database, or IHD. Were any data sent to or contained in the IHD to become personally identifiable, we would incur the same risks above and potentially lose our database license.

Some parts of our product development services create a risk of liability from clinical trial participants and the parties with whom we contract.

        Through our wholly-owned subsidiary Encode ehf., we contract with drug companies to perform a wide range of services to assist them in bringing new drugs to market. Our services include:

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supervising clinical trials;



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data and laboratory analysis;



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patient recruitment;



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acting as investigators in conducting clinical trials; and



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engaging in Phase I clinical trials.

        If, in the course of these trials or activities,

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we do not perform our services to contractual or regulatory standards;



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patients or volunteers suffer personal injury caused by or death from adverse reactions to the test drugs or otherwise;



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there are deficiencies in the professional conduct of the investigators with whom we contract;



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our laboratories inaccurately report or fail to report lab results; or



•

our informatics products violate rights of third parties,

then, we could be held liable for these eventualities by the drug companies with whom we contract or by study participants. We maintain insurance to cover ordinary risks, but such insurance may be inadequate and it would not cover the risk of a customer deciding not to do business with us as a result of poor performance.

Use of therapeutic or diagnostic products developed as a result of our programs may result in product liability claims for which we have inadequate insurance.

        Our discovery or research programs or the use of our database or informatics products may bring product liability claims against us. We currently do not carry liability insurance to cover such claims. We are not certain that we or our collaborators will be able to obtain such insurance or, if obtained, that sufficient coverage can be acquired at a reasonable cost. If we cannot protect against potential liability claims, we or our collaborators may find it difficult or impossible to commercialize products.

We may be unable to hire and retain the key personnel upon whom our success depends.

        We depend on the principal members of our management and scientific staff, including Dr. Kari Stefansson, Chairman, President and Chief Executive Officer and Hannes Smarason, Executive Vice President and Senior Business Officer. We have not entered into agreements with any of these people that bind them to a specific period of employment. If any of these people leaves, our ability to conduct our operations may be negatively affected. Our future success also will depend in part on our ability to

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attract, hire and retain additional personnel. There is intense competition for such qualified personnel and we cannot be certain that we will be able to continue to attract and retain such personnel. Failure to attract and retain key personnel could have a material adverse effect on us.

Currency fluctuations may negatively affect our financial condition.

        We publish our consolidated financial statements in U.S. dollars. Currency fluctuations can affect our financial results because a portion of our cash reserves and our operating costs are in Icelandic kronas. A fluctuation of the exchange rates of the Icelandic krona against the U.S. dollar can thus adversely affect the "buying power" of our cash reserves and revenues. Most of our long-term liabilities are U.S. dollar denominated. However, we may enter into hedging transactions if we have substantial foreign currency exposure in the future. We may have increased exposure as a result of investments or payments from collaborative partners.

Our contracts may terminate upon short notice.

        Many of our contracts for research services are terminable on short notice. This means that our ontracts could be terminated for numerous reasons, any of which may be beyond our control such as a reduction or reallocation of a customer's research and development budget or a change in a customer's overall financial condition. The loss of a large contract or multiple smaller contracts, or a significant decrease in revenue derived from a contract, could significantly reduce our profitability and require us to reallocate under-utilized physical and professional resources.

Risks Related to Our Collaborators

We may not be able to form and maintain the collaborative relationships that our business strategy requires and the relationships may lead to disputes over technology rights.

        Our ability to generate revenue growth and become profitable is dependent, in part, upon our ability to enter into additional collaborative arrangements, and upon our ability and that of our collaborative partners to successfully commercialize products incorporating, or based upon, our work.

        We must form research collaborations and licensing arrangements with several partners at the same time in order to execute our business strategy. We currently have a number of collaborative relationships and only three substantial collaborative relationships, including two with Roche. To succeed, we will have to maintain or expand these relationships and establish additional collaborations. There can be no assurance that we will be able to maintain or expand our existing collaborations, enter into future collaborations to develop applications based on existing or future research agreements, sign additional subscribers to our database services, or successfully expand our medicinal chemistry or pharmacogenetics businesses.

        If our collaborations are not successful or if we are not able to manage multiple collaborations successfully, our programs will suffer. If we increase the number of collaborations, it will become more difficult to manage the various collaborations successfully and the potential for conflicts among the collaborators as to rights to the technology and products generated under work conducted with us will increase.

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Dependence on collaborative relationships may lead to delays in product development, product defects and disputes over rights to technology.

        We depend on collaborators for the pre-clinical study and clinical development of therapeutic and diagnostic products and for regulatory approval, manufacturing and marketing of any products that result from our technology. Our agreements with collaborators typically allow them significant discretion in electing whether to pursue such activities. We cannot control the amount and timing of resources collaborators will devote to our programs or potential products.

        In addition, our arrangements may place responsibility for key aspects of information technology, product development and marketing on our collaborative partners. If our collaborators fail to perform their obligations, our information technology products could contain erroneous data, design defects, viruses or software defects that are difficult to detect and correct and may adversely affect our revenues and the market acceptance of our products.

        Our collaborators may stop supporting our products or providing services to is if they develop or obtain rights to competing products. Disputes may arise in the future over the ownership of rights to any technology developed with collaborators. These and other possible disagreements between our collaborators and us could lead to delays in the collaborative research, development or commercialization of products. Such disagreements could also result in litigation or require arbitration to resolve.

Risks Related to Our Industry

Concerns regarding the use of genetic testing results may limit the commercial viability of any products we develop.

        Other companies have developed genetic predisposition tests that have raised ethical concerns. It is possible that employers or others could discriminate against people who have a genetic predisposition to certain diseases. Concern regarding possible discrimination may result in governmental authorities enacting restrictions or bans on the use of all, or certain types of, genetic testing. Similarly, such concerns may lead individuals to refuse to use genetic tests even if permissible. These factors may limit the market for, and therefore the commercial viability of, products that our collaborators and/or we may develop.

We may not be able to compete successfully with other companies and government agencies in the development and marketing of product services.

        A number of companies are attempting to rapidly identify and patent genes that cause diseases or an increased susceptibility to diseases. Competition in this field and our other areas of business, including drug discovery and development as well as database services and healthcare informatics, is intense and is expected to increase. We have numerous competitors, including major pharmaceutical and diagnostic companies, specialized biotechnology firms, universities and other research institutions, and other government-sponsored entities and companies providing healthcare information products. Our collaborators, including Roche and Merck, may also compete with us. Many of our competitors, either alone or with collaborators, have considerably greater capital resources, research and development staffs and facilities, and technical and other resources than we do, which may allow them to discover important genes before we do. We believe that a number of our competitors are developing competing products and services that may be commercially successful and that are further advanced in development than our potential products and services. To succeed, we, together with our collaborators, must discover disease-predisposing genes, characterize their functions, develop genetic tests or therapeutic products and related information services based on such discoveries, obtain regulatory and other approvals, and launch such services or products before competitors. Even if we or our collaborators are successful in developing effective products or services, our products and services may

30

not successfully compete with those of its competitors. Our competitors may succeed in developing and marketing products and services that are more effective than ours or that are marketed before ours.

        Competitors have established, and in the future may establish, patent positions with respect to gene sequences related to our research projects. Such patent positions or the public availability of gene sequences comprising substantial portions of the human genome could decrease the potential value of our research projects and make it more difficult for us to compete. We may also face competition from other entities in gaining access to DNA samples used for research and development purposes. Our competitors may also obtain patent protection or other intellectual property rights that could limit our rights, or our customers' ability, to use our technologies or databases, or commercialize therapeutic or diagnostics products. In addition, we face, and will continue to face, intense competition from other companies for collaborative arrangements with pharmaceutical and biotechnology companies, for establishing relationships with academic and research institutions and for licenses to proprietary technology.

        We expect competition to intensify as technical advances are made and become more widely known. Our future success will depend in large part on maintaining a competitive position in the genomic field. Others or our rapid technological development may result in products or technologies becoming obsolete before we recover the expenses we incurs in developing them.

        Our ability to compete successfully will depend, in part, on our ability, and that of our collaborators, to:

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develop proprietary products;



•

develop and maintain products that reach the market first, and are technologically superior to and more cost effective than other products on the market;



•

obtain patent or other proprietary protection for our products and technologies;



•

attract and retain scientific and product development personnel;



•

obtain required regulatory approvals; and



•

manufacture, market and sell products that we develop.

Changes in outsourcing trends and economic conditions in the pharmaceutical and biotechnology industries could adversely affect our growth.

        Economic factors and industry trends that affect our primary customers, pharmaceutical and biotechnology companies, also affect our business. For example, the practice of many companies in these industries has been to outsource to organizations like us to conduct genetic research, clinical research, sales and marketing projects and chemistry research and development projects. If these industries reduce their present tendency to outsource those projects, Our operations, financial condition and growth rate could be materially and adversely affected. These alliances and arrangements are both time consuming and complex and we face substantial competition in establishing these relationships. In addition, our ability to generate new business could be impaired by general economic downturns in our customers' industries. We have experienced increasing pressure on the part of our customers to reduce expenses, including the use of our services as a result of negative economic trends generally and in the pharmaceutical industry. While we have continued to increase our contract revenues despite this environment, we may not be able to continue this trend should these economic conditions intensify or worsen. If pharmaceutical and biotechnology companies discontinue or decrease their usage of our services, including as a result of the slowdown in the overall U.S. economy, our revenues and earnings could be lower than we expect and our revenues may decrease or not grow at historical rates.

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If regulatory approvals for products resulting from ours gene discovery programs are not obtained, we will not be able to derive revenues from these products.

        Government agencies must approve new drugs and diagnostic products in the countries in which they are to be marketed. We cannot be certain that we can obtain regulatory approval for any drugs or diagnostic products resulting from our gene discovery programs. The regulatory process can take many years and require substantial resources. Because some of the products likely to result from our disease research programs involve the application of new technologies and may be based upon a new therapeutic approach, various government regulatory authorities may subject such products to substantial additional review. As a result, these authorities may grant regulatory approvals for these products more slowly than for products using more conventional technologies. Furthermore, regulatory approval may impose limitations on the use of a drug or diagnostic product.

        After initial regulatory approval, a marketed product and its manufacturer must undergo continuing review. Discovery of previously unknown problems with a product may have adverse effects on our business, financial condition and results of operations, including withdrawal of the product from the market.

        Our success will depend, in part, on the development and marketing of products based upon our research and development. Strict regulatory controls on the clinical testing, manufacture, labeling, supply and marketing of the products will influence our and our partners' ability to successfully manufacture and market therapeutic or diagnostic products. Most countries require a company to obtain and maintain regulatory approval for a product from the relevant regulatory authority to enable the product to be marketed. Obtaining regulatory approval and complying with appropriate statutes and regulations is time-consuming and requires the expenditure of substantial resources.

        Most European countries and the United States have very high standards of technical appraisal and consequently, in most cases, a lengthy approval process for pharmaceutical products. The regulatory approval processes, which usually include pre-clinical and clinical studies, as well as post-marketing surveillance to establish a compound's safety and efficacy, can take many years and require the expenditure of substantial resources. Data obtained from such studies is susceptible to varying interpretations that could delay, limit or prevent regulatory approval. Delays or rejections may also be encountered based upon changes in drug approval policies in applicable jurisdictions. There can be no assurance that we or our collaborative customers will obtain regulatory approval for any drugs or diagnostic products developed as the result of our gene discovery programs.

Efforts to reduce healthcare costs may reduce market acceptance of our products.

        Our success will depend in part on the price and extent to which we will be paid for our products by government and health administration authorities, private health insurers and other third party payors. Reimbursement for newly approved healthcare products is uncertain. Third party payors, including Medicare in the United States, are increasingly challenging the prices charged for medical products and services. They are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement for new therapeutic products. We cannot be certain that any third party insurance coverage will be available to patients for any products we discover or develop. If third party payors do not provide adequate coverage and reimbursement levels for our products, the market acceptance of these products may be materially reduced.

        Numerous governments have undertaken efforts to control growing healthcare costs through legislation, regulation and voluntary agreements with medical care providers and pharmaceutical companies. If cost containment efforts limit the profits that can be derived from new drugs, ours customers may reduce their research and development spending which could reduce the business they outsource to us.

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Our operations involve a risk of injury or damage from hazardous materials, and if an accident were to occur, we could be subject to costly and damaging liability claims, which could have a material adverse effect on our business, financial condition and results of operations.

        Our research and development activities involve the controlled use of hazardous materials and chemicals. Although we believe that our safety procedures for handling and disposing of hazardous materials comply with the standards prescribed by applicable governmental regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of an accident, we could be held liable for any damages or fines that result. Such liability could have a material adverse effect on our business, financial condition, results of operations and liquidity.

Risks Related to Our Intellectual Property

We may not be able to protect the proprietary rights that are critical to our success.

        Our success will depend in part on our ability to protect our genealogy database and genotypic data and any other proprietary databases that we develop and our proprietary software and other proprietary methods and technologies. Despite our efforts to protect our proprietary rights, unauthorized parties may be able to obtain and use information that we regard as proprietary. Our commercial success will depend in part on obtaining patent protection. The patent positions of pharmaceutical, biopharmaceutical and biotechnology companies, including deCODE, are generally uncertain and involve complex legal and factual considerations. We cannot be sure that:

•

any of our pending patent applications will result in issued patents;



•

that we will develop additional proprietary technologies that are patentable;



•

that any patents issued to us or our partners will provide a basis for commercially viable products, will provide us with any competitive advantages or will not be challenged by third parties; or



•

that the patents of others will not have an adverse effect on our ability to do business.

        If we are unable to obtain patent protection for our technology or discoveries, the value of our proprietary resources will be adversely affected.

        In addition, patent law relating to the scope of claims in the area of genetics and gene discovery is still evolving. There is substantial uncertainty regarding the patentability of genes or gene fragments without known functions. The laws of some European countries provide that genes and gene fragments may not be patented. The Commission of the EU has passed a directive that prevents the patenting of genes in their natural state. The U.S. Patent and Trademark Office initially rejected a patent application by the National Institutes of Health on partial genes. Accordingly, the degree of future protection for our proprietary rights is uncertain and, we cannot predict the breadth of claims allowed in any patents issued to us or others. We could also incur substantial costs in litigation if we are required to defend ourselves in patent suits brought by third parties or if we initiate such suits.

        Others may have filed and in the future are likely to file patent applications covering genes or gene products that are similar or identical to our products. We cannot be certain that our patent applications will have priority over any patent applications of others. The mere issuance of a patent does not guarantee that it is valid or enforceable; thus even if we are holding or are granted patents we cannot be sure that they would be valid and enforceable against third parties. Further, a patent does not provide the patent holder with freedom to operate in a way that infringes the patent rights of others. Any legal action against us or our partners claiming damages and seeking to enjoin commercial activities relating to the affected products and processes could, in addition to subjecting us to potential liability for damages, require us or our partners to obtain a license in order to continue to manufacture or market the affected products and processes. There can be no assurance that we or our partners

33

would prevail in any action or that any license required under any patent would be made available on commercially acceptable terms, if at all. If licenses are not available, we or our partners may be required to cease marketing our products or practicing our methods.

        If expressed sequence tags, single nucleotide polymorphisms, or SNPs, or other sequence information become publicly available before we apply for patent protection on a corresponding full-length or partial gene, our ability to obtain patent protection for those genes or gene sequences could be adversely affected. In addition, other parties are attempting to rapidly identify and characterize genes through the use of gene expression analysis and other technologies. If any patents are issued to other parties on these partial or full-length genes or gene products or uses for such genes or gene products, the risk increases that the sale of our or our collaborators' potential products or processes may give rise to claims of patent infringement. The amount of supportive data required for issuance of patents for human therapeutics is highly uncertain. If more data than we have available is required, our ability to obtain patent protection could be delayed or otherwise adversely affected. Even with supportive data, the ability to obtain patents is uncertain in view of evolving examination guidelines, such as the utility and written description guidelines that the U.S. Patent and Trademark Office has adopted.

        While we require employees, academic collaborators and consultants to enter into confidentiality agreements, there can be no assurance that proprietary information will not be disclosed, that others will not independently develop substantially equivalent proprietary information and techniques, otherwise gain access to our trade secrets or disclose such technology, or that we can meaningfully protect our trade secrets.

Our patent protection for DG031 may provide protection for only a limited term.

        The patents we licensed from Bayer for DG031 expire in 2009 and 2012. While we will seek to obtain one or more use patents protecting our proprietary rights to this compound for a longer period, we cannot be certain that we will obtain such patents or that they will adequately protect us. In addition, although we may seek to extend the term of one of the patents we licensed from Bayer and to obtain marketing exclusivity under the Hatch-Waxman Act, we cannot be certain that we will be successful. If we cannot obtain new patents or extend the term of patent protection under one of the patents we licensed from Bayer, the amount of revenues that we will be able to derive from an approved product based on these patents may be adversely affected.

Item 2. Properties

        Our headquarters are in Iceland in an approximately 150,000 square-foot, three-story building, used both for our laboratories and offices. The building is owned by us and located on property subject to a 50-year ground lease at Sturlugata 8, Reykjavik, Iceland. Furthermore, we own a total of 31,000 square feet in a building at Krokhals 5, Reykjavik, to house additional laboratory facilities and storage including Encode's operation, and maintain a facility for approximately 5 genealogists located in Thverholt 14, Reykjavik.

        Our principal executive offices and discovery laboratories in the United States are located in Woodridge, Illinois, and encompass approximately 103,000 square feet with the capability to expand our offices and laboratories to 200,000 square feet. Additionally, we occupy approximately 30,000 square feet of additional leased office and laboratory space in Lemont, Illinois, which has a lease expiration date of September 30, 2004, and an 18,000 square foot leased office and laboratory facility in Bainbridge Island, Washington, near Seattle.

        We also lease approximately 6,500 square feet of office space in Waltham, Massachusetts, for business development and finance.

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Item 3. Legal Proceedings

        Other than claims and legal proceedings that arise from time to time in the ordinary course of its business which are not material, deCODE has no pending legal proceedings except as follows:

        On or about April 20, 2002, an amended class action complaint, captioned In re deCODE genetics, Inc. Initial Public Offering Securities Litigation (01 Civ. 11219(SAS)), alleging violations of federal securities laws was filed in the United States District Court for the Southern District of New York on behalf of certain purchasers of deCODE common stock. The complaint names us, two of our current executive officers (the "Individual Defendants"), and the two lead underwriters (the "Underwriter Defendants") for our initial public offering in July 2000 (the "IPO") as defendants.

        In the amended pleading, the plaintiff alleges violations of Section 11 of the Securities Act of 1933 and violations of Section 10(b) of the Securities Exchange Act of 1934 (and Rule 10b-5 promulgated thereunder) against us, the Individual Defendants and the Underwriter Defendants. In addition, the amended complaint alleges violations of Section 15 of the Securities Act of 1933, and Section 20(a) of the Securities Exchange Act of 1934 against the Individual Defendants. Generally, the amended complaint alleges that the Underwriter Defendants: (i) solicited and received excessive and undisclosed commissions from certain investors in exchange for which the Underwriter Defendants allocated to those investors material portions of the shares of our stock sold in the IPO; (ii) entered into agreements with customers whereby the Underwriter Defendants agreed to allocate shares of our stock sold in the IPO to those customers in exchange for which the customers agreed to purchase additional shares of our stock in the aftermarket at pre-determined prices; and (iii) improperly used their analysts, who purportedly suffered from conflicts of interest, to manipulate the market. The amended complaint further alleges that the prospectus incorporated into the registration statement for the IPO was materially false and misleading in that it failed to disclose these arrangements. The amended complaint also alleges that we and the Individual Defendants had numerous interactions and contacts with the Underwriters from which we and the Individual Defendants either knew of, or recklessly disregarded, the Underwriters' purported wrongful acts. The suit seeks unspecified monetary and recissionary damages and certification of a plaintiff class consisting of all persons who purchased shares of our common stock from July 17, 2000 to December 6, 2000.

        We are aware that similar allegations have been made in hundreds of other lawsuits filed (many by some of the same plaintiff law firms) against numerous underwriter defendants and issuer companies (and certain of their current and former officers) in connection with various public offerings conducted in recent years. All of the lawsuits that have been filed in the Southern District of New York have been consolidated for pretrial purposes before Honorable Judge Shira Scheindlin. Pursuant to the underwriting agreement executed in connection with our IPO, we have demanded indemnification from the Underwriter Defendants. The Underwriter Defendants have asserted that our request for indemnification is premature.

        Pursuant to an agreement the Individual Defendants have been dismissed from the case without prejudice. Along with numerous other issuers, we moved to dismiss the complaint for failure to state a claim. On February 19, 2003, Judge Scheindlin granted our motion with respect to the Section 10(b) claims and denied the motion with respect to the Section 11 claims.

        On July 31, 2003, our Board of Directors (other than Dr. Stefansson, who recused himself because he was an Individual Defendant) conditionally approved a proposed partial settlement with the plaintiffs in this matter. The settlement would provide, among other things, a release of deCODE and of the Individual Defendants for the conduct alleged in the amended complaint to be wrongful. We would agree to undertake other responsibilities under the partial settlement, including agreeing to assign away, and not assert or release, certain potential claims we may have against our underwriters. Any direct financial impact of the proposed settlement is expected to be borne by our insurers. The Board agreed to approve the settlement subject to a number of conditions, including the participation

35

of a substantial number of other issuer defendants in the proposed settlement, the consent of our insurers to the settlement, and the completion of acceptable final settlement documentation. Furthermore, the settlement is subject to a hearing on fairness and approval by the Court overseeing the litigation.

        Due to the inherent uncertainties of litigation and the fact that the settlement is in its early stages, the ultimate outcome of this matter cannot be predicted. If the settlement is not consummated, we expect to contest the allegations against us and our officers vigorously. If we were required to pay significant monetary damages as a result of such litigation (or any other lawsuits alleging similar claims filed against us and our officers in the future), our business could be significantly harmed. Even if such suit concludes in our favor, we may be required to expend significant funds to defend against the allegations. We are unable to estimate the range of possible loss from the litigation and no amounts have been provided for such matters in our financial statements.

Item 4. Submission of Matters to a Vote of Security Holders

        On October 3, 2003, we held our annual meeting of stockholders. The results of the voting on the proposals submitted to the stockholders at this meeting were as follows:

1.

Election of two Class II Directors

NAME	FOR	WITHHELD
Jean-Francois Formela	36,651,348	470,401
J. Neal Armstrong	36,970,938	150,811

2.

Ratification of the appointment of PricewaterhouseCoopers LLP as our independent accountants for the fiscal year ending December 31, 2003

FOR	AGAINST	ABSTAIN
36,734,421	363,251	24,077

36

PART II

Item 5. Market for the Company's Common Equity and Related Stock holder Matters

        The Company's Common Stock is been traded on the Nasdaq National Market under the symbol "DCGN". The following table sets forth, for the calendar periods indicated, the range of high and low sale prices for the Common Stock of the Company on the Nasdaq National Market:

	High		Low
2002
First Quarter	$	10.10	$	5.52
Second Quarter	$	6.30	$	3.50
Third Quarter	$	4.99	$	1.55
Fourth Quarter	$	2.79	$	1.60
2003
First Quarter	$	3.25	$	1.70
Second Quarter	$	3.95	$	1.78
Third Quarter	$	5.41	$	2.45
Fourth Quarter	$	9.74	$	4.61

        We have neither declared nor paid dividends on our common stock since our inception and do not plan to pay dividends in the foreseeable future. Any earnings that we may realize will be retained to finance our growth.

        As of March 2, 2004, there were 5,017 holders of record of the Common Stock.

        On September 15, 2003, we issued (i) 178,968 shares of common stock to Polaris Venture Partners, L.P., upon the net exercise of a warrant for 189,496 shares with an exercise price of $1.00 per share, and (ii) 10,707 shares of common stock to Polaris Venture Partners Founders' Fund, L.P., upon the net exercise of a warrant for 11,337 shares with an exercise price of $1.00 per share. On September 25, 2003, we issued (i) 118,055 shares of common stock to Atlas Venture Fund II, L.P., upon the net exercise of a warrant for 125,000 shares with an exercise price of $1.00 per share, and (ii) 118,055 shares of common stock to Atlas Venture Europe Fund B.V., upon the net exercise of a warrant for 125,000 shares at an exercise price of $1.00 per share. The issuances of these securities were deemed to be exempt from registration under the Securities Act by virtue of Section 4(2) as transactions not involving any public offering. The transferees made appropriate representations as part of the settlements and had, or had access to, adequate information about deCODE. Appropriate legends are affixed to the stock certificates that were issued.

        See Item 12 of this Annual Report on Form 10-K regarding the information called for by Item 201(d) of Regulation S-K.

Item 6. Selected Financial Data

        The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and the notes to those statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Annual Report. The following data has been derived from consolidated financial statements audited by PricewaterhouseCoopers, independent auditors. Consolidated balance sheets at December 31, 2003 and

37

2002 and the related statement of income and cash flows for the three years ended December 31, 2003 and the notes thereto appear elsewhere in this annual report.

		For the Year-Ended December 31,
		2003			2002			2001			2000			1999
		(Tabular amounts in thousands, except share and per share amounts)
Revenue		$	46,811		$	41,065		$	26,099		$	21,545		$	16,591
Operating expenses
	Research and development, including cost of revenue		63,466			89,612			70,954			45,742			33,213
	Selling, general and administrative		17,178			18,685			12,402			15,373			8,221
	Impairment, employee termination and other charges(4)		951			64,790			0			0			0
Total operating expenses			81,595			173,087			83,356			61,115			41,434
Operating loss			(34,784	)		(132,022	)		(57,257	)		(39,570	)		(24,843	)
Interest income			1,151			2,954			6,925			7,378			2,188
Interest expense			(3,478	)		(3,079	)		(440	)		(495	)		(549	)
Other non-operating income and (expense), net			1,988			(72	)		(1,675	)		1,568			(584	)
Net loss before cumulative effect of change in accounting principle			(35,123	)		(132,219	)		(52,447	)		(31,119	)		(23,788	)
Cumulative effect of change in milestone revenue recognition method			0			333			0			0			0
Net loss			(35,123	)		(131,886	)		(52,447	)		(31,119	)		(23,788	)
Accrued dividends and amortized discount on preferred stock(1)			0			0			0			(7,541	)		(7,543	)
Premium on repurchase of preferred stock			0			0			0			0			(30,887	)
Net loss available to common stockholders(1)		$	(35,123	)	$	(131,886	)	$	(52,447	)	$	(38,660	)	$	(62,218	)
Basic and diluted net loss per share:
	Net loss before cumulative effect of change in accounting principle	$	(0.68	)	$	(2.69	)	$	(1.26	)	$	(1.81	)	$	(12.34	)
	Cumulative effect of change in milestone revenue recognition method		0.00			0.01			0.00			0.00			0.00
	Net loss	$	(0.68	)	$	(2.68	)	$	(1.26	)	$	(1.81	)	$	(12.34	)
Shares used in computing basic and diluted net loss per share(1)			51,507,869			49,098,254			41,634,009			21,381,256			5,042,844
Pro forma amounts assuming new milestone revenue recognition method is applied retroactively:
	Revenue							$	23,182		$	22,670
	Net Loss								(55,364	)		(29,994	)
	Basic and diluted net loss per share								(1.33	)		(1.40	)
Other non-GAAP Financial Data:
	Pro forma basic and diluted net loss per share(2)										$	(0.91	)	$	(0.91	)
	Shares used in computing pro forma basic and diluted net loss per share(2)											34,228,300			26,156,154

38

	As of December 31,
	2003		2002		2001		2000		1999
	(In thousands)
Cash and cash equivalents	$	68,669	$	87,244	$	153,061	$	194,145	$	29,846
Total assets(3)(4)		183,475		213,417		249,900		248,901		80,527
Total long-term liabilities		49,874		56,533		44,428		3,519		5,471
Redeemable, convertible preferred stock(1)		0		0		0		0		121,589
Total stockholders' equity (deficit)(1)(3)(4)		93,407		125,246		170,733		216,269		(72,772	)

(1)

Effective upon the closing of our initial public offering in 2000, the outstanding shares of preferred stock were converted into shares of common stock and retired.

(2)

Pro forma basic and diluted net loss per share is computed as if the preferred shares had converted into common shares immediately upon their issuance. Accordingly, in the calculation of pro forma net loss per share, net loss has not been increased for the accumulated dividends or amortized discounts on preferred stock.

(3)

In March 2002, deCODE completed the acquisition of MediChem Life Sciences, Inc. (MediChem) in a stock-for-stock exchange accounted for as a purchase transaction. Total consideration for the acquisition was $85,845,000. deCODE's Statements of Operations include the results of MediChem from March 18, 2002, the date of acquisition.

(4)

In September 2002, deCODE recorded impairment, employee termination benefits and other charges in the total amount of $64,790,000.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

        This Management's Discussion and Analysis of Financial Condition and Results of Operations as of December 31, 2003 and for the three years then ended should be read in conjunction with the audited consolidated financial statements and notes thereto set forth elsewhere in this report.

        This annual report on Form 10-K contains forward-looking statements, including our expectations of future industry conditions, strategic plans and forecasts of operational results. Various risks may cause our actual results to differ materially. A list and description of some of the risks and uncertainties is contained below and in the summary of risk factors included in Item 1.

Overview

        We are a population genetics company developing drugs and DNA-based diagnostics based upon our discoveries in the inherited causes of common diseases. Our population approach and resources have enabled us to identify genes and targets directly involved in the development of many of the most common diseases. We are focused on turning these findings into a growing pipeline of products and services which we believe will be able to combat the causes of disease, not just the signs and symptoms. Our approach to research and development brings together three key types of non-personally identifiable data derived from our population research in Iceland: genotypic and disease data from more than 100,000 volunteer participants in some 50 disease-gene research programs and information that can be analyzed in tandem with genealogical data linking together the entire present-day population of Iceland and going back to the settlement of the country in the ninth century.

39

        Our primary focus is on the discovery and commercialization of novel therapeutics based on genetic information identified in our population-based gene discovery work. Through the acquisition in March 2002 of MediChem Life Sciences and its subsidiary, Emerald Biostructures, now our pharmaceuticals and biostructures groups, we have integrated capabilities for applying genetic findings to the development of drugs, both through our own programs and in alliance with corporate partners. We are also applying the links we have identified between genetic factors and disease to create DNA based tests which can also be used to identify patients with increased risk of developing a disease or to predict which patients will respond well to a given drug therapy. We believe that such tests will become a standard part of healthcare within the coming decade, making it possible to gauge individual predisposition to a particular illness and to design effective preventive strategies; to complement traditional clinical diagnoses; and to identify patients who are likely to respond or not respond to particular drugs. We are also marketing software systems we have developed, making correlations between genetic variation and disease and drug response.

        We currently derive revenues primarily from research funding and other service fees from our collaborative partners; milestone payments, and upfront, exclusivity, technology access and technology development fees under our collaboration agreements comprise most of the rest of our revenues. Our expenses consist primarily of research and development expenses. While we are entitled to royalties or profit sharing under the terms of our agreements, due to the extended time period for the development and commercialization of a saleable product or therapy, we have not yet received royalties or profit sharing under any of our contracts and expect that we will not do so for several years, if at all. In addition to conducting work on our targets in our collaborative and internal programs, our pharmaceuticals group provides drug discovery work for our fee-for-service customers. Our other service offerings include protein crystallization products and protein structure analysis contract services through our Seattle-based biostructures group; pharmacogenomics and clinical trials services through our wholly-owned subsidiary Encode; and DNA analysis services through our genotyping laboratory in Reykjavik.

        As we continue our discovery in common diseases, we aim to conserve ample resources to bring our products forward to the market, and we are constantly evaluating the optimal balance between several factors crucial to our strategy. These include the level of our investment in research and development, the preservation of cash resources and their deployment for product development, and the financing environment. Our goal is to bring products to the market and, in that, make the company profitable. We believe the best means in achieving that objective is to operate the company on a sustainable basis such that it will have the staying power to turn our discoveries into products in the marketplace. As a means to this end, in late 2002 and in the face of an uncertain environment in the capital markets, we undertook measures aimed at improving our operational efficiency and at lowering our operating costs. As a benchmark, we set ourselves the goal of running our base research and development activities on a cash-neutral basis. However, this objective was not an end unto itself but rather a means to ensure that we continued to have on hand the resources to advance our key drug and diagnostic programs.

        We have incurred losses since our inception, principally as a result of research and development and general and administrative expenses in support of our operations. As of December 31, 2003 we had an accumulated deficit of $330.2 million. While we achieved positive cash flow from operations for the third quarter of 2003, we believe that the initiation of substantial new activities such as the conduct of clinical trials on deCODE-owned compounds will require significant additional expenditures. For example, in our target discovery work on our findings in myocardial infarction, we have in-licensed a compound which acts upon our principal target and for which we are preparing to enter directly into a Phase II clinical trial. We expect to seek similar in-licensing opportunities for other compounds in other diseases and any success may increase our cash requirements. We anticipate incurring additional net losses at least through the next several years, due to, among the above-mentioned factors, depreciation and amortization, as well as stock-based compensation and other non-cash charges. We expect that our

40

revenues and losses will fluctuate from quarter to quarter and that such fluctuations may be substantial, especially because progress in our scientific work and milestone payments that are related to progress can fluctuate between quarters. We do not believe that comparisons of our quarter-to-quarter performance are a good indication of future performance.

        We are highly susceptible to conditions in the global financial markets and in the pharmaceutical industry. Positive and negative movement in those markets will continue to pose challenges and opportunities to us. Previous downturns in the market valuations of biotechnology companies and of the equity markets more generally have restricted our ability to raise additional capital on favorable terms. To the extent that equity markets are risk-averse, our ability to raise capital will be adversely affected. However, we believe that we have sufficient cash resources to continue to fund our current research and operations for several years, and we are also investigating the possibility of alternative avenues of financing for our product development programs.

        The pharmaceutical industry, which is the principal customer base for our gene-discovery and contract chemistry businesses, is experiencing difficulties in maintaining historical rates of growth. This presents near-term challenges and significant longer-term opportunities. One of the main challenges facing the pharmaceutical industry is developing pipelines of effective new drugs to treat major indications. As many leading brand-name drugs come off patent and face generic competition, developing successful new medicines will become critical for filling the gap. In the short term, the financial pressures on pharmaceutical companies may be reflected in their research and development spending, making it more difficult for us to sign corporate alliances with significant upfront funding, or lengthening the time required to negotiate such deals. We believe that in the medium to longer term, however, companies such as ours may be well positioned to play an important role in filling the gap in the pipeline of new drugs, either on their own or as partners of pharmaceutical companies. Our gene discovery programs are aimed at identifying novel drug targets that are involved in the basic biology of common diseases and we are focused on discovering new drugs against these targets, both on our own and with major pharmaceutical partners. Our partnerships with Roche and Merck demonstrate that the industry is already investing in the development of new therapeutics based on our approach. Our recent in-licensing of a developmental compound from Bayer demonstrates that the industry may be prepared to provide companies such as ours with rights to shelved compounds that may be brought forward in clinical development in indications other than those for which the compounds were originally designed.

Collaborations and Alliances

        Collaborations and further growth in our medicinal chemistry, pharmacogenomics and informatics services will remain an important element of our business strategy and future revenues. Our ability to generate revenue growth and become profitable is dependent, in part, on our ability to enter into additional collaborative arrangements, and on our ability and our collaborative partners' ability to successfully commercialize products incorporating, or based on, our work. It is also dependent on our ability to maintain and grow our service lines of business. There can be no assurance that we will be able to maintain or expand our existing collaborations, enter into future collaborations to develop applications based on existing or future research agreements, sign additional subscribers to our database services, or successfully expand our medicinal chemistry or pharamacogenomics businesses. Our failure to successfully develop and market products over the next several years, or to realize product revenues, would have a material, (or materially) adverse effect on our business, financial condition and results of operations. We do not expect to receive royalties or other revenues from commercial sales of products developed using our technologies in the near term. It may be several years before product revenues materialize, if they do at all.

Acquisitions

        As part of our business strategy, we continue to consider joint development programs and merger and acquisition opportunities that may provide us with products in late-stage development, intellectual

41

property or financial resources, or with capabilities that will help accelerate our downstream drug discovery efforts.

        On March 18, 2002, we acquired MediChem Life Sciences, Inc. in a stock-for-stock exchange accounted for as a purchase transaction. The acquisition of MediChem is a central element in our strategy to transform deCODE from a company focused on gene discovery into a biopharmaceutical company capable of creating and capturing the greatest possible value from its discovery capabilities. The acquisition has benefited us in three ways: enabling us to advance our in-house programs in drug discovery; enabling us to negotiate much more favorable terms in our alliances with pharmaceutical companies, in which we take our discoveries much further down the drug development process and receive a more significant share of revenues from sales of products that are developed; and providing us with a service business generating revenue in the short term and maintaining the infrastructure for conducting drug discovery work on several programs at once.

        The total consideration for the acquisition was approximately $85.9 million, which consists of deCODE common stock issued in exchange for outstanding MediChem common stock ($79.7 million), MediChem employee stock options assumed ($2.3 million) and deCODE transaction costs ($3.9 million).

        We have recorded the transaction as a purchase for accounting purposes and have allocated the purchase price, based upon independent valuations, to the assets purchased and liabilities assumed based upon their respective estimated fair values. Identifiable intangible assets include developed technology, patents, customer and other contracts and agreements that have estimated useful lives ranging from three to ten years. In the first quarter 2002 we recorded a charge to earnings for acquired in-process research and development amounting $0.5 million. In addition, amortization charges for other identifiable intangibles recorded in the MediChem acquisition will amount to approximately $1.2 million annually. Under Statement of Financial Accounting Standards No. 142 (SFAS No. 142), resulting goodwill ($62.3 million) will not be amortized but is subject to annual impairment testing (refer below).

        Our statements of operations include the results of MediChem from March 18, 2002, the date of acquisition. The following unaudited pro forma financial information presents our consolidated results as if the acquisition of MediChem occurred at the beginning of 2002. Nonrecurring charges, such as the acquired in-process research and development charge of $0.5 million is not reflected in the following pro forma financial information. This pro forma information is not intended to be indicative of future operating results.

	For the Year Ended December 31,
	2002
	(In thousands, except per share amount)
Total revenues	$	45,153
Net loss		(136,318	)
Basic and diluted net loss per share		(2.68	)

Critical Accounting Policies

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported period. On an ongoing basis we evaluate our estimates, which include, among others, those related to revenue recognition, property and equipment, intangible assets, materials and supplies, derivative financial instruments, income taxes, litigation and other contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the

42

circumstances, the results of which form our basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. The impact and any associated risks related to these and our other accounting policies on our business or operations is discussed throughout Management's Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, please refer to our notes to the Consolidated Financial Statements. There can be no assurance that actual results will not differ from the estimates referred to above.

        We believe the following policies to be the most critical to an understanding of our financial condition and results of operations because they require us to make estimates, assumptions and judgements about matters that are inherently uncertain.

        Collaborations and Revenue.    Our collaborative arrangements and the recognition of revenue in such arrangements is the accounting policy most critical to us. A substantial portion of our revenues relate to funded research collaborations. Under these arrangements, we perform research in a specific disease area or disease areas aimed at discoveries leading to novel pharmaceutical and diagnostic products. These arrangements generally have fixed terms and renewal periods specific to each agreement. Under these agreements we are entitled to receive committed payments for which we recognize revenue over the term of the associated contract, inclusive of renewal periods to which we are contractually bound. In addition, we generally receive contractually agreed milestone payments upon the achievement of specific research and product development milestones. We recognize milestones when acknowledgement of having achieved applicable performance requirements is received.

        Our revenues from research and development collaboration agreements are recorded and recognized in accordance with the applicable performance requirements and terms of the respective contracts, generally either (i) as contract research costs are incurred, usually ratably over the period of effort, (ii) according to the level of efforts expended based on the ratio of contract research costs incurred to expected total costs, or (iii) upon the achievement of substantive milestones. Funding payments are not refundable in the event that the related efforts are not successful. Non-refundable, up-front payments we receive are deferred and recognized on a straight-line basis over the contract term. Our contracted chemistry services revenue from negotiated rate contracts are recognized on a per diem basis as services are rendered or on the percentage of completion method based on the ratio of costs incurred to expected total costs for fixed fee contracts based upon the terms of the underlying contract. Any losses on contracts are provided for when they are determinable. Included in revenue are billings to customers for the cost of materials purchased by us under the contract.

        Given the nature of some of our contractual obligations, we may invoice in advance of the work being completed or we may be required to recognize revenue under GAAP in advance of being contractually permitted to invoice for our services. Revenue invoiced in advance of satisfying the applicable criteria for revenue recognition remains as deferred revenue in our balance sheet at any reporting date and then is recognized as revenue as we provide the related services. Revenue recognized prior to the time we are contractually entitled to invoice is reported as unbilled costs and fees. In considering whether to recognize unbilled revenues we assess the likelihood of successfully fulfilling our obligations under the arrangement as well as the risk of collection.

        Revenue estimates are reviewed and revised throughout the lives of our contracts and are made based upon current facts and circumstances. If changes in these estimates or other material adjustments to revenue are identified, the adjustments to profits resulting from such revisions will be recorded on a cumulative basis in the period in which the revisions are made.

        In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables" (EITF No. 00-21). EITF No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of

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EITF No. 00-21 were applicable to revenue arrangements entered into fiscal periods beginning after June 15, 2003. Our adoption of EITF No. 00-21 did not impact revenue for 2003; however, this pronouncement may have a significant impact on timing of revenue recorded under future agreements, including the possible deferral of milestone payments received during the research period and recognition over the remaining period of performance.

        Other.    We consider certain other accounting matters related to property and equipment, materials and supplies, foreign exchange transactions, income taxes and litigation and other contingencies to also be important policies for us.

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Long-lived assets.  We periodically review property and equipment for potential impairments and to assess whether their service lives have been affected by continued technological change and development. In September of 2002, we implemented a cost reduction program and reduced total worldwide headcount by approximately 200 employees, focusing in particular on utilizing ongoing process automation and increased productivity in the core genetics operations in Reykjavik. Stemming from this initiative and together with our consideration of significant and pervasive declines in the market environment for pharmaceutical and biotech industries, we determined that impairment tests of the carrying value of our goodwill and other long-lived assets, including the long-lived assets acquired through the MediChem acquisition, should be performed. We completed these tests and recorded impairments and write-downs of long-term assets amounting to $60.9 million for the year-ended December 31, 2002. There were no events in 2003 that triggered an impairment review nor did our annual review indicate any recoverability issues. Should we determine that there has been further impairment of our fixed assets, goodwill or other intangible assets in the future we would suffer an increase to our net loss or a reduction of our net income in the period such a determination is made. In 2001, we reduced the service lives of our gene sequencing machines from five years to four years to better reflect our estimate of the service lives of these machines resulting in an increase to depreciation expense of $1.4 million in that year. Should we determine that the pace of technological change or other matters dictate that we change the estimated service lives of other of our assets, there will be an impact on depreciation expense from the date of the change.



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Materials and supplies.  We value our materials and supplies at the lower of cost or market, cost being determined on the first-in, first-out method. We apply judgment in determining necessary provisions for slow moving, excess and obsolete materials and supplies based on historical experience and anticipated usage, giving effect to general market conditions. Any rapid technological changes or future business developments could result in an increase in the amount of obsolete materials and supplies on hand. Furthermore, if our estimates of our needs for materials and supplies prove to be inaccurate, additional provision may be required for incremental excess and obsolete items. We recorded charges for write-down of obsolete and excess materials and supplies of $0.8 million, $3.4 million and $3.0 million for the years ended December 31, 2003, 2002 and 2001, respectively. In 2003, we used materials and supplies for which we had made provisions for in prior years as slow-moving, excess and obsolete, benefiting otherwise reported research and development expenses by $0.8 million.



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Foreign exchange transactions.  Our functional currency is the U.S. dollar. However, in light of the significance of our operations outside the United States, an important element of our cost base is or will be denominated in Icelandic krona, including much of our payroll and other operating expenses and some of our long-term borrowings. To manage our exposure to fluctuations in exchange rates, we have entered into and will likely continue to enter into derivative instruments to hedge our exposure to such fluctuations. We have entered into interest rate and foreign currency risk arising from long-term debt obligations denominated in Icelandic krona. To this end, we have entered into two interest rate and cross-currency swaps to manage interest rate and foreign currency risk. These interest rate and cross-currency swaps are designated as

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economic hedges of fixed rate foreign currency debt, but do not qualify for hedge accounting under SFAS No. 133. At each reporting date, the estimated fair value of these instruments is recorded on our balance sheet and the resulting unrealized gain or loss is included as an other non-operating income or expense in our Statements of Operations. We estimate the fair value of these instruments using information that is available at the time of such determination; however, the financial markets for these instruments are immature and, as a result, there is significant judgment inherent in the estimating process. Consequently, subsequent changes in the market for such instruments and/or our views with respect to such and the estimate of the fair value of these instruments could materially affect our results of operations for any particular quarterly or annual period.

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Income Taxes.  Significant estimates are required in determining our provision for income taxes, including interpretations of existing tax laws and regulations. Various internal and external factors may have favorable or unfavorable effects on our future effective tax rate. These factors include, but are not limited to, changes in tax laws, regulations and/or rates, changing interpretations of existing tax laws or regulations, future research and development spending and future levels of capital expenditures.

The preparation of financial statements requires us to evaluate the positive and negative evidence bearing upon the realizability of our deferred tax assets resulting from deductible operating losses and other items. Due primarily to our history of operating losses and the expectation that such losses will continue into the foreseeable future, we have concluded that currently insufficient positive evidence exists to justify the recognition of our net deferred tax assets in our balance sheet. Although there can be no assurance that losses generated to date will be used to offset future taxable income, an adjustment to the valuation of our current net deferred tax assets in the future would increase income in the period that we made a determination that such an adjustment was appropriate.

Income tax in Iceland is payable in Icelandic krona. Consequently, the US dollar value of our net operating loss carryforwards and other deferred tax assets and liabilities is subject to fluctuations in exchange rates. Such fluctuations over time may increase or reduce the reported US dollar balance of our deferred tax assets and liabilities, and there would be a corresponding gain or loss reported in our income statement.

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Litigation and Other Contingencies.  We consider litigation and other claims and potential claims or contingencies in preparing our financial statements under generally accepted accounting principles. We maintain accruals for litigation and other contingencies when we believe a loss to be probable and reasonably estimated. In doing so, we assess the likelihood of any adverse judgements or outcomes with respect to legal and other matters as well as potential of probable losses. We base our accruals on information available at the time of such determination. Changes or developments in the relevant action or our strategy in such proceedings could materially affect our results of operations for any particular quarterly or annual period. Since the recognition of a loss is dependent upon factors not completely in the control of management, timing of a charge, if any, is difficult to predict with certainty.

Results of Operations from the Years Ended December 31, 2003, 2002 and 2001

        Our results of operations have fluctuated from period to period and may continue to fluctuate in the future based upon, among other things, the timing and composition of funding under our various collaborative agreements, as well as the progress of our own research and development efforts. Results of operations for any period may be unrelated to results of operations for any other period. In addition, historical results should not be viewed as indicative of future operating results. We are subject to risks common to companies in our industry and at our stage of development, including risks inherent in our research and development efforts, reliance upon collaborative partners, development by us or

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our competitors of new technological innovations, ability to market products or services, dependence on key personnel, dependence on key suppliers, protection of proprietary technology, ability to obtain additional financing, ability to negotiate collaborative arrangements, and compliance with governmental and other regulations. In order for a product to be commercialized based on our research, we and our collaborators must conduct preclinical tests and clinical trials, demonstrate the efficacy and safety of our product candidates, obtain regulatory approvals or clearances and enter into manufacturing, distribution and marketing arrangements, as well as obtain market acceptance. We do not expect to receive revenues or royalties based on therapeutic or diagnostic products for a period of years, if at all.

        Financial highlights for the year-ended December 31, 2003 include:

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Our revenue increased to $46.8 million for the year ended December 31, 2003 as compared to $41.1 million and $26.1 million for the years ended December 31, 2002 and 2001, respectively. This growth reflects continued expansion across our product development and other service businesses, including milestone revenue from our existing product development alliances and the formation of new corporate partnerships. Importantly, from our revenues we were able to derive the funds necessary to sustain our investment in research and development including investment in clinical development, as we have done for DG031 in heart attack.



•

We decreased our research and development expenses to $63.5 million for the year-ended December 31, 2003 as compared to $89.6 million and $71.0 million for the years ended December 31, 2002 and 2001, respectively. The 29% decrease in 2003 as compared to 2002 is principally attributable to the cost reduction measures we implemented late in 2002, taking advantage of investments in automation in our disease-gene research programs. The principal result of this effort has been a marked increase in productivity enabling us to continue to accelerate both our discovery and downstream work with substantially lower costs.



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At December 31, 2003, we had $74.7 million in cash and cash equivalents, including $6.0 million in restricted cash. Our cash resources are down $18.6 million from our year-end 2002 balance on $20.3 million of cash used in operating activities together with $9.6 million of debt service and $11.4 million of new financing proceeds.

        Revenue.    Our business strategy is focused on turning our discoveries and assets into a broad range of products for the market, at the same time as we leverage our capabilities to generate near-term service revenue. In some instances, we are pursuing product development on our own. In others, we have formed alliances with pharmaceutical and biotechnology firms through which we can cover some of the cost of conducting basic research and spread the risk and investment involved in product development. We have entered into research, development and commercialization alliances and collaborations with major pharmaceutical and biotechnology companies across our business. Depending on the nature of each prospective business opportunity, the key components of the commercial terms of such alliance arrangements typically include one or more of the following: research funding; up-front, exclusivity, technology access, and technology development fees; milestone payments; license or commercialization fees; and royalties or profit sharing from the commercialization of products.

        Significant elements of our revenue is summarized as follows:

	For the Year Ended December 31,
	2003		2002		2001
	(In thousands)
Research funding and service fees	$	35,718	$	36,641	$	18,182
Milestone payments		5,794		1,462		6,917
Up-front, exclusivity, technology access, and technology development fees		4,000		2,500		1,000
Other		1,299		462		0
	$	46,811	$	41,065	$	26,099

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        Collaborations with our most significant partners include:

F. Hoffmann-La Roche (Roche).

        Therapeutics.    In 1998 we entered into a research collaboration and cross-license agreement with Roche, which terminated in 2002, under which we identified key genetic factors involved in ten common diseases: osteoarthritis, Alzheimer's disease, schizophrenia, PAOD, stroke, osteoporosis, obesity, anxiety, non-insulin-dependent diabetes and rheumatoid arthritis. In January 2002, we entered into a new three-year agreement with Roche focused on turning the achievements of our 1998 gene discovery collaboration into novel therapeutics. The 2002 agreement provided that we would collaborate with respect to four diseases that had been the subject of the 1998 agreement. We are currently collaborating on two of those diseases. Under the 2002 agreement we have received $16,000,000 in research funding and may receive an additional $4,000,000 in research funding during the remainder of the term of the agreement. The agreement provides that upon the development of specified compounds during the term of the agreement and for a specified period thereafter we may receive milestone payments, the amount of which will depend on the type of compound developed. In addition, we will be entitled to receive royalties on the sales of drugs that are developed. We expect that we will not receive research funding under the 2002 agreement after February 1, 2005, when the research term ends, unless we and Roche decide to extend the collaboration beyond that time.

        Diagnostics.    In June 2001, we signed a five-year alliance with Roche's diagnostics division to develop and market DNA-based diagnostics for major diseases. More recently we have added research programs aimed at developing diagnostics to predict drug response for major therapeutics used to treat those diseases, in order to help select the most effective treatment of those available. Under the agreement we have received $28,625,000 in research funding, up-front fees and milestone payments. We may receive $15,625,000 in additional research funding over the remainder of the term of the agreement as well as milestone payments upon the achievement of research and development milestones and royalties on the sales of diagnostic products developed.

        Revenues from these alliances with Roche amounted to $19.9 million, $16.9 million, and $25.2 million for the years ended December 31, 2003, 2002 and 2001, respectively.

Merck & Co, Inc. (Merck).

        Obesity.    In September 2002, we entered into an alliance with Merck aimed at developing new treatments for obesity. Under the alliance, we are combining our research efforts in the genetics of obesity to identify, validate and prioritize a series of drug targets to take into development. Under the terms of the three-year agreement, which can be extended on a year-to-year basis upon the consent of the parties, we have received research funding, technology access fees and milestone payments in the aggregate amount of $13,750,000 and may receive research funding and technology access in the future of $10,750,000. In addition, we may receive further research milestone payments and we may receive milestone payments as compounds developed under the alliance advance in the development process and royalties on successfully marketed drugs. Merck may terminate the agreement at any time upon 90 days' notice or after September 26, 2004 upon 30 days' notice in the event that the research program fails to achieve certain specified goals.

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        Information Rich Clinical Trials.    In February 2004, we entered into an agreement with Merck under which we will conduct information-rich clinical trials on a range of Merck's developmental compounds. The term of the alliance is seven years, subject to termination by Merck after five years. We will, at any given point over the course of the alliance, be conducting concurrent trials on as many as five Merck compounds. Under the terms of the agreement, we will receive royalties on sales of drugs and diagnostics developed as part of the alliance. We will receive a one-time technology access fee, will share research funding for the clinical development of compounds and pharmacogenomic analysis, and will receive milestone payments as compounds or pharmacogenomic tests reach the market. In addition, Merck has purchased 689,703 shares of our common stock at a price of $14.50 per share, and has received a warrant to purchase up to 1,724,257 of additional shares of our common stock at $29.00 per share over the next five years.

        Revenues from the therapeutics and other alliances with Merck during the periods presented amounted to $9.2 million, and $1.6 million and $0 for the years ended December 31, 2003, 2002 and 2001, respectively.

        Applied Biosystems Group (ABG).    In the fourth quarter of 2002, we terminated and entered into a related settlement agreement regarding two agreements with ABG that had been in place since July 2001. Our accounting policy for the Joint Development and Commercialization Agreement with ABG to develop genotypic analysis products provided for revenue related to ABG's payment obligation and our development costs associated with the Agreement to be deferred until the development efforts were completed or the Agreement is terminated, if earlier, as was the case. As a result, deferred revenue of $6.3 million was recognized in the fourth quarter of 2002 when the parties reached agreement as to termination.

        Revenue for the years ended December 31, 2003, 2002 and 2001 are as follows:

							2003 as Compared to 2002				2002 as Compared to 2001
	2003		2002		2001		$ Change		% Change		$ Change		% Change
	(In thousands, except %)
Revenue	$	46,811	$	41,065	$	26,099	$	5,746	14	%	$	14,966	57	%

        The 14% increase in revenue in 2003 from 2002 is largely accountable to there being a full year of research funding payments and amortization of technology access and exclusivity fees in our collaboration with Merck and from milestone payments received in our collaborations with Roche and with Merck, partially offset by the termination of the ABG collaboration in the fourth quarter of 2002. The 57% increase in revenue in 2002 from 2001 is attributable to the addition of deCODE's pharmaceuticals and biostructures groups and the totality of revenue recognized under deCODE's contract with ABG, offset by the recognition of revenue from milestone achievements under the 1998 research collaboration with Roche during 2001 that did not recur in 2002. We expect that our revenues will fluctuate from quarter to quarter and that such fluctuations may be substantial especially because progress in our scientific work, including milestone payments that are related to progress, can fluctuate between quarters.

        Research and Development, including Cost of Revenue.    Research and development expenses for the years ended December 31, 2003, 2002 and 2001 are as follows:

							2003 as Compared to 2002					2002 as Compared to 2001
	2003		2002		2001		$ Change			% Change		$ Change		% Change
	(In thousands, except %)
Research and Development, including Cost of Revenue	$	63,466	$	89,612	$	70,954	$	(26,146	)	(29	)%	$	18,658	26	%

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        Our 2003 research and development costs reflects spending related to the range of our disease-gene research programs, including product development and downstream work on targets already identified as well as our pharmaceutical and biostructures groups, which are now an integral part of our operations. The 29% decrease in 2003 as compared to 2002 is principally attributable to the cost reduction measures we implemented late in 2002, taking advantage of investments in automation in our disease-gene research programs and with notable reductions in our usage of chemicals and consumables ($7.4 million), salary and related expenses ($4.8 million), costs related to our clinical collaborations ($3.4 million) and our research and development property-related and other overheads ($3.2 million). Further, productivity gains have enabled acceleration in our basic gene and target discovery work while also making available the resources to undertake preparations for clinical work on our lead drug development programs. Our research and development expenses for 2003 as compared to 2002 also reflect a relative net benefit of $6.3 million resulting from (i) a reversal of accrued database license fees—discussed further below, (ii) materials and supplies we used for which there was relatively little or no attendant cost as a result of the settlement agreement we entered into with ABG in 2002 or for which we had made provisions for in prior years as slow moving, excess or obsolete according to our accounting policy, and (iii) development funding received from IBM, partially offset by (iv) license fees to Bayer AG with respect to the small molecule compound, DG031. The increase in 2002 as compared to 2001 reflects spending related to the range of our disease-gene research programs and the initiation of downstream work on targets already identified as well as, from March 2002, the addition of our pharmaceutical and biostructures groups.

        On January 22, 2000, the Icelandic Ministry of Health and Social Security (the "Ministry"), granted deCODE an operating license (the "License") to create, operate and commercialize the Icelandic Health Sector Database (the "IHD"), or the License. As required by the License, and concurrently with its issuance, deCODE entered into an agreement (the "Agreement") with the Ministry whereby deCODE would be obligated to pay the Icelandic government a fixed annual fee of 70 million Icelandic kronas per year (approximately $1.0 million per year as of December 2003) and an additional annual fee of 6% of its net profit, up to a maximum of 70 million Icelandic krona per year as a consideration for the rights granted to deCODE under the License. Through June 2003 and December 31, 2002, $3.2 million and $2.6 million, respectively, of these annual fees had been provided for and included in other accrued expenses. Under the terms of the Agreement, certain events needed to take place in order for the fixed annual fee to become due, including the consummation of certain data transfer agreements with the two largest Icelandic hospitals, which have subsequently merged to form the National University Hospital ("NUH"). No such agreement with the NUH has been consummated, and the IHD has not been commercialized primarily because the Icelandic Data Protection Authority has not issued the required security certification. In light of the development of our business since the Agreement was entered into, the lack of the required agreement with the NUH and the fact that the Icelandic Data Protection Authority has not issued the required security certification, we do not expect to operate the IHD under the terms of the Agreement. As such, management's estimation after consultation with legal counsel is that it is no longer probable that the accrued fixed annual fee will become due, and accordingly, a reversal of $3.2 million of the accrued fees in the third quarter of 2003, has reduced recorded research and development expenses for the year ended December 31, 2003.

        Selling, General and Administrative Expenses.    Selling, general and administrative expenses for the years ended December 31, 2003, 2002 and 2001 are as follows:

							2003 as Compared to 2002					2002 as Compared to 2001
	2003		2002		2001		$ Change			% Change		$ Change		% Change
	(In thousands, except %)
Selling, General and Administrative	$	17,178	$	18,685	$	12,402	$	(1,507	)	(8	)%	$	6,283	51	%

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        The 8% decrease in 2003 as compared to 2002 reflects the impact of the cost reduction programs implemented in late 2002, with notable reductions in our legal and other third-party service costs ($2.0 million) and in our travel and other overhead expenses ($0.9 million), more than making up for approximate increases in our outside auditing expenses ($0.4 million) and in our director's and officer's insurance premiums ($0.5 million). The increase in 2002 as compared to 2001 results from expanded sales efforts across our businesses and from the addition of selling, general and administrative costs of our pharmaceutical and biostructures groups from March 2002, offset somewhat by a one-time, non-cash litigation settlement in 2001.

        Stock Based Compensation and Remuneration Expense.    Stock based compensation and remuneration expense for the years ended December 31, 2003, 2002 and 2001 are as follows:

							2003 as Compared to 2002					2002 as Compared to 2001
	2003		2002		2001		$ Change			% Change		$ Change			% Change
	(In thousands, except %)
Stock Based Compensation and Remuneration Expense	$	2,440	$	3,048	$	4,651	$	(608	)	(20	)%	$	(1,603	)	(34	)%

        With little compensation expense being attributed to our more recent stock option grants, stock-based compensation and remuneration expense has been decreasing as grants made to employees in earlier years become fully vested. Historical stock-based compensation and remuneration is not necessarily representative of the effects on reported income or loss for future years due to, among other things, the vesting period of the stock options, the value of stock options that have been granted in recent times and the value of additional options that may be granted in future years.

        Impairment, Employee Termination Benefits and Other Costs.    Impairment, employee termination benefits and other costs for the years ended December 31, 2003, 2002 and 2001 are as follows:

							2003 as Compared to 2002					2002 as Compared to 2001
	2003		2002		2001		$ Change			% Change		$ Change		% Change
	(In thousands, except %)
Impairment, Employee Termination Benefits and Other Costs	$	951	$	64,790	$	0	$	(63,839	)	(99	)%	$	64,790	100	%

        In September 2002, we implemented a cost reduction program aimed at achieving positive operating cashflow from existing operations by the end of 2003. In this regard, we reduced total worldwide headcount, focusing in particular on utilizing ongoing process automation and increased productivity in the core genetics operations in Reykjavik. Stemming from this initiative and together with our consideration of significant and pervasive declines in the market environment for pharmaceutical and biotech industries, we determined that impairment tests of the carrying value of our goodwill and other long-lived assets, including the long-lived assets acquired through the MediChem acquisition, should be performed. We have recorded the following impairment, employee termination benefits and other charges in the year-ended December 31, 2002:

	(In thousands)
Employee termination benefits	$	2,158
Impairment of goodwill		53,400
Impairment of property and intangible asset		2,715
Write-down of assets held for sale		2,706
Write-down of equipment		2,053
Obsolete and excess materials and supplies		1,758
	$	64,790

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        During the year ended December 31, 2003, deCODE recorded $951,000 of additional employee terminations benefits. The following summarizes the charges, payments and unpaid termination benefits for the years ended December 31, 2003 and 2002:

	For the Year Ended December 31,
	2003			2002
	(In thousands)
Balance at beginning of period	$	874		$	0
Additions to accrual		951			2,158
Payments of benefits		(1,759	)		(1,284	)
	$	66		$	874

        The charges related to termination benefits are for 61 and 132 employees during 2003 and 2002, respectively. Benefits remaining as of December 31, 2003 are expected to be settled in cash over the first half of 2004.

        For purposes of the goodwill impairment tests, we identified our reporting units, identified the assets and liabilities of the reporting units and performed impairment tests on the net goodwill associated with them. Goodwill that resulted from the acquisition of MediChem was assigned to the reporting units based upon expectations of synergies to be gained from the integration of the pharmaceutical and biostructures groups with the overall group. Goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. To identify potential impairment, we compare fair value of a reporting unit with its carrying amount, including goodwill. For this purpose, we estimate fair value of a reporting unit using analyses of comparable companies and recent comparable transactions. In measuring the amount of impairment loss, we compare the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill, estimating the fair value of an impaired reporting unit using discounted cash flow methodologies. The goodwill impairment charge is associated solely with goodwill resulting from the acquisition of MediChem and results largely from significant and pervasive declines in the market environment for the pharmaceutical and biotech industries impacting, among other things, market valuations of companies operating in those industries.

        In September 2002, we committed to a plan to sell our Woodridge Discovery Center and an agent was engaged and has initiated an active marketing program to locate a buyer/investor in a sale and leaseback transaction. Efforts to enter into a sale and leaseback transaction or other form of re-financing continue but have yet to be consummated. Taking into account the then estimated selling price of the building, we recorded an impairment charge in the year-ended December 31, 2002 amounting to $2.1 million. In addition, certain intangible assets amounting to $0.6 million were determined to be impaired utilizing a discounted cashflow methodology to estimate fair value.

        In September 2002, we committed to a plan to sell our former headquarters facility that had been vacated in connection with the move to our new headquarters facility in Reykjavik's University district earlier in the year. In October 2002, an agent for the sale was engaged and an active marketing program to locate a buyer was initiated. In November 2002, terms of sale were agreed and executed with a buyer in the amount of $2.9 million. Taking into account the selling price of the building less costs to sell, we wrote-down the property in September 2002 amounting to $2.7 million.

        In September 2002, we wrote-down the value of certain laboratory equipment no longer in use to fair value, amounting to an impairment of $2.1 million.

        Ongoing process automation and increased productivity in the core genetics operations in Reykjavik and changes in some of our target research programs have affected planned volume and timing of usage of materials and supplies. In this connection, we recorded a write-down for excess and

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obsolete materials and supplies during September 2002 of $1.8 million, which was recorded in impairment, employee termination benefits and other charges in the statement of operations.

        Interest Income.    Interest income for the years ended December 31, 2003, 2002 and 2001 are as follows:

							2003 as Compared to 2002					2002 as Compared to 2001
	2003		2002		2001		$ Change			% Change		$ Change			% Change
	(In thousands, except %)
Interest Income	$	1,151	$	2,954	$	6,925	$	(1,803	)	(61	)%	$	(3,971	)	(57	)%

        In general, the decreased returns are attributable to the continued decline of prevailing interest rates but also from an overall decrease in our cash balance as we utilize the proceeds of, among other of our financing activities, our initial public offering.

        Interest Expense.    Interest expense for the years ended December 31, 2003, 2002 and 2001 are as follows:

							2003 as Compared to 2002				2002 as Compared to 2001
	2003		2002		2001		$ Change		% Change		$ Change		% Change
	(In thousands, except %)
Interest Expense	$	3,478	$	3,079	$	440	$	399	13	%	$	2,639	600	%

        The increase in interest expense from 2002 reflects the cost of financings put into place during the late part of 2001 and early part of 2002 and, from 2003, reflects an equipment sale-leaseback financing in June as well as short-term borrowings made in the latter-half of the year.

        Other Non-Operating Income and Expense, Net.    Other non-operating income and expense for the years ended December 31, 2003, 2002 and 2001 are as follows:

									2003 as Compared to 2002				2002 as Compared to 2001
	2003		2002			2001			$ Change		% Change		$ Change		% Change
	(In thousands, except %)
Other Non-Operating Income And Expense, Net	$	1,988	$	(72	)	$	(1,675	)	$	2,060	2,861	%	$	1,603	96	%

        Our other non-operating income and expense, net for the year ended December 31, 2003 comprises unrealized swap gains ($1.8 million), the net impact of foreign exchange ($0.1 million loss) and the gain on the sale of deCODE's investment in the common stock of eMR ($0.3 million). Our unrealized swap gains stem from the two cross-currency swaps we entered into as economic hedges against foreign exchange rate fluctuations that may occur on our Tier A and Tier C bonds but that do not qualify for hedge accounting under SFAS No. 133. Such unrealized amounts may or may not equate to the realized gains or losses that may result in the final settlement of these swaps. The continued weakening of the U.S. dollar compared to the Icelandic krona during 2003 has been significant and these currency fluctuations may continue to adversely affect our financial results.

        Income Taxes.    As of December 31, 2003, we had an accumulated deficit of $330.2 million and did not owe any Icelandic or U.S. federal income taxes nor did we pay any in the years ended December 31, 2003, 2002 or 2001. Realization of deferred tax assets is dependent on future earnings, if any. As of December 31, 2003, we had net operating losses able to be carried forward for U.S. federal income tax purposes of approximately $31.4 million to offset future taxable income in the United States that expire at various dates through 2023. Also, as of December 31, 2003 our foreign subsidiaries had

52

net operating loss carryforwards of approximately $146.3 million that expire in varying amounts beginning in 2006.

        Net Loss and Basic and Diluted Net Loss Per Share.    Net loss and basic and diluted net loss per share for the years ended December 31, 2003, 2002 and 2001 are as follows:

							2003 as Compared to 2002					2002 as Compared to 2001
	2003		2002		2001		$ Change			% Change		$ Change		% Change
	(In thousands, except % and per share amounts)
Net Loss	$	35,123	$	131,886	$	52,447	$	(96,763	)	(73	)%	$	79,439	151	%
Basic and Diluted Net Loss Per Share	$	0.68	$	2.68	$	1.26	$	(2.00	)	(75	)%	$	1.42	137	%

        This is a decrease of 73% in net loss and a decrease of 75% in basic and diluted net loss per share from 2002 to 2003. Increased revenue and the introduction of significant operational efficiencies account for these decreases in the 2003 periods as compared to the 2002 periods together with the impact of significant impairment, employee termination costs and other gains and charges in all periods presented. This is an increase of 151% in net loss and an increase of 113% in basic and diluted net loss per share from 2001 to 2002. The increases in net loss and basic and diluted net loss per share in 2002 are primarily attributable to the impairment, employee termination benefits and other charges recorded offset in part by the higher average number of shares outstanding for the 2002 periods. The difference in the average number of shares outstanding is the result of our acquisition of MediChem in March 2002.

        Pro Forma Net Loss and Basic and Diluted Net Loss Per Share.    Pro forma net loss and basic and diluted net loss per share for the years ended December 31, 2003, 2002 and 2001 are as follows:

							2003 as Compared to 2002					2002 as Compared to 2001
	2003		2002		2001		$ Change			% Change		$ Change		% Change
	(In thousands, except % and per share amounts)
Pro Forma Net Loss	$	35,123	$	131,886	$	55,364	$	(96,763	)	(73	)%	$	76,522	138	%
Pro Forma Basic and Diluted Net Loss Per Share	$	0.68	$	2.68	$	1.33	$	(2.00	)	(75	)%	$	1.35	102	%

        Net loss and basic and diluted net loss per share were $35.1 million and $0.68, respectively, for the year-ended December 31, 2003 as compared to pro forma net loss and basic and diluted net loss per share calculated assuming our new milestone revenue recognition method is applied retroactively of $131.9 million and $2.68, respectively, for the year-ended December 31, 2002 and of $55.4 million and $1.33, respectively, for the year-ended December 31, 2001.

53

Liquidity and Capital Resources

        We have financed our operations primarily through funding from research and development collaborative agreements, and the issuance of equity securities and long-term financing instruments ($497 million from the beginning of 1999 to-date). Future funding under terms of our existing agreements is approximately $61 million excluding milestone payments and royalties that we may earn under such collaborations.

        Although we currently depend upon funded research arrangements for a significant portion of our revenue, we continue to invest in proprietary research and we will incur the costs of such research. In the near term, this will require us to continue to make investments in our in-house capabilities for downstream development which we believe will better position us to capture the most value to us in our discoveries. As we identify promising discoveries for further development, we may choose to continue the development ourselves into and through clinical trials, regulatory clearances and manufacture, distribution and marketing. In other cases we are or will be working to varying degrees with partners. The decisions we make as to these matters will affect our cash requirements.

        Based upon the range of our current activities, including the clinical trial alliance we formed with Merck in February 2004, we expect to have an overall net use of cash in 2004 in our operating, investing and financing activities very similar to that used in 2003 ($18.6 million). Debt service in 2004 together with net payments on short-term borrowings and other working capital needs are expected to amount to $15.0 million. In February 2004, we received proceeds of $10.0 million from Merck in their purchase of deCODE common stock. Although our capital expenditure needs and other investing activities may in the future fluctuate significantly from period to period, we currently anticipate that we will only have to make replacement capital expenditures in 2004, likely amounting to under $1.0 million. However, while we will continue to carefully manage our basic operating costs we are also beginning to deploy the necessary resources to bring our proprietary programs into the clinic. Our most advanced proprietary drug discovery programs are in myocardial infarction and PAOD. In our myocardial infarction program we in-licensed DG031 in the fourth quarter of 2003, a compound that we will be testing in the clinic as a treatment for vascular inflammation and the prevention of heart attack. We are preparing to begin a Phase II information-rich clinical trial in 2004. In our PAOD program during 2003 we advanced into screening of lead compounds and we anticipate filing an IND in PAOD by the end of 2004 or early 2005, and entering into the clinic shortly thereafter.

        Our cash requirements depend on numerous factors, including our ability to obtain new research and development collaboration agreements; to obtain and maintain contract service agreements in our pharmaceuticals, biostructures, clinical research trials and genotyping service groups; expenditures in connection with alliances, license agreements and acquisitions of and investments in complementary technologies and businesses; competing technological and market developments; the cost of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights; the purchase of additional capital equipment, including capital equipment necessary to ensure that our sequencing and genotyping operations remain competitive; and capital expenditures required to expand our facilities. Changes in our research and development plans, the entry into clinical trials of a drug based on our discoveries, or other changes affecting our operating expenses may result in changes in the timing and amount of expenditures of our capital resources.

        Under all circumstances, we will require significant additional capital in the future, which we may seek to raise through further public or private equity offerings, additional debt financing or added collaborations and licensing arrangements. However, no assurance can be given that additional financing or collaborations and licensing arrangements will be available when needed, or that if

54

available, will be obtained on favorable terms. If adequate funds are not available when needed, we may have to curtail operations or attempt to raise funds on unattractive terms.

		For the Year Ended December 31,
		2003			2002			2001
		(In thousands)
Cash provided by (used in):
	Operating activities	$	(20,331	)	$	(53,161	)	$	(21,470	)
	Investing activities		(792	)		(13,355	)		(47,691	)
	Financing activities		2,548			699			28,077
Cash and cash equivalents, at end of period			68,669			87,244			153,061

        Cash and Cash Equivalents.    At December 31, 2003, we had $74.7 million in cash and cash equivalents, including $6.0 million in connection with a financing that is restricted as to its use. Our cash resources are down $18.6 million from our year-end 2002 balance on $20.3 million of cash used in operating activities together with $9.6 million of debt service and $11.4 million of new financing proceeds. Available cash is invested in accordance with our investment policy's primary objectives of liquidity, safety of principal and diversity of investments. Our cash is deposited only with financial institutions in Iceland, the United Kingdom and the United States having a high credit standing. This cash is largely invested in U.S. dollar denominated money market and checking accounts and also in Icelandic krona denominated accounts.

        Operating Activities.    Working capital needs resulted in the net use of $1.0 million of funds in the year-ended December 31, 2003 as compared to $3.2 million in the year-ended December 31, 2002. On account of this and significant non-cash impairment and other charges in 2002, although net loss decreased $96.8 million in 2003 as compared to 2002, net cash used in operating activities decreased $32.8 million. As more fully described above, this is as a result of our increased revenue base and the impacts of the cost reduction measures we implemented late in 2002. Working capital needs resulted in the net use of $3.2 million of funds in the year-ended December 31, 2002 as compared to $10.5 that was provided by working capital sources in the year-ended December 31, 2001. On account of this and significant non-cash impairment and other charges in 2002, although net loss increased by $79.4 million in 2002 as compared to 2001, net cash used in operating activities increased $31.7 million in 2002 as compared to 2001. Notably, in 2002 we made significant payments to our vendors and particularly to ABG for reagents, other supplies and DNA analyzers. In addition, into 2002 we were continuing to make significant investments in our disease-gene research programs and had taken on the costs of downstream work on targets already identified as well as were expanding our sales efforts across our businesses.

        Investing Activities.    Our investing activities have consisted of capital expenditures and long-term strategic equity investments in, and acquisitions of, technologies and businesses that are complementary to our business. Purchases of property and equipment during the year ended December 31, 2003 were $0.9 million as compared to $15.6 and $47.7 million in the years ended December 31, 2002 and 2001, respectively; the latter being primarily due to the expansion of our facilities and operations. We principally made replacement capital expenditures during 2003. In 2002, we expended $5.7 million in respect of the new building to house our operations in the University District of Reykjavik, $2.8 million for the purchase of DNA analyzers under our supply agreement with ABG, and acquired $3.3 million of cash in the purchase of MediChem. There were also $3.9 million of MediChem transaction costs, resulting in a net outlay of cash for the year ended December 31, 2002 in connection with the acquisition of $0.6 million. During 2001, we expended $23.7 million in respect of our new headquarters building and we paid $13.1 million for DNA analyzers acquired late in 2000. Although we expect to continue to make simply replacement capital expenditures, net cash used in investing activities may in

55

the future fluctuate significantly from period to period due to the timing of our capital expenditures and other investments.

        Financing Activities.    Net cash of $2.5 million was provided in financing activities in the year-ended December 31, 2003 as compared to $0.7 million and $28.1 million provided in financing activities in the years-ended December 31, 2002 and 2001, respectively. Financing activities for the year ended December 31, 2003 largely consisted of the sale and 18-month leaseback of certain laboratory equipment ($4.8 million), short-term borrowings ($6.5 million) and installment payments on our existing debt and capital lease obligations ($9.6 million). In 2001, we financed certain equipment purchases ($12.0 million) in a sale and leaseback transaction and, importantly, in December 2001 we established a $27.5 million bridge loan with an Icelandic financial institution to finance the construction of our new headquarters facility. We repaid the borrowings under the bridge loan in January and March 2002 with the proceeds from our Tier A $13.5 million bond offering, Tier C $7.3 million offering of privately placed bonds and Tier D $6.7 million bank loan. $14 million of cash that was restricted as of December 31, 2001 was provided in 2002 in the final financing (Tiers C and D) of our new headquarters facility. In addition, we repaid the existing mortgage on our Woodridge, IL discovery center ($11.9 million) and re-financed the property in June 2002, resulting in proceeds of $5.8 million.

        We seek to maintain a desired level of floating-rate debt with respect to our overall debt portfolio denominated in U.S. Dollars. To this end, we have entered into two interest rate and cross-currency swaps to manage interest rate and foreign currency risk arising from long-term debt obligations denominated in Icelandic krona. These interest rate and cross-currency swaps with a remaining combined notional amount of 1,730 million Icelandic krona are designated as economic hedges of fixed rate foreign currency debt (Tier A and Tier C bonds), but do not qualify for hedge accounting under SFAS 133. The estimated fair value of these instruments is included in other long-term assets is $11.2 million and $6.4 million as of December 31, 2003 and December 31, 2002, respectively. The unrealized gain for the year-ended December 31, 2003 and 2002 resulting from the recording of these instruments together with the translation of the Tier A and Tier C bonds is $1.8 million and $1.1 million, respectively, and is included in other non-operating income and (expense), net in the Consolidated Statements of Operations.

        On March 1, 2004, we prepaid the Tier C bonds ($10,946,000) as a first step in an integrated refinancing of the Tier C bonds and the Tier D bank loan with an Icelandic financial institution (the "Lender"). On March 12, 2004, we entered a $17,500,000 term loan with the Lender to refinance the Tier C bonds and the Tier D bank loan. The term loan bears interest at the three-month LIBOR plus 3% (4.11% as of March 12, 2004) until March 1, 2009, at which point, the Lender may adjust the interest margin unilaterally on the interest date March 1, 2009. The term loan is payable in twenty quarterly payments starting on March 1, 2009 and the final payment is due on December 1, 2013. The term loan can be repaid on every anniversary of the loan starting on March 1, 2006, but for which we will pay a prepayment fee of 1% for every year that remains on the term loan facility with a maximum fee of 6%. Final execution of the term loan and our receipt of the related proceeds is expected to occur by March 19, 2004.

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        Contractual Commitments.    Our major outstanding contractual commitments relate to the privately placed bonds and bank loans and equipment lease financings. Our contractual commitments as of December 31, 2003 were as follows:

			Payments Due by period
	Total		Less Than 1 Year		1-3 Years		3-5 Years		More than 5 Years
	(In thousands)
Long-term debt	$	48,740	$	4,893	$	10,779	$	33,068	$	0
Capital lease obligations, including interest		8,580		5,988		2,506		86		0
Operating leases		2,709		1,484		1,213		12		0
	$	60,029	$	12,365	$	14,498	$	33,166	$	0

        Under the terms of certain technology licensing agreements, we are obligated to make payments upon the achievement of established milestones leading to the discovery of defined products. These payments could total $6.0 million and the year incurred cannot be determined at the current time.

        Recent Accounting Pronouncements.    In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51." FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first reporting period beginning after December 15, 2003. We adopted this standard on July 1, 2003 and its adoption did not have an impact on our financial position or results of operations.

        In April 2003, the Financial Accounting Standards Board (FASB) released Statement of Financial Accounting Standards (SFAS) No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 clarifies under what circumstances a contract with an initial net investment meets the characteristics of a derivative, amends the definition of an underlying contract, and clarifies when a derivative contains a financing component in order to increase the comparability of accounting practices under SFAS No. 133. The statement is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. We adopted this standard on July 1, 2003 and its adoption did not have any impact on our financial position or results of operations.

        In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. The Statement is effective for financial instruments entered into or modified after May 31, 2003. We adopted this standard on June 1, 2003 and its adoption did not have any impact on our financial position or results of operations.

        In August 2003, the EITF reached a consensus on Issue 03-05, "Applicability of AICPA Statement of Position 97-2 to Non-Software Deliverables in an Arrangement Containing More-Than-Incidental Software." EITF 03-05 addresses the applicability of SOP 97-2 to non-software deliverables in an arrangement containing more-than-incidental software. In an arrangement that includes software that is more than incidental to the products or services as a whole, software and software-related elements are included within the scope of SOP 97-2. Software-related elements include software products and

57

services, as well as any non-software deliverables for which software deliverable is essential to its functionality. We adopted EITF 03-05 and its adoption did not have any impact on our financial position or results of operations.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

        The primary objective of our investment activities is to preserve principal while maximizing income we receive from our investments without significantly increasing risk. Some of the securities in our investment portfolio may be subject to market risk. This means that a change in prevailing interest rates may cause the market value of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the market value of our investment will probably decline. To minimize this risk in the future, we intend to maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, money market funds and government and non-government debt securities. In general, money market funds and bank deposits are not subject to market risk because the interest paid on such funds fluctuates with the prevailing interest rate. As of December 31, 2003, all of our cash and cash equivalents were in money market, bank deposit and checking accounts.

        We are exposed to market risks from changes in foreign currency exchange rates, interest rates and investment prices. These changes may adversely affect our operating results and financial condition. We seek to manage these risks through regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. We control and manage foreign exchange risk, interest rate risk, and investment price risk by continually monitoring changes in key economic indicators and market information.

        As a consequence of the nature our business and operations our reported financial results and cash flows are exposed to the risks associated with fluctuations in the exchange rates of the U.S. dollar, the Icelandic krona and other world currencies. We continue to monitor our exposure to currency risk but have not yet purchased instruments to hedge these general risks through the use of derivative financial instruments.

        We hold various interest rate sensitive assets and liabilities to manage the liquidity and cash needs of our day-to-day operations. As a result, we are exposed to risks due to changes in interest rates. In order to mitigate risks associated with interest rate sensitive liabilities we use interest rate derivative instruments, such as cross currency interest rate swaps, and may in future use other instruments to achieve the desired interest rate maturities and asset/liability structures.

        We are exposed to credit (or repayment) risk, as well as market risk from the use of derivative instruments. If the counterparty fails to fulfill its performance obligations under a derivative contract, our credit risk will equal the positive market value in a derivative. Consequently, when the fair market value of a derivative contract is positive, this indicates that the counterparty owes us, thus creating a repayment risk for us. When the fair market value of a derivative contract is negative, we owe the counterparty and therefore, assume no repayment risk.

        In order to minimize the credit risk in derivative instruments, we enter into transactions with high quality counterparties such as financial institutions that satisfy our established credit approval criteria. We review the credit ratings of such counterparties on a regular basis.

Item 8. Financial Statements and Supplementary Data

        The financial statements required to be filed pursuant to this Item 8 are appended to this Annual Report on Form 10-K. A list of the financial statements filed herewith is found at "Index to Financial Statements and Schedules" on page F-1.

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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

        None.

Item 9A. Controls and Procedures

        a)    Evaluation of disclosure controls and procedures.    Our Chief Executive Officer and our Chief Financial Officer evaluated the effectiveness of deCODE's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the fiscal year covered by this Annual Report on Form 10-K. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that as of the end of such fiscal year deCODE's current disclosure controls and procedures are adequate and effective to ensure that information required to be disclosed in the reports deCODE files under the Exchange Act is recorded, processed, summarized and reported on a timely basis.

        b)    Changes in internal control over financial reporting.    There was no change in deCODE's internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the last quarter of the year ended December 31, 2003 that has materially affected, or is reasonably likely to materially affect, deCODE's internal control over financial reporting.

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PART III

Item 10. Directors and Executive Officers of the Registrant

Directors

        Our certificate of incorporation requires that the Board of Directors be divided into three classes. The members of each class of directors are to serve for staggered three-year terms. Class I consists of Sir John Vane and Göran A. Ando, whose terms will expire at the Annual Meeting of Stockholders in 2005. Class II consists of Jean-Francois Formela and J. Neal Armstrong, whose terms will expire at the Annual Meeting of Stockholders in 2006. Class III consists of Kari Stefansson and Terrance McGuire, whose terms will expire at the Annual Meeting of Stockholders in 2004. The directors hold office until the expiration of their respective terms and until their respective successors are elected and qualify, or until death, resignation or removal.

        The name and age of each of our current directors, as well as their respective positions and the period during which each such individual has served as a director, are set forth below. Additional biographical information concerning each of the directors follows the table.

Name	Age	Position(s)	Director Since
Kari Stefansson(1)	54	Director, Chairman of the Board, Chief Executive Officer and President	1996
Terrance G. McGuire(1)(2)(3)	47	Director and Vice-Chairman	1996
Jean-Francois Formela(2)(3)	47	Director	1996
Sir John Vane	76	Director	1997
J. Neal Armstrong(2)(4)	65	Director	2003
Göran A. Ando	54	Director	2004

(1)

Member of Nominating Committee

(2)

Member of Audit Committee

(3)

Member of Compensation Committee

(4)

Chair of the Audit Committee. The Board of Directors has determined that Mr. Armstrong is an audit committee financial expert. Mr. Armstrong is "independent" as that term is used in applicable regulations of the Securities and Exchange Commission.

        Kari Stefansson, M.D., Dr. Med. has served as our President, Chief Executive Officer and a Director since he co-founded deCODE in August 1996. Dr. Stefansson was appointed to serve as the Chairman of our Board of Directors in December 1999. He also served as our Secretary from August 1996 to March 2001. From 1993 until April 1997, Dr. Stefansson was a professor of Neurology, Neuropathology and Neuroscience at Harvard University. In addition, from 1993 through December 1996 he was Director of Neuropathology at Beth Israel Hospital in Boston, Massachusetts. From 1983 to 1993, he held faculty positions in Neurology, Neuropathology and Neurosciences at the University of Chicago. Dr. Stefansson received his M.D. and Dr. Med. from the University of Iceland in 1976 and 1986, respectively.

        Terrance G. McGuire has served as a director since August 1996 and as Vice-Chairman of the Board of Directors since April 2000. He currently serves as Chairman of two board committees: the Compensation Committee and the Nominating Committee and as a member of our Audit Committee. He previously served as our assistant secretary from January 1998 to October 2000. Since March 1996, he has been a Founding General Partner of Polaris Venture Partners. Since 1992, he has served as a general partner of Alta V Management Partners L.P., which is the general partner of Alta V Limited Partnership. He is a director of Acusphere, Inc. and several private healthcare and information

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technology companies. Mr. McGuire received his B.S. in Physics and Economics from Hobart College, his M.S. in Engineering from Dartmouth College and his M.B.A. from the Harvard Business School.

        Jean-Francois Formela, M.D. has served as a director since August 1996, and as a member of our Audit Committee since February 1998. Dr. Formela is a Senior Partner of Atlas Venture. Before joining Atlas Venture in 1993, Dr. Formela was Senior Director, Medical Marketing and Scientific Affairs at Schering-Plough in the U.S. where he also held biotechnology licensing and marketing responsibilities. Dr. Formela is a director of Exelixis, Inc., Nuvelo, Inc. and several private companies. Dr. Formela holds an M.D. from Paris University School of Medicine and an M.B.A. from Columbia Business School.

        Sir John Vane has served as a director since January 1997. In 1982, Sir John received the Nobel Prize in Physiology or Medicine for his work in prostaglandins and for discovering the mode of action of aspirin. As a consultant to Squibb, he initiated the program on inhibiting angiotensin-converting enzyme which led to the marketing of Captopril. During 12 years as Director of Research and Development at the Wellcome Foundation, he oversaw the development of Tracrium, Flolan, Zovirax and Lamictal. In 1986, he founded the William Harvey Research Institute and built the Institute to over 100 members, first as Chairman, then as Director General, and, since 1997, as Honorary President. Sir John graduated with a degree in Chemistry from Birmingham University, obtained a D.Phil and D.Sc in Pharmacology from Oxford University, and spent 20 years in academic research. Sir John acts as a consultant to, and board member of, several pharmaceutical and biopharmaceutical companies. Sir John also has served as a director of Vane Associates since 1997. He became a Fellow of the Royal Society in 1974, was knighted in 1984 and has received numerous other honorary fellowships and doctorates.

        J. Neal Armstrong has served as a director since October 2003. Mr Armstrong has served as Vice President, Chief Financial Officer, Secretary and Treasurer of Aspect Medical Systems, Inc., a developer and manufacturer of an anesthesia monitoring system since 1996. From 1990 to 1996, Mr. Armstrong served as Vice President of Finance, Chief Financial Officer and as a director of Haemonetics, Inc., a manufacturer of blood processing systems. From 1985 to 1990, he was the Vice President of Finance and Administration, Treasurer and Chief Financial Officer at BTU International, a manufacturer of thermal processing systems. Prior to 1985, he served for 14 years in senior operating and financial positions at Texas Instruments, Inc., an electronics company.

        Göran A. Ando, M.D. has served as a director since February 2004. Dr. Ando is Group Chief Executive of Celltech Group, which he joined in April 2003. Prior to joining Celltech, he served as Executive Vice President and President, Research and Development for Pharmacia Corporation from March 2000 until its acquisition by Pfizer Inc. in April 2003. While with Pharmacia & Upjohn, Inc., Dr. Ando served as Executive Vice President and President, Research & Development from November 1997 to March 2000, Executive Vice President, Science & Technology from 1995 to 1997, and Executive Vice President and Deputy CEO in 1995.

Executive Officers Who Are Not Directors

        The name, age and position of each person who is currently serving as an executive officer (but not also as a director) is listed below, followed by summaries of their backgrounds and principal

61

occupations. Executive officers are elected annually, and serve at the discretion of the Board of Directors.

Name	Age	Position(s)
Hannes Smarason	36	Executive Vice President and Senior Business Officer
Lance Thibault	37	Chief Financial Officer and Treasurer
Jeffrey Gulcher	44	Chief Scientific Officer
Mark Gurney	49	Senior Vice President, Drug Discovery
Hakon Hakonarson	43	Vice President, Clinical Sciences
Michael Young	52	Senior Vice President, Business Development

        Hannes Smarason has served as our Executive Vice President and Senior Business Officer (formerly Senior Business and Finance Officer) since March 2000. From March 1999 to March 2000, he served as our Senior Vice President, Chief Business Officer and Treasurer, and, from January 1997 to March 1999, he served as our Chief Financial Officer and Vice President, Business Development. Before joining us, he worked with McKinsey & Co. in Boston from 1992 through December 1996 as a consultant. Mr. Smarason received his B.S. in Mechanical Engineering and Management from the Massachusetts Institute of Technology and his M.B.A. from the Massachusetts Institute of Technology Sloan School of Management.

        Lance Thibault joined deCODE in February 2001 and was named Chief Financial Officer and Treasurer in June 2001. Before joining us, he was a Director with the Global Capital Markets practice of PricewaterhouseCoopers in London, England. Mr. Thibault received a B.S. in Accountancy from Bentley College in 1988 and is a CPA.

        Jeffrey Gulcher, M.D., Ph.D. has served as our Chief Scientific Officer since October 2003, prior to that he had served as Vice President, Research and Development since he co-founded the company in August 1996. Dr. Gulcher was on staff in the Department of Neurology at Beth Israel Hospital in Boston, Massachusetts and Harvard University Medical School from June 1993 to October 1998. Dr. Gulcher received his Ph.D. and M.D. from the University of Chicago in 1986 and 1990, respectively, and completed his neurology residency at the Longwood Program of the Neurology Department of the Harvard Medical School in 1996.

        Mark Gurney, Ph.D. has served as our Senior Vice President, Drug Discovery since October 2003. He joined deCODE in August 2000 and was elected our Vice President, Pharmaceutical Discovery in October 2000 and our Vice President, Drug Development in August 2002. He was formerly Director, Genomics Research at Pharmacia Corporation. Prior to his positions at Pharmacia, Dr. Gurney held academic appointments in the Department of Pharmacological and Physiological Sciences at the University of Chicago and in the Department of Cell, Molecular and Structural Biology at the Northwestern University Medical School. He received his B.A. in Biology from the University of California at San Diego in 1975 and his Ph.D. from the California Institute of Technology in 1980. In 1994, he completed his M.B.A. at Northwestern University's Kellogg School of Management.

        Hakon Hakonarson has served as or Vice President, Clinical Sciences since October 2003. Prior to that he also served as our Director of Respiratory, Inflammatory and Pharmacogenomics Research as well as Chief Scientific Officer of Encode. Dr. Hakonarson received his M.D., Ph.D. from the University of Iceland, School of Medicine. He completed his pediatric residency training at the University of Connecticut in 1992 and subspeciality training in pulmonary medicine at the Children's Hospital of Philadelphia, University of Pennsylvania School of Medicine in 1995. Dr. Hakonarson was an Assistant Professor of Pediatrics at the Children?s Hospital and the University of Pennsylvania from 1995 until his relocation to Iceland in 1998, at which time he became Director of Respiratory Research at deCODE.

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        Michael W. Young was elected to serve as our Senior Vice President, Business Development since October 2003, prior to that he had served as our Vice President, Business Development since June 2001. Prior to joining deCODE, Mr. Young had been Vice President of Commercial Development for GTC, a subsidiary of Genzyme Corporation, since 1995. Mr. Young has held marketing, sales and business development positions with other emerging biotech and biopharma companies, including Millipore Corporation, Ventrex Laboratories, Verax Corporation and PerSeptive Biosystems. Subsequent to military service, Mr. Young completed his BA in biology from Canisius College in 1974, attended the University of Miami and Nova University (MS 1976) and attended graduate school at the Harvard University School of Public Health, Department of Nutrition.

Section 16(a) Beneficial Ownership Reporting Compliance

        Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our executive officers and directors and persons who beneficially own more than ten percent of a registered class of our equity securities to file reports of ownership and changes in ownership with the Securities and Exchange Commission and the Nasdaq National Market. Based solely upon our review of the copies of such Forms 3 and 4 we have received during the most recent fiscal year and Form 5 and amendments thereto furnished to us, we believe that all of our directors, officers and greater than 10% stockholders have timely filed all required reports except that Hakon Hakonarson and J. Neal Armstrong inadvertently filed their Forms 3 late.

Code of Ethics

        We have adopted a Code of Business Conduct and Ethics that applies to all of our directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer or controller. The Code of Business Conduct and Ethics can be found on our website at www.decode.com.

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Item 11. Executive Compensation

        The following table sets forth information concerning the annual and long-term compensation for services to us for each of the fiscal years ended December 31, 2003, 2002 and 2001 of those persons who served as (i) our chief executive officer during 2003 and (ii) our other four most highly compensated executive officers who were serving as such as of December 31, 2003 (the "Named Executive Officers"):

	Annual Compensation						Long-Term Compensation Stock Option Awards (Number of Shares)
Name and Principal Position								All Other Compensation
	Year	Salary(1)		Bonus
Kari Stefansson Chairman,President and Chief Executive Officer	2003 2002 2001	$	503,373 443,585 372,597	$	— — 130,000	(3)	600,000 — —	$	44,116 67,677 45,062	(2) (2) (2)
Hannes Smarason Executive Vice President and Senior Business Officer	2003 2002 2001	$	286,678 252,673 204,696	$	— — 71,000	(3)	400,000 — —		— — —
Jeffrey Gulcher Chief Scientific Officer	2003 2002 2001	$	236,256 238,110 203,096	$	— 50,000 69,445	(4)	100,000 — —	$	— 11,436 12,215	(2) (2)
Mark Gurney Senior Vice President, Drug Discovery	2003 2002 2001	$	212,423 251,707 148,714	$	— — 65,000	(4)	120,000 — —	$	— 9,030 10,498	(2) (2)
Michael Young(5) Senior Vice President, Business Development	2003 2002 2001	$	235,000 235,000 137,083	$ $	— 48,500 48,500	(4) (4)	— 100,000 100,000		— — —

(1)

Includes, except with respect to Mr. Young (all years presented), Jeffrey Gulcher and Mark Gurney (2003 only), compensation paid in Icelandic kronas. Figures reflect exchange rates of 71.16, 80.77 and, 103.20 Icelandic kronas to $1.00, the exchange rates determined by the Central Bank of Iceland on December 31, 2003, 2002 and 2001, respectively.

(2)

Includes the value of housing and an automobile provided by us for the benefit of the Named Executive Officer.

(3)

Represents bonus paid to individual in December 2002 for services rendered in 2001.

(4)

Represents bonus paid to individual in March 2002 for services rendered in 2001.

(5)

Mr. Young was elected in June 2001.

Option Grants in Last Fiscal Year

        The following table sets forth certain information concerning grants of stock options to the Named Executive Officers during the fiscal year ended December 31, 2003.

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Option Grants in Last Fiscal Year

							Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term(1)
		Percentage of Total Options Granted to Employees in Fiscal 2003
	Number of Securities Underlying Options Granted			Exercise or Base Price Per Share
Name						Expiration Date	5%		10%
Kari Stefansson	600,000	23.51	%	$	8.96	11/17/13	$	3,380,938	$	8,567,959
Hannes Smarason	260,000	10.19	%		5.63	11/17/13		1,527,499		4,826,073
	140,000	5.49	%		7.06	11/17/13		621,599		1,575,255
Jeffrey Gulcher	100,000	3.92	%		8.96	11/17/13		563,490		1,427,993
Mark Gurney	120,000	4.70	%		8.96	11/17/13		676,188		1,713,592

(1)

The dollar amounts under these columns are the result of calculations assuming that the price of common stock on the date of the grant of the option increases at the hypothetical 5% and 10% rates set by the Securities and Exchange Commission and therefore are not intended to forecast possible future appreciation, if any, of our stock price over the option term of 10 years.

Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values

Name	Shares Acquired on Exercise (#)	Value Realized	Number of Securities Underlying Unexercised Options at December 31, 2003 Exercisable/Unexercisable		Value of Unexercised in-the-Money Options at December 31, 2003 (1) Exercisable/Unexercisable
Kari Stefansson	—	—	312,501	287,499	$	0	$	0
Hannes Smarason	—	—	263,890	136,110		671,296		153,804
Jeffrey Gulcher	—	—	4,167	86,160		0		0
Mark Gurney	—	—	105,000	123,840		0		0
Michael Young	—	—	67,603	32,397		52,054		24,946

(1)

Based on the closing price on The Nasdaq Stock Market at December 31, 2003 of $8.19.

Compensation Arrangements

Director Compensation

        Except as set forth below, our directors do not receive cash compensation for services on our Board of Directors or any board committee. We do, however, reimburse all directors for their expenses incurred in connection with attendance at Board of Directors and committee meetings.

        We have entered into an agreement with Vane Associates (of which Sir John Vane is a partner) pursuant to which Vane Associates will receive (i) $12,000 for each year Sir John serves as a director, and (ii) $3,000 for each board meeting that Sir John attends and for each other day on which Sir John provides services to deCODE. In addition, we granted Sir John an option to purchase 60,000 shares of our common stock. The option vests in equal annual installments over three years commencing August 30, 2003 and has an exercise price of $2.15. We reimbursed Vane Associates for its legal expenses incurred to review, negotiate and amend its agreement with us.

        We have entered into an agreement with Mr. Armstrong pursuant to which he will receive (i) $12,000 for each year he serves as a director, and (ii) $3,000 for each board and board committee

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meeting that he attends and for each other day on which he provides services to deCODE. In addition, we granted Mr. Armstrong an option to purchase up 60,000 shares of our common stock. The option vests in equal annual installments over three years commencing on October 3, 2004 and has an exercise price of $5.35.

        In November 2003 the board adopted a policy for compensating directors who are not also employees. Pursuant to this policy, (1) we pay each director an annual retainer of $12,000 (or a pro rated portion of such amount in case of a partial term) and $3,000 per day for each board or committee meeting that he or she attends whether personally or by telephone participation and for each other day on which he or she provides services to deCODE at deCODE's request and (2) we grant each director a non-qualified stock option under our 2002 Equity Incentive Plan to purchase 60,000 shares (or a pro rated portion of such amount in case of a partial term) of our common stock at a price equal to the closing price of the stock as reported on the Nasdaq National Market on the day prior to such director's election or appointment to the Board, with such option to vest in periodic installments over the course of the director's term.

        At the time of adoption of this policy, we granted a non-statutory stock option to purchase 60,000 shares of the our common stock to Jean-Francois Formela at an exercise price of $8.17. The option vests as to 20,000 shares on each of the first, second and third anniversaries of the date of our 2003 Annual Meeting of Stockholders (or, the date of our 2006 Annual Meeting of Stockholders, if earlier than such third anniversary), provided that Mr. Formela is then serving as a director. We also granted a non-statutory stock option to purchase 80,000 shares of our common stock to Terrance G. McGuire at an exercise price of $8.17. The option vests as to 20,000 shares on each of the first, second, third and fourth anniversaries of the date of our 2003 Annual Meeting of Stockholders (or the date of our 2007 Annual Meeting of Stockholders, if earlier than such fourth anniversary), provided that Mr. McGuire is then serving as a director. At the time of Dr. Ando's appointment to the Board, we granted him a non-qualified option to purchase 26,667 shares of our common stock at an exercise price of $12.33 per share, with such option to vest as to 6,667 shares at our 2004 Annual Meeting of Stockholders and as to 20,000 shares at our 2005 Annual Meeting of Stockholders, provided that Dr. Ando is then serving as a director.

Employment Agreements

        At the time of commencement of employment, our executive officers generally receive offer letters specifying basic terms and conditions of their employment. We have entered into an employment agreement with Mr. Young which stipulates that if we terminate his employment other than for "cause": (a) we are required to make a lump sum severance payment to him equal to one year of his base salary then in effect; and (b) options to purchase the lesser of (i) 20,000 shares of our common stock or (ii) the number of shares of our common stock underlying his remaining unvested options, shall become immediately exercisable. Pursuant to the terms of his agreement, Mr. Young's base salary is $235,000 per year, and he is eligible for a bonus at the determination of the Compensation Committee.

        Our executive officers have signed agreements which require them to maintain the confidentiality of our information and to assign inventions to us. These agreements also prohibit these officers from competing with us during the terms of their employment and for a certain period thereafter by engaging in any capacity in any business which is, or on the date of termination of their employment was, competitive with our business.

Defined Contribution Plans

        In accordance with applicable Icelandic law, deCODE contributes to relevant pension organizations for personnel in Iceland. Certain other discretionary contributions may be made.

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Contributions are based on employee salaries paid and deCODE has no further liability in connection with these plans. Total contributions of $1,744,808 were made for the year ended December 31, 2003.

        Effective December 1, 2001, deCODE adopted a 401(k) plan (the "deCODE 401(k) Plan") available to eligible full-time employees in the United States. Additionally, deCODE's wholly owned subsidiary, MediChem Life Sciences, Inc., sponsors a contribution savings and investment 401(k) plan (the "MediChem 401(k) Plan and collectively with the deCODE 401(k) Plan, the "401(k) Plans") in which employees meeting minimum service requirements are eligible to participate. Pursuant to the 401(k) Plans, employees may elect to reduce their current compensation by up to the statutorily prescribed annual limit ($13,000 in 2004) and have the amount of such reduction contributed to the 401(k) Plan. Each of the 401(k) Plans requires that we make additional matching contributions on behalf of participants at a rate of 50% of employee contributions up to a maximum of 6% of their base salary. Contributions by employees to the 401(k) Plans and income earned on such contributions are not taxable to employees until withdrawn from the 401(k) Plans. deCODE made contributions of $32,854 in the year ended December 31, 2003 to the deCODE 401(k) Plan. In 2003 deCODE contributed $155,146 to the MediChem 401(k) Plan.

Compensation Committee Interlocks and Insider Participation

        The current members of our Compensation Committee are Mr. McGuire and Dr. Formela each of whom served on the Compensation Committee of the Board of Directors during 2003. Mr. McGuire served as deCODE's assistant secretary from January 1998 until October 2000. Otherwise, no member of the Compensation Committee was at any time during 2003, or formerly, an officer or employee, and no member of the Compensation Committee had any relationship with us requiring disclosure under Item 404 of Regulation S-K under the Exchange Act of 1934, as amended. No executive officer has served as a director or member of the Compensation Committee (or other committee serving an equivalent function) of any other entity whose executive officers served as a director of deCODE or a member of our Compensation Committee.

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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

        The following table sets forth certain information as of February 16, 2004, except as otherwise noted, regarding the beneficial ownership of our common stock by (i) each current director, (ii) each Named Executive Officer, (iii) all of our directors and executive officers as a group, and (iv) each person known to be the beneficial owner of more than five percent of the outstanding shares of the common stock.

Name And Address of Beneficial Owner	Amount and Nature of Beneficial Ownership(1)	Percent of Outstanding Common Stock(2)
SAPAC Corporation Ltd(3) 124 Grenzacherstrasse CH-4070 Basel	4,483,334	8.3	%
Kari Stefansson(4) c/o deCODE genetics, Inc. Sturlugata 8 Reykjavik, Iceland	3,356,542	6.2	%
T. Rowe Price Associates, Inc.(5) 100 E. Pratt Street Baltimore, MD	3,301,703	6.1	%
Hannes Smarason(6)	599,352	1.1	%
Jeffrey Gulcher(7)	381,617	*
Mark Gurney(8)	121,875	*
Michael Young(9)	74,803	*
Göran A. Ando	0	*
Jean-Francois Formela	0	*
Terrance G. McGuire(10)	96,554	*
J. Neal Armstrong	0	*
Sir John Vane(11)	80,000	*
All directors and executive officers as a group (12 persons)(12)	4,848,896	8.9	%

*

Comprises less than one percent of the outstanding common stock.

(1)

The number of shares beneficially owned by the individuals and entities listed in the table is determined in accordance with the rules of the United States Securities and Exchange Commission, and may not be conclusive as to ownership of those securities for any other purpose. Under those rules, an individual (or entity) is deemed to beneficially own shares of common stock as to which the individual currently has certain sole or shared powers or as to which the individual can acquire such powers within 60 days by the exercise of any option, warrant or other right. We have been advised that each stockholder listed in the table has sole voting and dispositive power with respect to such shares unless otherwise noted in the footnotes below.

(2)

Applicable percentage of ownership is based on 53,809,619 shares of common stock outstanding on February 16, 2004.

(3)

SAPAC is successor-in-interest to Roche Finance Ltd. Includes 4,066,667 shares of common stock and 416,667 shares of common stock issuable upon exercise of warrants owned by SAPAC. Roche Holdings Ltd exercises voting and investment control over the shares held by SAPAC.

(4)

Includes 331,250 shares of common stock issuable upon exercise of options held by Dr. Stefansson.

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(5)

As set forth in Schedule 13G, dated February 13, 2004, filed by T. Rowe Price Associates, Inc. These securities are owned by various individuals and institutional investors, which T. Rowe Price Associates, Inc. (Price Associates) serves as investment adviser with power to direct investments and/or sole power to vote the securities. For purposes of the reporting requirements of the Securities and Exchange Act of 1934, Price Associates is deemed to be a beneficial owner of such securities; however Price Associates expressly disclaims that it is, in fact, the beneficial owner of such securities.

(6)

Includes (a) 300,000 shares of common stock of Fjarfestingarfelagid Primus ehf, of which Mr. Smarason is the sole shareholder, and (b) 279,448 shares of common stock issuable upon exercise of options held by Mr. Smarason.

(7)

Includes 10,417 shares of common stock issuable upon exercise of options held by Dr. Gulcher.

(8)

Represents shares of common stock issuable upon exercise of options held by Mr. Gurney.

(9)

Represents shares of common stock issuable upon exercise of options held by Mr. Young.

(10)

Includes 96,554 shares of common stock held by Terrance McGuire TTEE, Terrance McGuire Trust—1999.

(11)

Includes 50,000 shares of common stock issuable upon exercise of options held by Sir John Vane.

(12)

Includes an aggregate of 3,853,809 shares of common stock and 995,087 of shares of common stock underlying warrants and stock options granted to all directors and executive officers as a group which will have vested within sixty days after February 16, 2004 (of which 10,859 shares of common stock and 127,294 shares of common stock underlying options are held by executive officers who are not named executive officers).

Equity Compensation Plan Information

        The following table sets forth information concerning the number of outstanding options, the weighted average exercise price of those securities and the number of securities remaining to be granted under existing equity plans, whether approved or not approved by security holders, as of December 31, 2003. The purpose of this table is to illustrate the potential dilution that could occur from past and future equity grants.

Plan Category	Number of Securities To Be Issued Upon Exercise of Outstanding Options, Warrants And Rights	Weighted-Average Exercise Price of Outstanding Options, Warrants And Rights		Number of Securities Remaining Available For Future Issuance Under Existing Equity Compensation Plans
Equity compensation plans approved by security holders	4,108,331	$	7.88	1,540,813
Equity compensation plans not approved by security holders	N/A		N/A	N/A
Total	4,108,331	$	7.88	1,540,813

Item 13. Certain Relationships and Related Transactions

        On November 1, 2003, principal and accrued interest in the amount of $1,846,338 under a promissory note from Hannes Smarason, our Executive Vice President and Senior Business Officer, which was delivered to the Company in 1999 in connection with the officer's early exercise of a stock option for 260,000 shares of common stock and was secured by a pledge of such shares, became due.

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On November 3, 2003, and in accordance with the terms of the note, the Company applied 240,096 shares of the pledged stock (valued at $1,846,000 based on the opening price on the Nasdaq Stock Market on November 3, 2003) to payment of principal and interest due on the note.

        On December 31, 2003, Hannes Smarason, our Executive Vice President and Senior Business Officer, was paid in full outstanding principal and interest in the amount of $70,798 under a note he delivered to us in 1998 in connection with his early exercise of a stock option.

        In January, 2004 Mr. Smarason acquired an ownership interest in Icelandair, the only regularly-scheduled commercial airline serving Iceland. Since January 1, 2004 we have incurred charges to Icelandair of approximately $183,434 for business travel by our officers and employees. We believe that the rates charged us by Icelandair are no less favorable than those it charges other customers.

        Kari Stefansson, our Chairman, Chief Executive Officer and President, and Hannes Smarason our Executive Vice President and Senior Business Officer, are beneficial owners of 17.8% and 19.7%, respectively, of the outstanding shares of Prokaria ehf., an Icelandic company. Pursuant to an agreement between us and Prokaria, we are entitled to receive royalties on any revenues Prokaria may receive from a patent application we transferred to Prokaria. In addition, we agreed to provide certain sequencing and advisory services to Prokaria. During the fiscal year ended December 31, 2003, we recognized $7,406 in revenue with respect to such services.

Item 14. Principal Accountant Fees and Services

Audit fees

        The following table summarizes the fees billed or billable by PricewaterhouseCoopers for services rendered for the fiscal years ended December 31, 2002 and December 31, 2003:

	Fiscal Year Ended December 31,
Type of Fees
	2002		2003
Audit Fees	$	973,206	$	663,005
Audit-Related Fees		456,995		86,840
Tax Fees		264,545		123,535
All Other Fees		0		0
Total Fees	$	1,694,746	$	873,380

        The caption "audit fees" are fees we paid PricewaterhouseCoopers for professional services for the audit of our financial statements included in our Form 10-K's and review of financial statements included our Form 10-Q's. "Audit-related fees" are fees billed by PricewaterhouseCoopers for grant audits, statutory audits, mergers and acquisitions and consultations."Tax fees" are fees for tax compliance, tax advice and tax planning.

Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services by Independent Accountants

        The Audit Committee pre-approves all audit and legally permissible non-audit services provided by the independent accountants. The Audit Committee is preparing a policy for the pre-approval of services provided by the independent accountants.

        The Audit Committee approved all services performed by the independent auditor during 2002 and 2003.

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PART IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)

The following documents are included as part of this Annual Report on Form 10-K:

1.

Financial Statements:

	PAGE
Reports of Independent Auditors	F-2, F-3
Consolidated Statements of Operations	F-4
Consolidated Balance Sheets	F-5
Consolidated Statements of Changes in Stockholders' Equity	F-6
Consolidated Statements of Cash Flows	F-9
Notes to Consolidated Financial Statements	F-10

2.

All schedules are omitted as the information required is inapplicable or the information is presented in the consolidated financial statements or the related notes.

3.

Exhibits:

Exhibit Number	Description
3.1	Amended and Restated Certificate of Incorporation, as further amended (Incorporated by reference to Exhibit 3.1 and Exhibit 3.3 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000).
3.2	Bylaws, as amended (Incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000).
3.3	Certificate of Amendment to Amended and Restated Certificate of Incorporation dated August 30, 2002 (Incorporated by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q filed on November 14, 2002).
4.1	Specimen Common Stock Certificate (Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000).
4.2	Form of Warrant to Purchase Series A Preferred Stock (Incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000).
4.3	Form of Warrant to Purchase Series C Preferred Stock (Incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000).
4.4	Warrant Certificate, dated May 6, 2002 issued to Islandsbanki-FBA hf. (Incorporated by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q filed on May 15, 2002).
4.5	Form of Indexed Bond (Tier A) (Incorporated by reference to Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q filed on May 15, 2002).
4.6	Form of Indexed Bond (Tier C) (Incorporated by reference to Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q filed on May 15, 2002).
4.7	Warrant, dated February 25, 2004, issued to Merck & Co., Inc.

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10.1	Form of License from The Icelandic Data Protection Commission (now, The Icelandic Data Protection Authority) to Islensk erfdagreining ehf. and its Clinical Collaborators to Use and Access Patient Records and Other Clinical Data Relating to Individuals (Incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000).
10.2*	1996 Equity Incentive Plan, as amended (Incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-8 (Registration No. 333-56996) filed on March 14, 2001).
10.3*	Form of Non-Statutory Stock Option Agreement, as executed by employees and officers of deCODE genetics, Inc. who received non-statutory stock options (Incorporated by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K filed on April 15, 2003).
10.4*	Form of Employee Proprietary Information and Inventions Agreement (Incorporated by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000).
10.5	Agreement on the Collaboration of Fridrik Skulason (FS) and Islensk erfdagreining ehf. (IE) on the Creation of a Database of Icelandic Genealogy, dated April 15, 1997 (Incorporated by reference to Exhibit 10.5 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000).
10.6*	Consultancy Contract between deCODE genetics, Inc. and Vane Associates, dated August 30, 2002 (Incorporated by reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K filed on April 15, 2003).
10.7*	Indemnity Agreement between deCODE genetics, Inc. and Sir John Vane, dated December 1, 1997 (Incorporated by reference to Exhibit 10.8 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000).
10.9	Amended and Restated Investor rights Agreement of deCODE genetics, Inc., dated as of February 2, 1998, as further amended and restated (Incorporated by reference to Exhibit 10.12 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000).
10.10	Co-operation Agreement between Reykjavik Hospital and Islensk erfdagreining ehf., dated November 4, 1998 (Incorporated by reference to Exhibit 10.22 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000).
10.11	Co-operation Agreement between the Iceland State Hospital and Islensk erfdagreining ehf., dated December 15, 1998 (Incorporated by reference to Exhibit 10.24 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000).
10.12*	Form of Employee Confidentiality, Invention Assignment and Non-Compete Agreement executed by certain officers (Incorporated by reference to Exhibit 10.44 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000).
10.13*	Employment and Amended and Restated Employee Confidentiality, Invention Assignment and Non-Compete Agreement between deCODE genetics, Inc. and Mark Gurney, dated as of August 21, 2000 and signed on August 13, 2001 (Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed on August 14, 2001).
10.14*	Employment and Employee Confidentiality, Invention Assignment and Non-Compete Agreement between deCODE genetics, Inc. and Lance Thibault, dated February 1, 2001 and signed on June 20, 2001 (Incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed on August 14, 2001).

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10.15*	Employment Agreement between deCODE genetics, Inc. and Michael W. Young dated June 4, 2001 (Incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q filed on August 14, 2001).
10.16+	Collaboration and Cross-License Agreement Re. Diagnostics between F.Hoffman-La Roche Ltd. AG and deCODE genetics, ehf dated as of June 29, 2001 (Incorporated by reference to Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q filed on August 14, 2001).
10.17	Contract on Financial Leasing between Lysing hf, and Islensk erfdagreining ehf., dated as of December 13, 2001. (Incorporated by reference to Exhibit 10.36 to the Company's Annual Report on Form 10-K filed March 27, 2002).
10.18	Land Lease Agreement between the City of Reykjavik and Islensk erfdagreining ehf., dated as of December 21, 2001. (Incorporated by reference to Exhibit 10.37 to the Company's Annual Report on Form 10-K filed March 27, 2002).
10.19	Agreement on the Details of the Arrangement of Encumbrances in the Site Agreement between the University of Iceland and Islensk erfdagreining ehf., dated as of December 21, 2001. (Incorporated by reference to Exhibit 10.38 to the Company's Annual Report on Form 10-K filed March 27, 2002).
10.20	Annex to the Agreement on the Details of the Arrangement of Encumbrances in the Site Agreement between the University of Iceland and Islensk erfdagreining ehf., dated as of January 4, 2002. (Incorporated by reference to Exhibit 10.39 to the Company's Annual Report on Form 10-K filed March 27, 2002).
10.21#	Loan Agreement between Sturlugata 8 ehf. (now named Vetrargardurinn ehf.) and Islandsbanki-FBA hf., dated as of December 21, 2001. (Incorporated by reference to Exhibit 10.40 to the Company's Annual Report on Form 10-K filed March 27, 2002).
10.22	Currency Exchange Agreement between Sturlugata 8 ehf. (now named Vetrargardurinn ehf.) and Islandsbanki-FBA hf., dated as of December 21, 2001. (Incorporated by reference to Exhibit 10.42 to the Company's Annual Report on Form 10-K filed March 27, 2002).
10.23	General Bond with Consumer Price Index between Islandsbanki-FBA, hf. and Sturlugata 8 ehf., (now named Vetrargardurinn ehf.) dated as of December 21, 2001. (Incorporated by reference to Exhibit 10.44 to the Company's Annual Report on Form 10-K filed March 27, 2002).
10.24	General Bond with Consumer Price Index between Islandsbanki-FBA hf. and Sturlugata 8 ehf., (now named Vetrargardurinn ehf.) dated as of December 21, 2001. (Incorporated by reference to Exhibit 10.45 to the Company's Annual Report on Form 10-K filed March 27, 2002).
10.25#	Research Collaboration and Cross-License Agreement among F.Hoffman-La Roche Ltd and Hoffman-La Roche Inc. and deCODE genetics, ehf. (Islensk erfdagreining), effective as of February 1, 2002. (Incorporated by reference to Exhibit 10.46 to the Company's Annual Report on Form 10-K filed March 27, 2002).
10.26	Currency Exchange Agreement between Vetrargardurinn ehf. and Islandsbanki-FBA hf., dated as of March 13, 2002 (Incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q filed on May 15, 2002).
10.27	General Bond with Consumer Price Index between Islandsbanki-FBA hf. and Vetrargardurinn ehf., dated as of February 8, 2002 (Incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q filed on May 15, 2002).
10.28+	Loan Agreement between Islandsbanki-FBA hf. and Vetrargardurinn ehf., dated as of March 13, 2002 (Incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q filed on May 15, 2002).

73

10.29+	Research Collaboration and License Agreement, dated September 26, 2002, between deCODE genetics, Inc., deCODE genetics, ehf., and Merck & Co., Inc. (Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed on November 14, 2002).
10.30	Nondisclosure Agreement executed by Vane Associates as of December 1, 1997, as amended (Incorporated by reference to Exhibit 10.7 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000).
10.31*	2002 Equity Incentive Plan (Incorporated by reference to Exhibit 10.40 to the Company's Annual Report on Form 10-K filed on April 15, 2003).
10.32#	License Agreement, dated as of October 17, 2003, between deCODE genetics, ehf. and Bayer AG
10.33#	License and Research Collaboration Agreement, dated February 25, 2004, between deCODE genetics, ehf and Merck & Co., Inc.
10.34*#	Employment Agreement between Islensk erfdagreining ehf. and Hakon Hakonarson dated as of July 23, 2003 (Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on From 10-Q filed on November 13, 2003).
10.35*	Agreement between deCODE genetics, Inc. and J. Neal Armstrong dated as of August 18, 2003 and effective as of October 3, 2003 Incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on From 10-Q filed on November 13, 2003).
10.36	Stock and Warrant Purchase Agreement dated February 25, 2004, between deCODE genetics, Inc., and Merck & Co., Inc.
21.1	Subsidiaries of deCODE genetics, Inc.
23.1	Consent of PricewaterhouseCoopers LLP, independent accountants.
23.2	Consent of PricewaterhouseCoopers hf, independent accountants.
31.1	Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

+

Certain portions of this exhibit have been granted confidential treatment by the Commission. The omitted portions have been separately filed with the Commission.

*

Constitutes a management contract or compensatory plan or arrangement.

#

A request for confidential treatment had been submitted with respect to this exhibit. The copy which was filed as an exhibit omits the information subject to the request for confidential treatment.

Note: Unless otherwise noted, the SEC File number of each of the above referenced documents is 000-30469.

(b)   Reports on Form 8-K

        On November 4, 2003, deCODE filed a Current Report on Form 8-K reporting the issuance of a press release containing financial information regarding its results of operations and financial condition for the quarter ended September 30, 2003.

74

SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

deCODE genetics, Inc.
By:	/s/  KARI STEFANSSON, Kari Stefansson, Chairman, President and Chief Executive Officer
Dated: March 15, 2004

        Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates stated.

/s/  KARI STEFANSSON Kari Stefansson	Chairman, President, Chief Executive Officer and Director (principal executive officer)	March 15, 2004
/s/  LANCE THIBAULT Lance Thibault	Chief Financial Officer and Treasurer (principal financial officer and principal accounting officer)	March 15, 2004
/s/  GÖRAN A. ANDO Göran A. Ando	Director	March 15, 2004
/s/  J. NEAL ARMSTRONG J. Neal Armstrong	Director	March 15, 2004
/s/  TERRANCE MCGUIRE Terrance McGuire	Director	March 15, 2004
/s/  SIR JOHN VANE Sir John Vane	Director	March 15, 2004

75

deCODE genetics, Inc.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Report of Independent Auditors	F-2, F-3
Consolidated Statements of Operations	F-4
Consolidated Balance Sheets	F-5
Consolidated Statements of Changes in Stockholders' Equity	F-6
Consolidated Statements of Cash Flows	F-9
Notes to Consolidated Financial Statements	F-10

F-1

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders of deCODE genetics, Inc.:

        In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, changes in stockholders' equity and cash flows present fairly, in all material respects, the financial position of deCODE genetics, Inc. and its subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        As discussed in the footnote to the consolidated financial statements titled "Revenue", effective January 1, 2002 the Company changed its method of recognizing milestone revenue.

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts
February 27, 2004, except for the
fifth paragraph of the
footnote titled "Debt" for which
the date is March 15, 2004

F-2

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders of deCODE genetics, Inc.:

        In our opinion, the accompanying statements of operations, changes in stockholders' equity and cash flows present fairly, in all material respects, the results of deCODE genetics, Inc. and subsidiaries operations and their cash flow for the year ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers ehf

Reykjavik, Iceland
March 18, 2002 except for the footnote to the 2001 financial statements titled "Restatement of Consolidated Financial Statements" (not shown herein) for which the date is April 2, 2003

F-3

'

deCODE genetics, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

				For the Years Ended December 31,
				2003			2002			2001
				(In thousands, except share and per share amounts)
Revenue				$	46,811		$	41,065		$	26,099
Operating expenses
	Research and development, including cost of revenue				63,466			89,612			70,954
	Selling, general and administrative				17,178			18,685			12,402
	Impairment, employee termination benefits and other charges				951			64,790			0
			Total operating expenses		81,595			173,087			83,356
Operating loss					(34,784	)		(132,022	)		(57,257	)
Interest income					1,151			2,954			6,925
Interest expense					(3,478	)		(3,079	)		(440	)
Other non-operating income and (expense), net					1,988			(72	)		(1,675	)
Net loss before cumulative effect of change in accounting principle					(35,123	)		(132,219	)		(52,447	)
Cumulative effect of change in milestone revenue recognition method					0			333			0
Net loss				$	(35,123	)	$	(131,886	)	$	(52,447	)
Basic and diluted net loss per share:
	Net loss before cumulative effect of change in accounting principle			$	(0.68	)	$	(2.69	)	$	(1.26	)
	Cumulative effect of change in milestone revenue recognition method				0.00			0.01			0.00
	Net loss				(0.68	)		(2.68	)		(1.26	)
Shares used in computing basic and diluted net loss
per share					51,507,869			49,098,254			41,634,009
Pro forma amounts assuming new milestone revenue recognition method is applied retroactively:
		Revenue								$	23,182
		Net loss									(55,364	)
		Basic and diluted net loss per share									(1.33	)

The accompanying notes are an integral part of the consolidated financial statements.

F-4

deCODE genetics, Inc.

CONSOLIDATED BALANCE SHEETS

			December 31,
			2003			2002
			(In thousands, except share amounts)
ASSETS
Current assets:
	Cash and cash equivalents		$	68,669		$	87,244
	Receivables			6,498			5,293
	Other current assets			5,894			9,609
		Total current assets		81,061			102,146
Restricted cash				6,000			6,000
Property and equipment, net				71,590			83,499
Goodwill				8,863			8,863
Other long-term assets and deferred charges				15,961			12,909
		Total assets	$	183,475		$	213,417
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable		$	5,353		$	4,865
	Accrued expenses and other current liabilities			7,189			10,613
	Short-term borrowings			6,500			0
	Current portion of capital lease obligations			5,741			4,311
	Current portion of long-term debt			4,893			4,243
	Deferred research revenue			10,518			7,606
		Total current liabilities		40,194			31,638
Capital lease obligations, net of current portion				2,520			5,008
Long-term debt, net of current portion				43,847			44,961
Deferred research revenue				3,500			6,557
Other long-term liabilities				7			7
Commitments and contingencies
Stockholders' equity:
	Preferred stock, $0.001 par value; Authorized: 6,716,666 shares; Issued and outstanding: none			0			0
	Common stock, $0.001 par value; Authorized: 100,000,000 shares; Issued and outstanding: 54,003,970 and 53,735,230 respectively, at December 31, 2003; and 53,695,869 and 53,545,234, respectively, at December 31, 2002			54			54
	Additional paid-in capital			430,489			431,494
	Notes receivable			(4,240	)		(7,607	)
	Deferred compensation			(572	)		(2,642	)
	Accumulated deficit			(330,210	)		(295,087	)
	Accumulated other comprehensive income (loss)			3			(1	)
	Treasury stock, 268,740 and 150,635 shares stated at cost at December 31, 2003 and 2002, respectively			(2,117	)		(965	)
		Total stockholders' equity		93,407			125,246
		Total liabilities and stockholders' equity	$	183,475		$	213,417

The accompanying notes are an integral part of the consolidated financial statements.

F-5

deCODE genetics, Inc.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

														Dividends Accreted on Redeemable, Convertible Preferred Stock
	Shares
	Common Stock		Par Value		Additional Paid-In Capital			Notes Receivable			Deferred Compensation					Accumulated Deficit
	(In thousands, except share amounts)
Balance at December 31, 2000	45,041,969		$	45	$	350,399		$	(11,851	)	$	(11,569	)	$	0	$	(110,754	)
Issuance of common stock upon exercise of warrants	94,444			0		(0	)
Other issuances of common stock	191,814			0		1,555
Forfeiture of unvested common stock issued upon early exercise of stock options	(70,841	)							410			750
Payment of notes						653
Deferred compensation arising from stock options						6						(6	)
Amortization of deferred compensation												4,651
Comprehensive income (loss):
Net loss for the period																	(52,447	)
Other comprehensive income (loss):
Foreign currency translation
Total comprehensive income (loss):
Balance at December 31, 2001	45,257,386			45		351,960			(10,788	)		(6,174	)		0		(163,201	)
Issuance of common stock on acquisition of MediChem	8,362,893			9		78,955
Issuance of common stock upon exercise of warrants	141,665			0		(0	)
Issuance of common stock upon exercise of stock options	38,813			0		48
Other issuances of common stock	20,508			0		131
Issuance of warrants in connection with financing						696
Forfeitures and cancellations of common stock issued upon early exercise of stock options	(276,031	)							2,947			188
Forfeiture of options						(296	)					296
Payment of notes									234
Amortization of deferred compensation												3,048
Comprehensive income (loss):
Net loss for the period																	(131,886	)
Other comprehensive income (loss):
Foreign currency translation
Total comprehensive income (loss):
Balance at December 31, 2002	53,545,234		$	54	$	431,494		$	(7,607	)	$	(2,642	)	$	0	$	(295,087	)

F-6

	Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total Stockholders' Equity
	(In thousands, except share amounts)
Balance at December 31, 2000	$	(1	)	$	0		$	216,269
Issuance of common stock upon exercise of warrants								0
Other issuances of common stock								1,555
Forfeiture of unvested common stock issued upon early exercise of stock options					(1,162	)		(2	)
Payment of notes								653
Deferred compensation arising from stock options								0
Amortization of deferred compensation								4,651
Comprehensive income (loss):
Net loss for the period								(52,447	)
Other comprehensive income (loss):
Foreign currency translation		54						54
Total comprehensive income (loss):								(52,393	)
Balance at December 31, 2001		53			(1,162	)		170,733
Issuance of common stock on acquisition of MediChem					3,332			82,296
Issuance of common stock upon exercise of warrants								0
Issuance of common stock upon exercise of stock options								48
Other issuances of common stock								131
Issuance of warrants in connection with financing								696
Forfeitures and cancellations of common stock issued upon early exercise of stock options					(3,135	)		0
Forfeiture of options								0
Payment of notes								234
Amortization of deferred compensation								3,048
Comprehensive income (loss):
Net loss for the period								(131,886	)
Other comprehensive income (loss):
Foreign currency translation		(54	)					(54	)
Total comprehensive income (loss):								(131,940	)
Balance at December 31, 2002	$	(1	)	$	(965	)	$	125,246

The accompanying notes are an integral part of the consolidated financial statements.

F-7

deCODE genetics, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Continued)

														Dividends Accreted On Redeemable Convertible Preferred Stock
	Shares																		Accumulated Other Comprehensive Income (Loss)
	Common Stock		Par Value		Additional Paid-In Capital			Notes Receivable			Deferred Compensation					Accumulated Deficit						Treasury Stock			Total Stockholders' Equity
	(In thousands, except share amounts)
Balance at December 31, 2002	53,545,234		$	54	$	431,494		$	(7,607	)	$	(2,642	)	$	0	$	(295,087	)	$	(1	)	$	(965	)	$	125,246
Issuance of common stock upon exercise of warrants	425,785					(1,799	)																1,799			0
Issuance of common stock upon exercise of stock options	135,801					306			(2	)																304
Deferred compensation arising from stock options.						373						(373	)													0
Other issuances of common stock	25,504					158																				158
Forfeiture and cancellations of common stock issued upon early exercise of stock options	(397,094	)							2,833			118											(2,951	)		0
Forfeiture of options						(43	)					43														0
Payment of notes									536																	536
Amortization of deferred compensation												2,282														2,282
Comprehensive income (loss):
Net loss for the period																	(35,123	)								(35,123	)
Other comprehensive income (loss):
Foreign currency translation																				4						4
Total comprehensive income (loss):																										(35,119	)
Balance at December 31, 2003	53,735,230		$	54	$	430,489		$	(4,240	)	$	(572	)	$	0	$	(330,210	)	$	3		$	(2,117	)	$	93,407

The accompanying notes are an integral part of the consolidated financial statements.

F-8

deCODE genetics, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

			For the Years Ended December 31,
			2003			2002			2001
			(In thousands)
Cash flows from operating activities:
Net loss			$	(35,123	)	$	(131,886	)	$	(52,447	)
Adjustments to reconcile net loss to net cash used in operating activities:
	Depreciation and amortization			13,913			13,753			10,028
	Purchased in-process research and development			0			480			0
	Equity in net loss of affiliate			0			563			462
	Gain on sale of investment in common stock of eMR			(254	)		0			0
	Amortization of deferred stock compensation			2,282			3,048			4,651
	Other stock-based compensation and stock contributions			158			0			53
	Loss on disposal of equipment, net			224			475			787
	Impairment of property, equipment and intangibles			0			7,474			0
	Impairment of goodwill			0			53,400			0
	Charges for write-down of obsolete and excess materials and supplies			802			3,352			2,961
	Litigation settlement			0			0			1,293
	Unrealized (gain) loss on derivative financial instruments			(1,764	)		(1,116	)		223
	Other			464			524			25
Changes in operating assets and liabilities net of effect of acquisitions:
	Receivables			(1,205	)		9,402			(4,259	)
	Other current assets			3,206			137			(2,672	)
	Accounts payable			488			(6,944	)		6,308
	Accrued expenses			(3,377	)		(3,314	)		5,049
	Deferred research revenue			(145	)		(2,962	)		6,892
	Other			0			453			(824	)
		Net cash used in operating activities		(20,331	)		(53,161	)		(21,470	)
CASH FLOWS FROM INVESTING ACTIVITIES:
	Purchase of property and equipment			(882	)		(15,637	)		(47,681	)
	Acquisitions and investments, net			0			(571	)		0
	Proceeds from sale of property and equipment			90			2,853			0
	Other			0			0			(10	)
		Net cash used in investing activities		(792	)		(13,355	)		(47,691	)
CASH FLOWS FROM FINANCING ACTIVITIES:
	Issuance of common stock			256			48			0
	Repayment of notes receivable for common stock			536			234			653
	Forfeiture of common stock			0			0			(2	)
	Changes in restricted cash			0			8,000			(14,000	)
	Proceeds from short-term borrowings			6,500			0			0
	Proceeds from equipment sale-leaseback financing			4,750			459			12,000
	Proceeds from facility financings			154			12,895			31,200
	Repayment of mortgage			0			(11,880	)		0
	Repayments of debt and capital lease obligations			(9,648	)		(9,057	)		(1,774	)
		Net cash provided by financing activities		2,548			699			28,077
Net decrease in cash and cash equivalents				(18,575	)		(65,817	)		(41,084	)
Cash and cash equivalents at beginning of period				87,244			153,061			194,145
Cash and cash equivalents at end of period			$	68,669		$	87,244		$	153,061
Supplemental cash flow information:
	Cash paid for interest		$	2,479		$	3,397		$	388
Supplemental schedule of non-cash transactions:
	Common stock issued for acquisitions and investments			0			82,296			210

The accompanying notes are an integral part of the consolidated financial statements.

F-9

deCODE genetics, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(tabular amounts in thousands, except share and per share amounts)

The Company

        References in this report to deCODE and "we" and "us" refer to deCODE genetics, Inc., a Delaware company, and deCODE genetics, Inc.'s wholly owned subsidiary, Islensk erfdagreining ehf., an Icelandic company registered in Reykjavik, and its subsidiaries Encode ehf., deCODE Cancer ehf. and Vetrargardurinn ehf. as well as deCODE genetics, Inc.'s wholly owned subsidiary, MediChem Life Sciences, Inc., a Delaware corporation, and its subsidiaries MediChem Research, Inc., ThermoGen, Inc., Emerald BioStructures, Inc., Advanced X-Ray Analytical Services, Inc. and MediChem Management, Inc.

        With its headquarters in Reykjavik, Iceland, deCODE is a population genetics company developing drugs and DNA-based diagnostics based upon its discoveries in the inherited causes of common diseases. deCODE's population approach and resources have enabled it to isolate gene and targets directly involved in the development of many of the biggest challenges to public health. deCODE is focused on turning these findings into a pipeline of products which it believes will be able to combat the cause of disease, not just the signs and symptoms. deCODE's customers include major pharmaceutical companies, biotechnology firms, pharmacogenomics companies, universities and other research institutions. deCODE's business is global, with its principal markets in the United States and in Europe.

        In March 2002, deCODE completed the acquisition of MediChem Life Sciences, Inc. (MediChem) in a stock-for-stock exchange accounted for as a purchase transaction. The acquisition gives deCODE capabilities in chemistry and structural proteomics that can be used in the implementation of its strategy of turning its targets identified by applying population genomics to common diseases into novel drugs for the market both through its own programs and in alliances with collaborators. Founded in 1987, MediChem (now our pharmaceuticals and biostructures groups) provides contract chemistry research services specializing in chemical synthesis for new drug discovery and development.

        deCODE's primary focus is on the discovery and commercialization of novel therapeutics based on genetic information identified in our population-based gene discovery work. Through the acquisition in March 2002 of MediChem Life Sciences and its subsidiary, Emerald Biostructures, now its pharmaceuticals and biostructures groups, deCODE has integrated capabilities for applying genetic findings to the development of drugs, both through its own programs and in alliance with corporate partners. deCODE is also applying the links it has identified between genetic factors and disease to create DNA based tests which can also be used to identify patients with increased risk of developing a disease or to predict which patients will respond well to a given drug therapy. deCODE believes that such tests will become a standard part of healthcare within the coming decade, making it possible to gauge individual predisposition to a particular illness and to design effective preventive strategies; to complement traditional clinical diagnoses; and to identify patients who are likely to respond or not respond to particular drugs.

        In addition to conducting work on our targets in our collaborative and internal programs, our pharmaceuticals group provides drug discovery work for our fee-for-service customers. Our other service offerings include protein crystallization products and protein structure analysis contract services through our Seattle-based biostructures group; pharmacogenomics and clinical trials services through our wholly-owned subsidiary Encode; and DNA analysis services through our genotyping laboratory in Reykjavik.

F-10

Basis of Presentation

        These financial statements are reported in United States dollars, deCODE's functional currency, and prepared in accordance with accounting principles generally accepted in the United States of America. Tabular amounts are stated in thousands, except share and per share amounts.

Reclassifications

        To be consistent with year-end 2003 operating expense classifications, deCODE has reclassed previously reported operating expenses for the year-ended December 31, 2002. These reclassifications between research and development and selling, general and administrative expenses totalled $3.0 million, and had no effect on reported amounts of total operating expenses or operating loss. In addition, certain reclassifications have been made to the December 31, 2002 balance sheet to be consistent with the December 31, 2003 balance sheet.

Principles of Consolidation

        The consolidated financial statements include the accounts and operations of deCODE genetics, Inc. and its wholly owned subsidiaries, Islensk erfdagreining ehf. and its subsidiaries, and MediChem Life Sciences, Inc. and its subsidiaries. No dividends have been paid. All significant intercompany accounts and transactions are eliminated upon consolidation.

Use of estimates

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. On an ongoing basis we evaluate our estimates, which include, among others, those related to collaborative arrangements, property and equipment, income taxes, litigation and other contingencies, materials and supplies valuation, derivatives, intangible assets, and bad debts. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.

Uncertainties

        deCODE is subject to risks common to companies in the biotechnology industry including, but not limited to, development by deCODE or its competitors of new technological innovations, ability to market products or services, dependence on key personnel, dependence on key suppliers and many of deCODE's materials and supplies, protection of proprietary technology, ability to obtain additional financing, ability to negotiate collaborative arrangements, and compliance with governmental and other regulations.

Concentration of Risk

        deCODE has no significant off-balance sheet concentrations of credit risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements. Financial instruments that potentially subject deCODE to concentrations of credit risk consist principally of temporary cash

F-11

investments. deCODE's cash is deposited only with financial institutions in Iceland, United Kingdom and the United States having a high credit standing. Deposits with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and, therefore, bear minimal risk.

Fair Value of Financial Instruments

        The fair value of short-term financial instruments, including cash and cash equivalents, restricted cash, receivables, certain other current assets, trade accounts payable, certain accrued liabilities, and other current liabilities approximates their carrying amount in the financial statements due mainly to the short maturity of such instruments. Based on borrowing rates currently available to deCODE for loans and capital lease obligations with similar terms, the carrying value of its debt obligations approximates fair value. Cross-currency swaps entered into as economic hedges against foreign exchange rate fluctuations on deCODE's Icelandic krona denominated debt and included in other long-term assets are recorded at their estimated fair value.

Cash Equivalents

        deCODE considers all highly liquid investments with a maturity of ninety days or less at the date of purchase to be cash equivalents.

Materials

        Materials and supplies, included in our other current assets, are valued at the lower of cost (first-in, first-out method) or market. deCODE evaluates materials and supplies levels and expected usage on a periodic basis and records write-downs of value for obsolescence as required.

Property and Equipment

        Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets of generally fifty years for buildings, three to four years for laboratory equipment, five years for furniture and fixtures, and three to five years for other equipment. Maintenance and repairs are expensed as incurred, while major betterments are capitalized. When assets are retired or otherwise disposed of, the assets and related accumulated depreciation or amortization are eliminated from the accounts and any resulting gain or loss is reflected in the statement of operations.

Impairment of Long-Lived Assets

        deCODE reviews long-lived assets for potential impairment annually and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets held for use is measured by comparing the carrying amount of an asset to the undiscounted estimated future cash flows expected to be generated by the asset. In estimating expected future cash flows for determining whether an asset is impaired, assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. If any such assets are considered to be impaired, the impairment to be recognized is the amount by which the carrying amount of the assets exceeds its fair value.

        Long-lived assets located in the United States and Iceland were $32,553,000 and $69,861,000, respectively at December 31, 2003 and $36,089,000 and $75,182,000, respectively, at December 31, 2002.

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Capital Leases

        Assets acquired under capital lease agreements are recorded at the present value of the future minimum rental payments using interest rates appropriate at the inception of the lease. Property and equipment subject to capital lease agreements are amortized over the shorter of the life of the lease or the estimated useful life of the asset unless the lease transfers ownership or contains a bargain purchase option, in which case the leased asset is amortized over the estimated useful life of such asset.

Finance Costs Related to Long-Term Debt

        Costs associated with obtaining long-term debt are deferred and amortized as interest expense over the term of the debt. Deferred financing costs are included in other current and long-term assets and total $1,232,000 and $1,016,000 at December 31, 2003 and 2002, respectively.

Derivative Financial Instruments

        Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133) as amended by SFAS 137 and SFAS 138 and as interpreted by the Derivatives Implementation Group, was adopted by deCODE effective as of January 1, 2001. SFAS 133 established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the consolidated balance sheet and measure those instruments at fair value. SFAS 133 prescribes requirements for designation and documentation of hedging relationships and ongoing assessments of effectiveness in order to qualify for hedge accounting.

        deCODE did not hold any derivative instruments or contracts that contained embedded derivatives as of January 1, 2001, the date of adoption of SFAS 133. Further, deCODE did not designate any derivative instruments as being part of a qualified hedging relationship under SFAS 133 during 2003, 2002 or 2001.

Revenue

        deCODE records revenue provided that there is persuasive evidence that an arrangement exists, the price is fixed and determinable and collectibility is reasonably assured. deCODE has entered into research, development and commercialization alliances and collaborations with major pharmaceutical and biotechnology companies. The key components of the commercial terms of such alliance arrangements typically include one or more of the following: research funding; up-front, exclusivity, technology access, and technology development fees; milestone payments; license or commercialization fees; and royalties or profit sharing from the commercialization of products.

        deCODE's revenues from research and development collaboration agreements are recorded and recognized in accordance with the applicable performance requirements and terms of the respective contracts, generally either (i) as contract research costs are incurred, usually ratably over the period of effort, (ii) according to the level of efforts expended based on the ratio of contract research costs incurred to expected total costs, or (iii) upon the achievement of substantive milestones. deCODE's

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accounting recognition policies with respect to each significant element of our revenue is summarized as follows:

        Research funding and other service fees.    Research funding is recognized as earned, typically ratably over the period of effort. Funding payments are not refundable in the event that the related efforts are not successful. Other service revenues from negotiated rate contracts are recognized based upon the terms of the underlying contract generally either (i) on a per diem basis as services are rendered; (ii) on the basis efforts expended, generally upon the ratio of costs incurred to total expected costs of providing the service; or (iii) upon completion of the service rendered. Any losses on contracts are provided for when they are determinable. Included in revenue are billings to customers for the cost of materials purchased by deCODE.

        Milestone payments.    Prior to January 1, 2002, we recorded all milestone payments received when acknowledgement of having achieved applicable performance requirements was received from the collaborator and recognized milestone payments as revenue on a retrospective basis over the contractual term of the underlying agreement. deCODE believes the substantive milestone method to be a preferable method in recognizing revenue for milestone payments made under particular contracts in that it more closely relates to the underlying activity that results in the revenue-generating milestone event under such contracts. Effective January 1, 2002, deCODE changed its method of recognizing milestone revenue to the substantive milestone method for contracts where (i) the milestone event is substantive, (ii) there is substantial effort involved in achieving the milestone, (iii) the milestone payment amount is commensurate with the magnitude of the related achievement, and (iv) the associated follow-on revenue streams bear a reasonable relationship to one another. Under the substantive milestone method deCODE records revenue when the milestone has been achieved and payment is due and payable under the terms of the respective agreement and deCODE recognizes revenue when acknowledgement of having achieved applicable performance requirements is received from the collaborator. As before, milestone payments without the above characteristics are recognized on a retrospective basis over the contractual term of the underlying agreement.

        The cumulative effect of the change in accounting principle on prior years results of $(333,000) is included in income in the year ended December 31, 2002. Had the retrospective basis of milestone revenue recognition been continued for the year ended December 31, 2002, revenue, net loss and basic and diluted net loss per share would have been $40,873,000, $(131,861) and $(2.69), respectively.

        Up-front, exclusivity, technology access, and technology development fees.    deCODE recognizes revenue from non-refundable fees not specifically tied to a separate earnings process ratably over the expected customer relationship period or estimated period of performance. Changes in estimates could impact revenue in the period the estimate is changed. If deCODE's estimate of the period of performance shortens or lengthens, the amount of revenue we recognize from such non-refundable fees not specifically tied to a separate earnings process could increase or decrease in the period the change in estimate becomes known; future related revenues would be adjusted accordingly.

        In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables" (EITF No. 00-21). EITF No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF No. 00-21 were applicable to revenue arrangements entered into fiscal periods beginning after June 15, 2003. deCODE's adoption of EITF No. 00-21 did not impact revenue for 2003; however, this pronouncement may have a significant impact on timing of revenue recorded under future agreements,

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including the possible deferral of milestone payments received during the research period and recognition over the remaining period of performance.

        Significant elements of our revenue are summarized as follows:

	For the Year Ended December 31,
	2003		2002		2001
	(In thousands)
Research funding and other service fees	$	35,718	$	36,641	$	18,182
Milestone payments		5,794		1,462		6,917
Up-front, exclusivity, technology access, and technology development fees		4,000		2,500		1,000
Other		1,299		462		0
	$	46,811	$	41,065	$	26,099

        In general, prerequisites for billings are established by contractual terms including predetermined payment schedules, the achievement of contract milestones, or submission of appropriate billing detail. Deferred revenue represents amounts billed in accordance with contract terms but not yet recognized according to our accounting policy. Unbilled costs and fees arise when revenue has been recognized but customers have not been billed.

        Revenues attributed to the United States and to Iceland were $13,744,000 and $33,067,000, respectively, for 2003 and $14,485,000 and $26,580,000, respectively, for 2002 and were all attributed to Iceland in 2001.

        Two of deCODE's executive officers own an aggregate 37.5% of the share capital and are board members of Prokaria ehf. (Prokaria). deCODE provides Prokaria certain sequencing and advisory services in exchange for fees and recognized $7,000, $102,000 and $322,000 in revenue in respect of such sequencing services provided during 2003, 2002 and 2001, respectfully.

Collaborations

F. Hoffmann-La Roche (Roche).

        Therapeutics.    In 1998 deCODE entered into a research collaboration and cross-license agreement with Roche, which terminated in 2002, under which deCODE identified key generic factors involved in ten common diseases: osteoarthritis, Alzheimer's disease, schizophrenia, PAOD, stroke, osteoporosis, obesity, anxiety, non-insulin-dependent diabetes and rheumatoid arthritis. In January 2002, deCODE entered into a new three-year agreement with Roche focused on turning the achievements of the 1998 gene discovery collaboration into novel therapeutics. The 2002 agreement provided that deCODE would collaborate with respect to four diseases that had been the subject of the 1998 agreement. deCODE is currently collaborating on two of these diseases. Under the 2002 agreement deCODE has received $16,000,000 in research funding and may receive an additional $4,000,000 in research funding during the remainder of the term of the agreement. The agreement provides that upon the development of specified compounds during the term of the agreement and for a specified period thereafter deCODE may receive milestone payments, the amount of which will depend on the type of compound developed. In addition, deCODE will be entitled to receive royalties on the sales of drugs that are developed.

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        Diagnostics.    In June 2002, deCODE signed a five-year alliance with Roche's diagnostics division to develop and market DNA-based diagnostics for major diseases. More recently deCODE has added research programs aimed at developing diagnostics to predict drug response for major therapeutics used to treat those diseases, in order to help select the most effective treatment of those available. Under the agreement we have received $28,625,000 in research funding, up-front fees and milestone payments. deCODE may receive $15,625,000 in additional research funding over the remainder of the term of the agreement as well as milestone payments upon the achievement of research and development milestones and royalties on the sales of diagnostic products developed.

        Revenues from these alliances with Roche amounted $19.9 million, $16.9 million, and $25.2 million for the years ended December 31, 2003, 2002 and 2001, respectively, representing 43%, 41% and 97% of consolidated revenue for the years ended December 31, 2003, 2002 and 2001, respectively.

Merck & Co, Inc. (Merck).

        Obesity.    In September 2002, deCODE entered into an alliance with Merck aimed at developing new treatments for obesity. Under the alliance, deCODE is combining our research efforts in the genetics of obesity to identify, validate and prioritize a series of drug targets to take into development. Under the terms of the three-year agreement, which can be extended on a year-to-year basis upon the consent of the parties, deCODE has received research funding, technology access fees and milestone payments in the aggregate amount of $13,750,000 and may receive research funding and technology access in the future of $10,750,000. In addition, deCODE may receive further research milestone payments and may receive milestone payments as compounds developed under the alliance advance in the development process and royalties on successfully marketed drugs. Merck may terminate the agreement at any time upon 90 days' notice or after September 26, 2004 upon 30 days' notice in the event that the research program fails to achieve certain specified goals.

        Information Rich Clinical Trials.    In February 2004, deCODE entered into an agreement with Merck under which deCODE will conduct information-rich clinical trials on a range of Merck's developmental compounds. The term of the alliance is seven years, subject to termination by Merck after five years. deCODE will, at any given point over the course of the alliance, be conducting concurrent trials on as many as five Merck compounds. Under the terms of the agreement, deCODE will receive royalties on sales of drugs and diagnostics developed as part of the alliance. deCODE will receive a one-time technology access fee, will share research funding for the clinical development of compounds and pharmacogenomic analysis, and will receive milestone payments as compounds or pharmacogenomic tests reach the market. In addition, Merck has purchased 689,703 shares of deCODE's common stock at a price of $14.50 per share, and has received a warrant to purchase up to 1,724,257 of additional shares of our common stock at $29.00 per share over the next five years.

        Revenues from the therapeutics and other alliances with Merck amounted to $9.2 million, and $1.6 million and $0 for the years ended December 31, 2003, 2002 and 2001, respectively, representing 19%, 4% and 0% of consolidated revenue for the years ended December 31, 2003, 2002 and 2001, respectively.

        Applied Biosystems Group (ABG).    In the fourth quarter of 2002, deCODE terminated and entered into a related settlement agreement regarding two agreements with ABG that had been in place since July 2001. deCODE's accounting policy for the Joint Development and Commercialization Agreement with ABG to develop genotypic analysis, products provided for revenue related to ABG's payment obligation and deCODE's development costs associated with the Agreement to be deferred

F-16

until the development efforts were completed or the Agreement is terminated, if earlier, as was the case. As a result, deferred revenue of $6.3 million (15% of consolidated revenue for the year ended December 31, 2002) was recognized in the fourth quarter of 2002 when the parties reached agreement as to termination.

Research and Development Expenses, Including Costs of Revenue

        In accordance with SFAS No. 2, "Accounting for Research and Development Costs," research and development costs are charged to expense when incurred. deCODE's research and development expenses consist of the costs of its own internal programs and costs associated with research and development conducted in collaboration with and for others. Major components of deCODE's research and development expenses include personnel costs, namely salaries, benefits and stock-based compensation; materials and supplies; services contracted for research activities; other third-party fees and costs; depreciation of property and equipment; amortization of patents and other intangible assets; and items of overhead, including allocations of various administrative and facilities related costs.

	For the Year Ended December 31,
	2003		2002		2001
	(In thousands)
Salaries and other personnel costs	$	28,102	$	33,946	$	22,512
Materials and supplies		10,103		20,632		17,713
Contractor services and other third party costs		4,829		10,069		8,109
Overhead expenses		5,727		9,092		7,945
Depreciation and amortization		13,377		13,869		11,361
Stock-based compensation and remuneration		1,328		2,004		3,314
	$	63,466	$	89,612	$	70,954

        In November 2003, deCODE acquired an exclusive worldwide license from Bayer HealthCare AG (Bayer) to develop and commercialize a small molecule compound that is active against a key target, located within an inflammatory pathway, made by a gene isolated at deCODE that predisposes to myocardial infarction, or heart attack. A portion of deCODE's payment to Bayer for this license was paid in the fourth quarter of 2003 and the remainder is included in accounts payable at December 31, 2003 and will be paid in the second quarter of 2004 following completion of certain diligence matters. Since there was no alternative use of the technology, these payments were recorded as research and development expense during the fourth quarter 2003. Further, deCODE is obligated to make development milestone payments to Bayer as the compound advances towards market approval and will make royalty payments to Bayer based upon sales of the compound as a marketed drug.

Patent Costs

        Patent application costs are charged to legal expense as incurred and classified in selling, general and administrative expense.

Stock-Based Compensation and Remuneration

        deCODE follows SFAS No. 123, Accounting for Stock-Based Compensation. The provisions of SFAS No. 123 allow companies to either expense the estimated fair value of stock options granted to employees or to follow the intrinsic value method set forth in Accounting Principles Board Opinion

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No. 25 (APB No. 25), Accounting for Stock Issued to Employees, and disclose the pro forma effects on net loss and net loss per share had the estimated fair value of the options granted to employees been expensed. SFAS No. 123 requires companies to expense the estimated fair value of stock options granted to non-employees. deCODE has elected to follow the intrinsic value method in accounting for its employee stock options and follows the fair value method in accounting for its non-employee stock options.

        Had compensation cost for all stock options been determined based on the fair value at the grant date for awards consistent with the provisions of SFAS No. 123, as amended by SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123" (SFAS 148), deCODE's net loss and basic and diluted net loss per share would have been changed to the pro forma amounts indicated below:

		For the Years Ended December 31,
		2003			2002			2001
		(In thousands, except per share amounts)
Net loss attributable to common stockholders—as reported		$	(35,123	)	$	(131,886	)	$	(52,447	)
	Add: Stock-based employee compensation expense included in reported net loss		2,440			3,048			4,598
	Deduct: Total stock-based employee compensation expense determined under fair value method for all awards		(6,964	)		(7,415	)		(6,577	)
Net loss attributable to common stockholders—proforma		$	(39,647	)	$	(136,253	)	$	(54,426	)
Basic and diluted net loss per share as reported—as reported		$	(0.68	)	$	(2.68	)	$	(1.26	)
Basic and diluted net loss per share—proforma			(0.77	)		(2.77	)		(1.31	)

        The effects of applying the provisions of SFAS No. 123 on net loss and net loss per share as stated above is not necessarily representative of the effects on reported income or loss for future years due to, among other things, the vesting period of the stock options and the fair value of additional stock options that may be granted in future years.

Foreign Currency Translation

        deCODE's functional currency is the U.S. dollar. Islensk erfdagreining also consolidates its subsidiaries, one of which uses the local currency, the Icelandic krona, as the functional currency. For these entities, the assets and liabilities are translated into U.S. dollars at exchange rates in effect at the balance sheet date. Income and expense items are translated at the average exchange rates prevailing during the period. Gains and losses from translation are included in accumulated other comprehensive income. For certain consolidated entities the books and records are not maintained in its functional currency. For these entities, translation gains and losses recorded upon remeasurement are included in the statement of operations.

        Foreign currency transaction gains and losses are reported according to the exchange rates prevailing on the transaction date and are included in the consolidated statements of operations classified as other non-operating income and expense. Net transaction and translation losses were $29,000, $731,000 and $1,264,000 in 2003, 2002 and 2001, respectively.

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Income Taxes

        deCODE accounts for income taxes using the liability method, which requires the recognition of deferred tax assets or liabilities for the temporary differences between the financial reporting and tax bases of deCODE's assets and liabilities and for tax loss carryforwards at enacted statutory tax rates in effect for the years in which the differences are expected to reverse. In addition, valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.

Computation of Net Loss Per Common Share

        Basic net loss per share is computed using net loss available to common stockholders and the weighted-average number of common shares outstanding. The weighted-average number of common shares outstanding during the period is the number of shares determined by relating the portion of time within a reporting period that common shares have been outstanding to the total time in that period. Net loss available to common stockholders was $35,123,000, $131,886,000 and $52,447,000 in 2003, 2002 and 2001, respectively.

        Diluted net loss per share is computed using the weighted-average number of common shares outstanding during the period, plus the dilutive effect of potential common shares. Diluted net loss per share does not differ from basic net loss per share in all periods presented as potential common shares are antidilutive for all such periods and are, therefore, excluded from the calculation. Potential common shares excluded from the calculation of diluted net loss per share as their inclusion would have been antidilutive were:

	For the Years Ended December 31,
	2003	2002	2001
	(Shares)	(Shares)	(Shares)
Warrants to purchase shares of common stock	1,400,467	1,851,300	1,067,500
Options to purchase shares of common stock	4,108,331	2,270,507	1,918,333
Restricted shares with an associated outstanding non-recourse promissory note	1,235,975	2,467,196	3,060,289
	6,744,773	6,589,003	6,046,122

Comprehensive Income

        Comprehensive income generally represents all changes in stockholders' equity except those resulting from investments or contributions by stockholders. Amounts reported in other comprehensive income include foreign currency translation adjustments.

Recent Accounting Pronouncements

        In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51." FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest

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entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first reporting period beginning after December 15, 2003. deCODE adopted this standard on July 1, 2003 and its adoption did not have an impact on deCODE's financial position or results of operations.

        In April 2003, the FASB released SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 clarifies under what circumstances a contract with an initial net investment meets the characteristics of a derivative, amends the definition of an underlying contract, and clarifies when a derivative contains a financing component in order to increase the comparability of accounting practices under SFAS No. 133. The statement is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. deCODE adopted this standard on July 1, 2003 and its adoption did not have any impact on deCODE's financial position or results of operations.

        In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. The Statement is effective for financial instruments entered into or modified after May 31, 2003. deCODE adopted this standard on June 1, 2003 and its adoption did not have any impact on deCODE's financial position or results of operations.

        In August 2003, the EITF reached a consensus on Issue 03-05, "Applicability of AICPA Statement of Position 97-2 to Non-Software Deliverables in an Arrangement Containing More-Than-Incidental Software." EITF 03-05 addresses the applicability of SOP 97-2 to non-software deliverables in an arrangement containing more-than-incidental software. In an arrangement that includes software that is more than incidental to the products or services as a whole, software and software-related elements are included within the scope of SOP 97-2. Software-related elements include software products and services, as well as any non-software deliverables for which software deliverable is essential to its functionality. deCODE's adoption of EITF 03-05 did not have any impact on deCODE's financial position or results of operations.

Receivables

        Receivables consist of the following:

		December 31,
		2003		2002
		(In thousands)
Receivables		$	6,475	$	4,863
Receivables, related party			0		102
Unbilled costs and fees			23		328
	Total	$	6,498	$	5,293

        Roche accounted for 32% and 43% of consolidated receivables as of December 31, 2003 and 2002, respectively.

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Other Current Assets

        Other current assets consist of the following:

		December 31,
		2003		2002
		(In thousands)
Materials and supplies		$	2,322	$	4,867
Value added taxes			1,447		1,796
Other current assets			2,125		2,946
	Total	$	5,894	$	9,609

eMR hf.

        Included in other non-operating income and expense for the year ended December 31, 2003 is a gain recorded on the sale of deCODE's investment in the common stock of eMR of $254,000. As of December 31, 2003, deCODE does not have any remaining ownership interest in eMR. Equity in net loss of affiliate in the years ended December 31, 2003, 2002 and 2001 included in other non-operating expense is comprised of deCODE's share of the loss of eMR from March 2000 and amortization of the difference between deCODE's cost and the underlying equity in the net assets of eMR at acquisition.

Property and Equipment

        Property and equipment consist of the following:

	December 31,
	2003			2002
	(In thousands)
Land	$	2,303		$	2,303
Buildings		50,418			50,479
Laboratory equipment		35,991			41,238
Furniture and fixtures		5,479			5,503
Other equipment		4,703			4,731
		98,894			104,254
Less: accumulated depreciation and amortization		(27,304	)		(20,755	)
Total	$	71,590		$	83,499

        The total depreciation and amortization expense of property and equipment for the years ended December 31, 2003, 2002 and 2001 was $12,442,000, $12,112,000 and $8,870,000, respectively.

        In light of then current conditions and the pace of technological change, effective from April 1, 2001 deCODE changed the estimated useful life of sequencing instruments for purposes of depreciation from 5 years to 4 years. This change in estimate had the effect of increasing depreciation expense and basic and diluted net loss per share by $1,400,000 and $0.03 per share, respectively, in the year ended December 31, 2001.

        In December 2001, deCODE sold certain laboratory equipment for $12,000,000 of cash proceeds and leased the equipment back from the counter-party (an Icelandic leasing company) for a three-year

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term. As ownership of the equipment will be transferred to deCODE at the end of the lease without any further significant payment, the transaction has been recorded as a financing and no immediate gain was recognized. In connection with this lease, deCODE must maintain an amount equal to 75% of the remaining lease payments on deposit with an Icelandic bank as a compensating balance totaling $5,173,000 at December 31, 2003.

        In June 2003, deCODE sold certain laboratory equipment for $4,750,000 net cash proceeds and leased the equipment back from the counter-party (an Icelandic leasing company) for an 18-month term. As ownership of the equipment will be transferred to deCODE at the end of the lease without any further significant payment, the transaction has been recorded as a financing and the gain ($1,418,000) has been deferred and is being amortized over the remaining useful life of the leased equipment (3 years).

        In addition to the building and equipment pursuant to the above sale-and-leaseback transactions, property and equipment also includes amounts for certain fixed assets financed under other capital lease obligations. Total cost and accumulated amortization relating to all of deCODE's property and equipment subject to capital lease obligations was $18,961,000 and $8,459,000, respectively, as of December 31, 2003 and $12,415,000 and $4,934,000, respectively, as of December 31, 2002. deCODE's capital lease obligations are collateralized by the assets to which the obligations relate. deCODE has an option to purchase all of the leased property and equipment for 0.2-3.0% of the original lease amount at lease end.

Acquisitions

MediChem Life Sciences, Inc.

        Under the terms of the merger agreement, MediChem shareholders received 0.3099 shares of newly issued deCODE common stock in exchange for each MediChem share of common stock, or 8,362,893 shares of deCODE common stock. In addition, options to purchase shares of MediChem common stock that vested immediately upon consummation of the merger have been assumed by deCODE, resulting in the issuance of 577,917 options to purchase deCODE common stock. In accordance with the terms of the merger agreement, in July 2002 deCODE also granted a further 136,352 deCODE stock options to certain employees of MediChem under the 1996 Equity Incentive Plan.

        The total consideration for the acquisition was $85,845,000. deCODE allocated the total cost of the acquisition to the net assets of MediChem as follows:

	(In thousands)
Net tangible assets acquired	$	16,962
In-process research and development		480
Identifiable intangible assets		6,140
Goodwill		62,263
	$	85,845

        Net tangible assets acquired include net working capital of $2,259,000, property and equipment of $28,908,000 and debt of $14,014,000.

F-22

        The in-process research and development has been charged to operations as a research and development expense in the year-ended December 31, 2002. Goodwill will not be amortized but is subject to annual impairment testing. Goodwill is also not tax-deductible. deCODE's statements of operations include the results of MediChem from March 18, 2002, the date of acquisition. The following unaudited pro forma financial information presents the consolidated results of deCODE as if the acquisition of MediChem occurred at the beginning of 2002. Nonrecurring charges, such as the acquired in-process research and development charge is not reflected in the following pro forma. This pro forma information is not intended to be indicative of future operating results.

	For the Year Ended December 31,
	2002
	(In thousands, except per share amounts)
Total revenues	$	45,153
Net loss		(136,318	)
Basic and diluted net loss per share		(2.68	)

Impairment, Employee Termination Benefits and Other Charges

        In September 2002, deCODE implemented a cost reduction program aimed at achieving positive operating cashflow from existing operations by the end of 2003. In this regard, deCODE reduced total worldwide headcount, focusing in particular on utilizing ongoing process automation and increased productivity in the core genetics operations in Reykjavik. Stemming from this initiative and together with deCODE's consideration of significant and pervasive declines in the market environment for pharmaceutical and biotech industries, deCODE determined that impairment tests of the carrying value of our goodwill and other long-lived assets, including the long-lived assets acquired through the MediChem acquisition, should be performed. We have recorded the following impairment, employee termination benefits and other charges in the year-ended December 31, 2002:

	(In thousands)
Employee termination benefits	$	2,158
Impairment of goodwill		53,400
Impairment of property and intangible asset		2,715
Write-down of assets held for sale		2,706
Write-down of equipment		2,053
Obsolete and excess materials and supplies write-down		1,758
	$	64,790

F-23

        During the year ended December 31, 2003, deCODE recorded $951,000 of additional employee terminations benefits. The following is a schedule of charges, payments and unpaid termination benefits for the years ended December 31, 2003 and 2002:

	For the Year Ended December 31,
	2003			2002
	(In thousands)
Balance at beginning of period	$	874		$	0
Additions to accrual		951			2,158
Payments of benefits		(1,759	)		(1,284	)
Balance at December 31	$	66		$	874

        The charges related to termination benefits are for 61 and 132 employees during 2003 and 2002, respectively. Benefits as of December 31, 2003 are expected to be settled in cash over the first half of 2004.

        For purposes of the goodwill impairment tests, deCODE identified its reporting units, identified the assets and liabilities of the reporting units and performed impairment tests on the net goodwill associated with them. Goodwill that resulted from the acquisition of MediChem was assigned to the reporting units based upon expectations of synergies to be gained from the integration of the pharmaceutical and biostructures groups with deCODE. Goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. To identify potential impairment, deCODE, based upon independent valuations, compares fair value of a reporting unit with its carrying amount, including goodwill. For this purpose, deCODE estimates fair value of a reporting unit using analyses of comparable companies and recent comparable transactions. In measuring the amount of impairment loss, deCODE, based upon independent valuations, compares the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill, estimating the fair value of an impaired reporting unit using discounted cash flow methodologies. The goodwill impairment charge is associated solely with goodwill resulting from the acquisition of MediChem and results largely from significant and pervasive declines in the market environment for the pharmaceutical and biotech industries impacting, among other things, market valuations of companies operating in those industries. The remaining goodwill is allocated to our drug discovery reporting unit.

        In September 2002, deCODE committed to a plan to sell its Woodridge Discovery Center and an agent was engaged and initiated an active marketing program to locate a buyer/investor in a sale and leaseback transaction. Efforts to enter into a sale and leaseback transaction or other form of re-financing continue but have yet to be consummated. Taking into account the estimated selling price of the building, deCODE recorded an impairment charge in the year-ended December 31, 2002 amounting to $2,065,000. In addition, certain intangible assets amounting to $650,000 were determined to be impaired utilizing a discounted cashflow methodology to estimate fair value.

        In September 2002, deCODE committed to a plan to sell its former headquarters facility that had been vacated in connection with the move to its new headquarters facility in Reykjavik's University district earlier in the year. In October 2002, an agent for the sale was engaged and an active marketing program to locate a buyer was initiated. In November 2002, terms of sale were agreed and executed with a buyer in the amount of $2,853,000. Taking into account the selling price of the building less costs

F-24

to sell, deCODE wrote-down the property in September 2002 and recorded a loss amounting to $2,706,000.

        In September 2002, deCODE wrote-down the value of certain laboratory equipment no longer in use, amounting to $2,053,000.

        Ongoing process automation and increased productivity in the core genetics operations in Reykjavik and changes in some of deCODE's target research programs have affected deCODE's planned volume and timing of usage of its materials and supplies. In this connection, management recorded an additional provision for excess and obsolete material and supplies during September 2002.

Goodwill and Other Intangibles

        The changes in the carrying amount of goodwill for the year ended December 31, 2003 and 2002 are as follows:

	For the Year Ended December 31,
	2003		2002
	(In thousands)
Balance at beginning of period	$	8,863	$	0
Goodwill acquired during year		0		62,263
Impairment losses		0		(53,400	)
Balance at December 31	$	8,863	$	8,863

        All of the Company's goodwill resulted from the acquisition of MediChem (see acquisition note above). The goodwill is tested for impairment annually on September 30 of each year and whenever changes in the circumstances indicate goodwill could be impaired.

F-25

        Other intangible assets included in other long-term assets and deferred charges on the consolidated balance sheetas of December 31, 2003 and 2002 consist of the following:

	For the Year Ended December 31, 2003
	Gross		Accumulated Amortization		Net
	(In thousands)
Developed technology, 5 year life	$	4,560	$	1,634	$	2,926
Patents, 5-7 year life		380		86		294
Royalty-free licenses, 10 year life		230		41		189
Standard operating procedures, 5 year life		320		115		205
Total	$	5,490	$	1,876	$	3,614

	For the Year Ended December 31, 2002
	Gross		Accumulated Amortization		Net
	(In thousands)
Developed technology, 5 year life	$	4,560	$	722	$	3,838
Patents, 5-7 year life		380		38		342
Royalty-free licenses, 10 year life		230		18		212
Standard operating procedures, 5 year life		320		51		269
Total	$	5,490	$	829	$	4,661

        Aggregate amortization expense was $1,047,000 and $829,000 for the years ended December 31, 2003 and 2002, respectively. These amounts were included in research and development expenses for all periods presented. Estimated amortization expense for the five succeeding years as of December 31, 2003 is as follows:

2004	$	1,047
2005		1,047
2006		1,047
2007		274
2008		71
Thereafter		128
	$	3,614

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Accrued Expenses and Other Current Liabilities

        Accrued expenses and other current liabilities consist of the following:

		December 31,
		2003		2002
		(In thousands)
Salaries and other employee benefits		$	3,885	$	4,257
Other current liabilities			3,304		3,756
Database license fee			0		2,600
	Total	$	7,189	$	10,613

        On January 22, 2000, the Icelandic Ministry of Health and Social Security (the "Ministry"), granted deCODE an operating license (the "License") to create, operate and commercialize the Icelandic Health Sector Database (the "IHD"), or the License. As required by the License, and concurrently with its issuance, deCODE entered into an agreement (the "Agreement") with the Ministry whereby deCODE would be obligated to pay the Icelandic government a fixed annual fee of 70 million Icelandic kronas per year (approximately $983,000 as of December 2003) and an additional annual fee of 6% of its net profit, up to a maximum of 70 million Icelandic krona per year as a consideration for the rights granted to deCODE under the License. Through June 2003, $3,221,000 in respect of these annual fees had been provided for and included in other accrued expenses. Under the terms of the Agreement, certain events needed to take place in order for the fixed annual fee to become due, including the consummation of certain data transfer agreements with the two largest Icelandic hospitals, which have subsequently merged to from the National University Hospital ("NUH"). No such agreement with the NUH has been consummated, and the IHD has not been commercialized primarily because the Icelandic Data Protection Authority has not issued the required security certification. In light of the development of our business since the Agreement was entered into, the lack of the required agreement with the NUH and the fact that the Icelandic Data Protection Authority has not issued the required security certification, we do not expect to operate the IHD under the terms of the Agreement. As such, management's estimation after consultation with legal counsel is that it is no longer probable that the accrued fixed annual fee will become due, and accordingly, a reversal of $3,221,000 of the accrued fees has reduced recorded research and development expenses for the year ended December 31, 2003.

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Short-Term Borrowings

        Short-term borrowings as of December 31, 2003 consists of a $6,500,000 loan with an Icelandic financial institution that is due in three traunches of $2,000,000, $2,000,000 and $2,500,000 on January 20, 2004, January 30, 2004 and February 17, 2004, respectively, at an interest rate of three month LIBOR (2.09%, 2.06% and 2.06%, respectively). On January 20, January 30 and February 17, 2004 the $2,000,000, $2,000,000 and $2,500,000 loans, respectively, were extended until March 22, April 30 and May 17, 2004 at an interest rate of 2.05%, 2.01% and 1.90%, respectively.

Debt

        In December 2001, deCODE established a $27,500,000 bridge loan with an Icelandic financial institution to finance the construction of its new headquarters facility. The borrowings under the bridge loan were repaid in January and March 2002 with the proceeds from deCODE's Tier A $13,500,000 bond offering, Tier C $7,300,000 offering of privately placed bonds and Tier D $6,600,000 bank loan. In December 2001, deCODE also entered into a $4,000,000 bank loan (Tier B) for the construction of it's new headquarters facility. The Tier B bank loan is denominated in U.S. dollars and the principal amount is payable quarterly beginning in March 2002. The Tier B bank loan bears annual interest of three-month LIBOR plus 3.0% (4.17% at December 31, 2003) that is payable quarterly beginning March 2002. The lender may demand prepayment of the Tier B bank loan in certain circumstances.

        The Tier A bonds are denominated in Icelandic krona and are linked to the Icelandic Consumer Price Index. The principal amount is payable annually beginning December 2002. The Tier A bonds bear annual interest of 8.5% that is payable annually in December 2002. The Tier C bonds are denominated in Icelandic krona and are linked to the Icelandic Consumer Price Index. The principal amount is payable in March 2007. The Tier C bonds bear annual interest of 12.0%. The principal amount is payable in March 2007. The Tier D bank loan bears annual interest of three-month LIBOR plus 6.0% (7.17% at December 31, 2003) that is payable quarterly. Tier C bonds may be prepaid at each interest payment date and the Tier D bank loan may be prepaid on the anniversary date of the loan.

        The Tier A bonds, Tier B bank loan, Tier C bonds and Tier D bank loan are collateralized by deCODE's headquarters facility.

        In connection with the Tier A and Tier C bonds deCODE entered into two cross-currency swaps as economic hedges against foreign exchange rate fluctuations that may occur on the Tier A and Tier C bonds. These outstanding contracts bear annual interest of three-month LIBOR plus 2.85% and twelve-month LIBOR plus 6%, respectively. (See "Derivative Financial Instruments")

        On March 1, 2004, deCODE prepaid the Tier C bonds ($10,946,000) as a first step in an integrated refinancing of the Tier C bonds and the Tier D bank loan with an Icelandic financial institution (the "Lender"). On March 12, 2004, deCODE entered a $17,500,000 term loan with the Lender to refinance the Tier C bonds and the Tier D bank loan. The term loan bears interest at the three-month LIBOR plus 3% (4.11% as of March 12, 2004) until March 1, 2009, at which point, the Lender may adjust the interest margin unilaterally on the interest date March 1, 2009. The term loan is payable in twenty quarterly payments starting on March 1, 2009 and the final payment is due on December 1, 2013. The term loan can be repaid on every anniversary of the loan starting on March 1, 2006, but for which deCODE will pay a prepayment fee of 1% for every year that remains on the term

F-28

loan facility with a maximum fee of 6%. Final execution of the term loan and receipt by deCODE of the related proceeds is expected to occur by March 19, 2004.

        In connection with the Tier C bonds and the Tier D bank loan, deCODE issued a warrant giving the holder the right to purchase a total of 933,800 shares of deCODE common stock at $15.00 per share, as adjusted. The warrants expire in March 2007 and convert into shares of deCODE common stock automatically in the event the market value of a share of deCODE common stock should exceed $24.00 for thirty consecutive days of trading. A portion of the proceeds from the Tier C bonds and the Tier D bank loan has been allocated to the warrant ($696,000) and recorded to additional paid-in capital. The resulting discount on the Tier C bonds and the Tier D bank loan is being amortized to interest expense through March 2007.

        In April 2002, deCODE repaid the existing loan that had been assumed in the acquisition of MediChem ($11,880,000). In June 2002, deCODE executed a mortgage for $11,800,000 with a financial institution for its Woodridge, IL discovery center. The debt carries an interest rate of three-month LIBOR + 1.75% (3.16% at December 31, 2003), payable in monthly installments of $49,000 for five years and a final payment of $8,800,000 due in 2007. The mortgage is collateralized by restricted cash totaling $6,000,000.

        In November 2002, deCODE established a $2,200,000 mortgage loan with an Icelandic financial institution. The bank loan is denominated in U.S. dollars and bears interest at a rate of 6 month LIBOR plus 1.95% (3.17% at December 31, 2003) that is payable in semi-annual installments of $73,000 beginning June 2003 with a final payment of $1,835,000 due in 2005.

        On April 5, 2001, MediChem Life Sciences, Inc., entered into a Master Security Agreement with General Electric Capital Corporation (G.E. Capital). This credit facility provides for revolving credit loans in the aggregate amount of $4,000,000. During 2002, deCODE entered into two promissory notes associated with this credit facility. These notes were for $266,000 and $193,000 and bear interest at fixed rates of 8.57% and 8.52%, respectively. During 2003, deCODE entered into two promissory notes associated with this credit facility. These notes were for $53,000 and $81,000 and bear interest a fixed rate of 8.58%. The terms of the notes are four years and are payable in equal monthly payments based on a 48-month amortization plus interest. The notes are collateralized by the equipment purchased.

        In the ordinary course of business, deCODE is contingently liable for performance under a standby letters of credit totaling $147,000 as of December 31, 2003.

        Debt consists of the following:

	December 31,
	2003		2002
	(In thousands)
Mortgage bonds; fixed interest of 8.5%—12.0%	$	25,406	$	24,316
Mortgage loans; interest at LIBOR plus 1.75%—6.0%		19,948		23,186
Equipment notes; fixed interest of 8.52%—9.57%		3,386		1,702
Total	$	48,740	$	49,204

F-29

        As of December 31, 2003 principal payments on long-term debt are as follows:

2004	$	4,893
2005		6,450
2006		4,329
2007		30,527
2008		2,541
2009 and thereafter		0
	$	48,740

Derivative Financial Instruments

        During the normal course of business, deCODE is exposed to foreign currency risk and interest rate risk. These risks can create volatility in earnings and cash flows from period to period. deCODE's objective is to reduce volatility of earnings and cash flows associated with market risks. Derivative instruments held by the Company are used for hedging and non-speculative purposes. As of December 31, 2003, deCODE had entered into two cross-currency swaps for purposes of managing certain of these risks.

        deCODE seeks to maintain a desired level of floating-rate debt with respect to its overall debt portfolio denominated in U.S. Dollars. To this end, deCODE uses interest rate and cross-currency swaps to manage interest rate and foreign currency risk arising from long-term debt obligations denominated in Icelandic krona. These interest rate and cross-currency swaps with a combined notional amount of 1,730 million Icelandic krona are designated as economic hedges of fixed rate foreign currency debt (Tier A and Tier C bonds), but do not qualify for hedge accounting under SFAS 133. The estimated fair value of these instruments is $11,185,000 as of December 31, 2003 and $6,361,000 as of December 31, 2002 and is included in other long-term assets and deferred charges on the consolidated balance sheet. The resulting unrealized gain for the year-ended December 31, 2003 and December 31, 2002 of $1,764,000 and $1,116,000, respectively are included in other non-operating income and (expense), net in the Consolidated Statements of Operations.

        The fair value of derivative instruments is sensitive to movements in the underlying market rates and variables. deCODE monitors the fair value of derivative instruments on a periodic basis. Fair values are estimated for each derivative using common market valuation methods with reference to available market data as of the balance sheet date.

F-30

Lease and Other Commitments

        deCODE leases certain property, laboratory equipment and other assets under obligations that expire at varying dates through 2008. At December 31, 2003, future minimum lease payments under all non-cancelable leases with remaining terms in excess of one-year are as follows:

	Operating		Capital
	(In thousands)
2004	$	1,484	$	5,988
2005		911		1,688
2006		302		818
2007		12		48
2008		0		38
2009		0		0
Total minimum lease payments	$	2,709		8,580
Less amount representing interest				(319	)
Present value of future minimum lease payments				8,261
Less: current portion				(5,741	)
Long-term portion			$	2,520

        Rental expense for operating leases was $1,648,000, $1,491,000 and $872,000 in the years ended December 31, 2003, 2002 and 2001, respectively. Included in operating and capital lease commitments are leases on facilities that deCODE has vacated during 2002 as a result of the move to the new headquarters facility. In 2002, management assessed its alternatives in respect of these leased facilities, including subleasing, and recorded a provision amounting to $903,000 with respect to the remaining commitments. Total remaining minimum lease payments on these facilities are $692,000 as of December 31, 2003. The remaining provision at December 31, 2003 totaling $330,000 is net of sub-lease payments deCODE will receive and is classified together with other current liabilities.

        Under the terms of certain technology licensing agreements, deCODE is obligated to make payments upon the achievement of established milestones leading to the discovery of defined products. These payments could total $6.0 million and the year incurred cannot be determined at the current time.

Guarantees

        In November 2002, the FASB issued FIN No. 45 "Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others—an interpretation of FASB Statements No. 5, 57 and 107 and rescission of FIN 34." deCODE has applied the disclosure provisions of this FIN 45 as of December 31, 2003. The following is a summary of deCODE's agreements that it has determined are within the scope of FIN 45.

        When as part of an acquisition deCODE acquires all of the stock or all of the assets and liabilities of a company, it assumes the liability for certain events or occurrences that took place prior to the date of acquisition. The maximum potential amount of future payments it could be required to make for such obligations is undeterminable at this time. deCODE has no liabilities recorded for these liabilities as of December 31, 2003.

F-31

        deCODE enters into indemnification provisions under (i) its agreements with other companies in its ordinary course of business, typically with business partners, contractors, clinical sites and customers and (ii) its agreements with investors. Under these provisions deCODE generally indemnifies and hold harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of deCODE's activities or, in some cases, as a result of the indemnified party's activities under the agreement. These indemnification provisions generally survive termination of the underlying agreement. In addition, in some cases, deCODE has agreed to reimburse employees for certain expenses and to provide salary continuation during short term disability. The maximum potential amount of future payments deCODE could be required to make under these indemnification provisions is unlimited. deCODE has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the estimated fair value of these agreements is minimal. Accordingly, deCODE has no liabilities recorded for these agreements as of December 31, 2003.

Settlement Agreement

        On December 31, 1997, deCODE entered into a settlement agreement (the Agreement) with The Beth Israel Deaconess Medical Center (Beth Israel) in respect of deCODE's past use of the institution's research facilities. Among other terms, the Agreement provides for the joint ownership of a specific technology associated with the linkage of a segment of DNA to the multiple sclerosis trait that was developed at the research facilities. deCODE has obtained an exclusive license from Beth Israel to develop and commercialize therapeutic and diagnostic products worldwide based on Beth Israel's interest in patents and know-how relating to the linkage between this particular segment of DNA and multiple sclerosis. The license under the patents will expire upon the expiration of the last patent to expire and thereafter the license to the know-how will be perpetual.

        Under the terms of the Agreement, deCODE is obligated to pay license fees and other payments upon the achievement of established milestones leading to the discovery of defined products. deCODE is also required to pay royalties to Beth Israel on certain royalty bearing products which may result from the licensed technology. Such royalties are to be paid for a period up to and potentially exceeding 15 years. No royalties have been paid to date under these agreements.

Litigation

        Other than claims and legal proceedings that arise from time to time in the ordinary course of its business which are not material, deCODE has no pending legal proceedings except as follows:

        On or about April 20, 2002, an amended class action complaint, captioned In re deCODE genetics, Inc. Initial Public Offering Securities Litigation (01 Civ. 11219 (SAS)), alleging violations of federal securities laws was filed in the United States District Court for the Southern District of New York on behalf of certain purchasers of deCODE common stock. The complaint names deCODE, two of deCODE's current executive officers (the "Individual Defendants"), and the two lead underwriters (the "Underwriter Defendants") for our initial public offering in July 2000 (the "IPO") as defendants.

        In the amended pleading, the plaintiff alleges violations of Section 11 of the Securities Act of 1933 and violations of Section 10(b) of the Securities Exchange Act of 1934 (and Rule 10b-5 promulgated thereunder) against deCODE, the Individual Defendants and the Underwriter Defendants. In addition, the amended complaint alleges violations of Section 15 of the Securities Act of 1933, and Section 20(a) of the Securities Exchange Act of 1934 against the Individual Defendants. Generally, the amended complaint alleges that the Underwriter Defendants: (i) solicited and received excessive and undisclosed

F-32

commissions from certain investors in exchange for which the Underwriter Defendants allocated to those investors material portions of the shares of our stock sold in the IPO; (ii) entered into agreements with customers whereby the Underwriter Defendants agreed to allocate shares of our stock sold in the IPO to those customers in exchange for which the customers agreed to purchase additional shares of our stock in the aftermarket at pre-determined prices; and (iii) improperly used their analysts, who purportedly suffered from conflicts of interest, to manipulate the market. The amended complaint further alleges that the prospectus incorporated into the registration statement for the IPO was materially false and misleading in that it failed to disclose these arrangements. The amended complaint also alleges that deCODE and the Individual Defendants had numerous interactions and contacts with the Underwriters from which deCODE and the Individual Defendants either knew of, or recklessly disregarded, the Underwriters' purported wrongful acts. The suit seeks unspecified monetary and recissionary damages and certification of a plaintiff class consisting of all persons who purchased shares of our common stock from July 17, 2000 to December 6, 2000.

        deCODE is aware that similar allegations have been made in hundreds of other lawsuits filed (many by some of the same plaintiff law firms) against numerous underwriter defendants and issuer companies (and certain of their current and former officers) in connection with various public offerings conducted in recent years. All of the lawsuits that have been filed in the Southern District of New York have been consolidated for pretrial purposes before Honorable Judge Shira Scheindlin. Pursuant to the underwriting agreement executed in connection with our IPO, deCODE has demanded indemnification from the Underwriter Defendants. The Underwriter Defendants have asserted that our request for indemnification is premature.

        Pursuant to an agreement the Individual Defendants have been dismissed from the case without prejudice. Along with numerous other issuers, deCODE moved to dismiss the complaint for failure to state a claim. On February 19, 2003, Judge Scheindlin granted our motion with respect to the Section 10(b) claims and denied the motion with respect to the Section 11 claims.

        On July 31, 2003, our Board of Directors (other than Dr. Stefansson, who recused himself because he was an Individual Defendant) conditionally approved a proposed partial settlement with the plaintiffs in this matter. The settlement would provide, among other things, a release of deCODE and of the Individual Defendants for the conduct alleged in the amended complaint to be wrongful. deCODE would agree to undertake other responsibilities under the partial settlement, including agreeing to assign away, and not assert or release, certain potential claims we may have against our underwriters. Any direct financial impact of the proposed settlement is expected to be borne by deCODE's insurers. The Board agreed to approve the settlement subject to a number of conditions, including the participation of a substantial number of other issuer defendants in the proposed settlement, the consent of deCODE's insurers to the settlement, and the completion of acceptable final settlement documentation. Furthermore, the settlement is subject to a hearing on fairness and approval by the Court overseeing the litigation.

        Due to the inherent uncertainties of litigation and the fact that the settlement is in its early stages, the ultimate outcome of this matter cannot be predicted. If the settlement is not consummated, deCODE expects to contest the allegations against deCODE and deCODE's officers vigorously. If deCODE was required to pay significant monetary damages as a result of such litigation (or any other lawsuits alleging similar claims filed against deCODE and deCODE's officers in the future), deCODE's business could be significantly harmed. Even if such suit concludes in deCODE's favor, deCODE may be required to expend significant funds to defend against the allegations. deCODE is unable to

F-33

estimate the range of possible loss from the litigation and no amounts have been provided for such matters in deCODE's financial statements.

Preferred Stock

        At December 31, 2003, deCODE had 6,716,666 shares of undesignated preferred stock authorized and no shares issued or outstanding. In respect of the undesignated shares of preferred stock, deCODE's Board of Directors is authorized, except as otherwise limited by Delaware law, without further action by the stockholders to:

•

issue shares of preferred stock in one or more series;



•

fix or alter the dividend rights, dividend rates, conversion rights, voting rights, terms of redemption (including sinking fund provisions), redemption price or prices, and liquidation preferences of any wholly unissued series of preferred stock;



•

designate the number of shares constituting, and the designation of, any series of preferred stock; and



•

increase or decrease the number of shares of a series subsequent to the issue of shares of that series, but not below the number of shares of that series then outstanding.

Common Stock

        The total authorized shares of common stock, par value $0.001, of deCODE is 100,000,000 shares. Holders of shares of common stock are entitled to one vote at all meetings of stockholders for each share held by them. The common stock has no preemptive rights or other rights to subscribe for additional shares, no conversion right and no right of redemption. Subject to the rights and preferences of the holders of any preferred stock, the holders of the common stock are entitled to receive such dividends as, when and if declared by the Board of Directors out of funds legally available for that purpose.

        Forfeited unvested founder stock and unvested common stock issued upon early exercise of stock options totaling 70,841 and 26,977 in 2001 and 2000, respectively, were held in treasury and subsequently re-issued during those same years. At December 31, 2003, forfeited unvested shares of common stock issued upon early exercise of stock options totaling 268,740 shares were held in treasury. At December 31, 2003, 0 shares of common stock that were issued upon early-exercise of stock options remained unvested.

        Notes receivable provided in connection with the purchase of common stock are collateralized only by the shares to which they relate, are payable after a fixed period of generally four years and bear a fixed interest rate of generally six percent per annum. Several of the notes that have become due have been extended a further six years without additional interest. The loan becomes payable upon termination of employment and/or when the shares are sold.

        On November 1, 2003, principal and accrued interest in the amount of $1,846,000 under a promissory note from an executive officer to the Company, which was delivered to the Company in 1999 in connection with the officer's early exercise of a stock option for 260,000 shares of common stock and was secured by a pledge of such shares, became due. On November 3, 2003, and in accordance with the terms of the note, the Company applied 240,096 shares of the pledged stock

F-34

(valued at $1,846,000 based on the opening price on the Nasdaq Stock Market on November 3, 2003) to payment of principal and interest due on the note.

        On December 31, 2003, principal and accrued interest in the amount of $71,000 under a promissory note from an executive officer to the Company, was paid in full in connection with the officer's early exercise in 1998 of a stock option for 300,000 shares of common stock.

Warrants

        Upon the closing of deCODE's public offering in July 2000, warrants to purchase 1,075,833 shares of Series A preferred stock and warrants and options to purchase 416,667 shares of Series C preferred stock automatically converted into warrants and options to purchase the same number of shares of common stock. Of these warrants, 450,833, 150,000 and 100,000 were exercised in the years ended December 31, 2003, 2002 and 2001, respectively. Holders of such warrants and options have the right to require deCODE to file a registration statement under the Securities Act covering the registration of their shares at any time after 180 days from the effective date of an initial registration statement if the holders of 50% of such shares demand registration. Such registration rights are subject to conditions and limitations, including the right of the underwriters of an offering to limit the number of shares of common stock which security holders may include in a registration. Further, deCODE may defer a registration for a period of 90 days if deCODE furnishes to the holders requesting registration a certificate signed by the chairman of the board stating that in the good faith judgment of the Board of Directors it would be seriously detrimental to deCODE and its stockholders for the requested registration to be effected at that time. deCODE is generally required to bear all of the expenses of such registrations, except underwriting discounts and selling commissions. Registration of any of the shares of common stock held by security holders with registration rights would result in such shares becoming freely tradable without restriction under the Securities Act immediately upon effectiveness of such registration.

        Warrant activity is summarized as follows:

	For the Years Ended December 31,
	2003		2002		2001
Outstanding at beginning of year	1,851,300		1,067,500		1,167,500
Issued	0		933,800		0
Exercised	(450,833	)	(150,000	)	(100,000	)
Outstanding at end of year	1,400,467		1,851,300		1,067,500

        In May 2002, deCODE issued warrants to purchase 933,800 shares of common stock at an exercise price of $15.00 per share in conjunction with the issuance of the Tier C bonds and Tier D bank loan. A

F-35

summary of the outstanding deCODE warrants as of December 31, 2003, of which all are currently exercisable, is as follows:

Common Shares Issuable for	Exercise Price Per Share		Warrant Expiration Date
50,000	$	1.00	August 26, 2005
250,000		2.00	February 2, 2007
55,555		3.00	February 5, 2008
55,556		3.00	May 20, 2009
55,556		4.00	February 10, 2010
933,800		15.00	March 1, 2007
1,400,467

Stock Option Plans

        In August 1996, deCODE adopted the deCODE genetics, Inc. 1996 Equity Incentive Plan (the "1996 Plan"). A total of 7,000,000 options are reserved for grants under the terms of the Plan. The Plan provides for grants of stock options to employees, members of the Board of Directors, consultants and other advisors who are not employees. Options granted to date generally vest over a period of four years, generally have a maximum term of 10 years, and may contain early-exercise provisions allowing for company-provided financing of the exercise price. In June 2002, deCODE adopted the deCODE genetics, Inc. 2002 Equity Incentive Plan (the "2002 Plan"). A total of 3,000,000 shares of common stock are reserved for grants under the terms of the 2002 Plan. The 2002 Plan provides for grants of stock options to employees, members of the Board of Directors, and consultants who are not employees. As of December 31, 2003, 1,540,813 shares were available for grant under the 1996 and 2002 Plans.

F-36

        Option transactions pursuant to the 1996 and 2002 Plan are summarized as follows:

	Exercise Price Greater Than Grant Date Stock Fair Value				Exercise Price Equals Grant Date Stock Fair Value				Exercise Price Less Than Grant Date Stock Fair Value				Total
	Number of Shares		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price
Outstanding at December 31, 2000	5,000		$	18.00	440,500		$	14.83	375,500		$	9.97	821,000		$	12.63
Granted	100,000			7.42	1,049,000			8.23	0			0.00	1,149,000			8.16
Exercised	0			0.00	0			0.00	0			0.00	0			0.00
Cancelled	0			0.00	(51,667	)		12.05	(5,000	)		18.00	(56,667	)		12.57
Outstanding at December 31, 2001	105,000			7.92	1,437,833			10.11	370,500			9.86	1,913,333			9.95
Granted	0			0.00	869,653			7.80	0			0.00	869,653			7.80
Exercised	0			0.00	(38,813	)		1.24	0			0.00	(38,813	)		1.24
Cancelled	0			0.00	(395,666	)		9.62	(78,000	)		7.75	(473,666	)		9.31
Outstanding at December 31, 2002	105,000			7.92	1,873,007			9.33	292,500			10.42	2,270,507			9.40
Granted	0			0.00	2,492,150			6.93	260,000			5.63	2,752,150			6.81
Exercised	0			0.00	(77,031	)		2.59	(60,000	)		1.00	(137,031	)		1.89
Cancelled	(5,000	)		18.00	(771,295	)		9.53	(1,000	)		18.00	(777,295	)		9.60
Outstanding at December 31, 2003	100,000		$	7.42	3,516,831		$	7.73	491,500		$	9.02	4,108,331		$	7.88

        In May 2003, deCODE granted options to purchase 633,400 shares of common stock to employees under the 1996 Equity Incentive Plan. In October and November 2003, deCODE granted options to purchase 2,118,000 shares of common stock to employees and directors under the 1996 and 2002 Equity Incentive Plan.

        The following table summarizes information about stock options outstanding under the 1996 and 2002 Plan at December 31, 2003:

	Outstanding
				Weighted Average Remaining Contractual Life (In Years)	Options Exercisable
Exercise Price	Number of Shares	Weighted Average Exercise Price			Number of Shares	Weighted Average Exercise Price
$1.52 to $2.15	615,440	$	2.09	9.02	230,099	$	2.04
$4.16 to $7.62	829,832		6.11	8.98	477,808		5.99
$8.00 to $10.56	2,304,457		8.81	9.09	867,250		8.80
$13.56 to $24.56	358,602		15.93	6.69	305,097		16.07
$1.52 to $24.56	4,108,331	$	7.88	8.85	1,880,254	$	8.44

        deCODE records deferred compensation for employee stock options based on the difference between the exercise price and the common stock fair value on the measurement date (i.e., the date on which both the number of shares to be issued and the exercise price are fixed and determinable) and records interim estimates of deferred compensation between the grant date and the measurement date. deCODE records deferred compensation for non-employee stock options based on the grant date fair value of options granted as estimated by the Black-Scholes option pricing model. Deferred

F-37

compensation is amortized and recorded as compensation expense ratably over the vesting period of the options. Stock-based compensation expense of $2,440,000, $3,048,000 and $4,598,000 was recognized in the statements of operations during the years ended December 31, 2003, 2002 and 2001 for employee stock options, and stock-based remuneration expense of $0, $0 and $53,000 was recognized in the statements of operations during the years ended December 31, 2003, 2002 and 2001 for non-employee stock options.

        Generally each employee option grant generally vests twenty-five percent on the first anniversary date of an employee's commencement of employment and 1/48th of the original grant each month thereafter for the following three years. Non-employee option grants generally have not contained vesting provisions.

        All options granted from inception through 1999 and two option grants in 2000 have contained a provision for early-exercise according to the terms of the Plan with company-provided financing of the exercise price made available. In almost all cases, employees took advantage of their right to early-exercise and to fund such exercise with a company-provided loan. The company-provided loans are due after a fixed term of generally four years and bear a fixed interest rate of six percent per annum. Many of the employee loans have been extended upon their due date for up to six years without additional interest. The loans become payable upon termination of employment and/or when the shares are sold.

        The weighted-average grant date fair values using the Black-Scholes option pricing model were:

	For the Years Ended December 31,
	2003		2002		2001
Exercise price greater than grant date stock fair value	$	—	$	—	$	7.42
Exercise price equals grant date stock fair value		4.97		5.91		8.23
Exercise price less than grant date stock fair value		5.54		—		—

        The fair values of the options granted during 2003, 2002 and 2001 are estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: no dividends, expected volatility of 100%, expected terms of 5 years for all periods; and risk-free interest rates of 3.11%, 4.49% and 4.39%, respectively.

F-38

Stock-Based Compensation and Remuneration

        Stock-based compensation represents the expense charged in the statements of operations relating to employee stock options granted. Stock-based remuneration represents the expense charged in the statements of operations relating to shares of stock issued to non-employees in exchange for services provided. Stock-based compensation and remuneration are included in the statements of operations in the following captions:

		For the Years Ended December 31,
		2003		2002		2001
		(In thousands)
Research and development expense		$	1,328	$	2,004	$	3,314
General and administrative expense			1,112		1,044		1,337
	Total	$	2,440	$	3,048	$	4,651

        Included in the above were the following transactions:

•

$158,000 that was paid in the form of 25,504 shares of deCODE common stock that were issued in October 2003.



•

$131,000 that was paid in the form of 20,508 shares of deCODE common stock that were issued in March 2002. Compensation related to these shares has been expensed in the year-ended December 31, 2001.



•

$53,000 that was paid in the form of 5,000 shares of deCODE common stock that was given as a charitable contribution in 2001.

Defined Contribution Benefits

        deCODE contributes to relevant pension organizations for personnel in Iceland. Certain other discretionary contributions may be made. Contributions are based on employee salaries paid and deCODE has no further liability in connection with these plans. Total contributions were $1,745,000, $1,928,000 and $1,434,000 for the years ended December 31, 2003, 2002 and 2001, respectively.

        Effective December 1, 2001, deCODE adopted a 401(k) pension plan available to eligible full-time employees in the United States. deCODE made contributions of $33,000, $31,000 and $1,000 in the years ended December 31, 2003, 2002 and 2001 to this plan. Additionally, MediChem sponsors a contribution savings and investment 401(k) plan in which employees meeting minimum service requirements are eligible to participate. Participants may contribute up to 15% of their compensation. In 2002 and since the date of acquisition, deCODE contributed an amount equal to 50% of participant contributions on the first 6% of compensation totaling $198,000. In 2003, deCODE contributed $155,000 to the MediChem plan.

Income taxes

        Deferred income taxes include the net effects of temporary differences between the carrying amounts for assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

F-39

        deCODE's deferred tax assets (liabilities) are comprised of the following:

		December 31,
		2003			2002
		(In thousands)
Loss carryforwards		$	38,783		$	32,050
Capitalized research and development costs			13,124			8,031
Deferred revenue			1,728			2,149
Fixed asset depreciation			(696	)		(51	)
Intangible assets/patents			(1,433	)		(1,427	)
Other deferred tax assets			(259	)		(159	)
	Total deferred tax asset, net		51,247			40,593
Valuation allowance			(51,247	)		(40,593	)
		$	0		$	0

        The table below reconciles the expected U.S. federal income tax rate to the recorded income tax rate:

	For the Years Ended December 31,
	2003		2002		2001
Income taxes at federal statutory rates	(34.0	)%	(34.0	)%	(34.0	)%
State income taxes, net of federal benefit	(1.4	)	(0.6	)	(0.5	)
Non-deductible equity compensation	1.3		0.4		3.5
Non-deductible goodwill amortization	0.0		13.8		2.2
Foreign rate differential	11.1		8.0		3.6
Foreign deferred tax asset adjustment	0.0		0.0		14.7
Foreign inflation adjustment	0.0		0.0		(8.1	)
Foreign currency adjustment	(9.2	)	(5.1	)	17.0
Other	1.9		(0.1	)	0.0
Net change in valuation allowance	30.3		17.6		1.6
	0.0	%	0.0	%	0.0	%

        Pre-tax U.S. losses were $10,813,000, $65,825,000 and $5,087,000 and pre-tax Icelandic losses were $24,310,000, $66,061,000 and $47,360,000 in 2003, 2002 and 2001, respectively. As of December 31, 2003, deCODE had U.S. federal net operating loss ("NOL") carryforwards of approximately $31,422,000 that may be available to offset future U.S. federal income tax liabilities and expire at various dates through 2023. As of December 31, 2003, deCODE's Icelandic subsidiaries had NOL carryforwards of approximately $146,303,000 that begin to expire in 2006. Management has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets and has established a full valuation allowance for such assets, which are comprised principally of net operating loss carryforwards and capitalized research and experimentation costs.

        Approximately $138,000 of the net operating loss carryforwards relate to the exercise of non-qualified stock options and disqualifying dispositions of incentive stock options, the tax benefit from which, if realized, will be credited to additional paid in capital.

F-40

        Ownership changes, as defined in the Internal Revenue Code, may have limited the amount of net operating loss carryforwards that can be utilized annually to offset future taxable income. Subsequent ownership changes could further affect the limitation in future years.

        In December 2001, the Government of Iceland enacted a change in the corporate tax rate from 30% to 18% with an effective date of January 1, 2002. As a result, the carrying value of the Icelandic deferred tax assets at December 31, 2001 were re-computed at the 18% rate, resulting in a decrease in deCODE's deferred tax assets and liabilities which was offset by a reduction in the tax valuation allowance of $7,700,000. For Icelandic tax purposes, the Income Tax and Capital Tax Act of 1981, as amended, contains provisions that stipulate that an inflation adjustment be taken into account in the annual reporting of taxable income. For the years ended December 31, 2001 the adjustment to taxable income was a benefit of approximately, $14,100,000. For the periods beginning on or after January 1, 2002, the Income Tax and Capital Tax Act was amended to remove these provisions.

        In the year-ended December 31, 2003 and 2002 there was a foreign currency adjustment caused by strengthening of the Icelandic krona against the U.S. dollar, resulting in an increase in deferred tax assets and liabilities that was offset by an increase in the tax valuation allowance of $18,000,000 and $37,400,000, respectively. In the year-ended December 31, 2001 there was a foreign currency adjustment caused by the devaluation of the Icelandic krona against the U.S. dollar, resulting in a decrease in deferred tax assets and liabilities which was offset by a decrease in the valuation allowance of $30,100,000.

Selected Quarterly Data (Unaudited)

		For the Three Months Ended
		March 31,			June 30,			September 30,			December 31,
		(In thousands, except per share amounts)
FISCAL 2003
	Revenue	$	11,842		$	10,536		$	12,763		$	11,670
	Operating loss		12,571			10,276			2,409			9,528
	Net loss		13,042			10,232			1,286			10,563
	Basic and diluted net loss per share		(0.25	)		(0.20	)		(0.03	)		(0.20	)
FISCAL 2002
	Revenue	$	5,258		$	9,442		$	8,982		$	17,383
	Operating loss		16,886			19,674			85,417			10,045
	Net loss		15,867			19,708			85,439			10,872
	Basic and diluted net loss per share		(0.36	)		(0.39	)		(1.68	)		(0.21	)

(1)

In March 2002, deCODE completed the acquisition of MediChem Life Sciences, Inc. (MediChem) in a stock-for-stock exchange accounted for as a purchase transaction. Total consideration for the acquisition was $85,845,000. deCODE Statements of Operations include the results of MediChem from March 18, 2002, the date of acquisition.

(2)

In September 2002, deCODE recorded impairment, employee termination benefits and other charges in the total amount of $64,790,000.

F-41

EXHIBIT INDEX

Exhibit Number	Description
3.1	Amended and Restated Certificate of Incorporation, as further amended (Incorporated by reference to Exhibit 3.1 and Exhibit 3.3 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000).
3.2	Bylaws, as amended (Incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000).
3.3	Certificate of Amendment to Amended and Restated Certificate of Incorporation dated August 30, 2002 (Incorporated by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q filed on November 14, 2002).
4.1	Specimen Common Stock Certificate (Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000).
4.2	Form of Warrant to Purchase Series A Preferred Stock (Incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000).
4.3	Form of Warrant to Purchase Series C Preferred Stock (Incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000).
4.4	Warrant Certificate, dated May 6, 2002 issued to Islandsbanki-FBA hf. (Incorporated by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q filed on May 15, 2002).
4.5	Form of Indexed Bond (Tier A) (Incorporated by reference to Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q filed on May 15, 2002).
4.6	Form of Indexed Bond (Tier C) (Incorporated by reference to Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q filed on May 15, 2002).
4.7	Warrant, dated February 25, 2004, issued to Merck & Co., Inc.
10.1	Form of License from The Icelandic Data Protection Commission (now, The Icelandic Data Protection Authority) to Islensk erfdagreining ehf. and its Clinical Collaborators to Use and Access Patient Records and Other Clinical Data Relating to Individuals (Incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000).
10.2*	1996 Equity Incentive Plan, as amended (Incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-8 (Registration No. 333-56996) filed on March 14, 2001).
10.3*	Form of Non-Statutory Stock Option Agreement, as executed by employees and officers of deCODE genetics, Inc. who received non-statutory stock options (Incorporated by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K filed April 15, 2003).
10.4*	Form of Employee Proprietary Information and Inventions Agreement (Incorporated by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000).
10.5	Agreement on the Collaboration of Fridrik Skulason (FS) and Islensk erfdagreining ehf. (IE) on the Creation of a Database of Icelandic Genealogy, dated April 15, 1997 (Incorporated by reference to Exhibit 10.5 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000).
10.6*	Consultancy Contract between deCODE genetics, Inc. and Vane Associates, dated August 30, 2002 (Incorporated by reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K filed April 15, 2003).
10.7*	Indemnity Agreement between deCODE genetics, Inc. and Sir John Vane, dated December 1, 1997 (Incorporated by reference to Exhibit 10.8 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000).

10.9	Amended and Restated Investor rights Agreement of deCODE genetics, Inc., dated as of February 2, 1998, as further amended and restated (Incorporated by reference to Exhibit 10.12 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000).
10.10	Co-operation Agreement between Reykjavik Hospital and Islensk erfdagreining ehf., dated November 4, 1998 (Incorporated by reference to Exhibit 10.22 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000).
10.11	Co-operation Agreement between the Iceland State Hospital and Islensk erfdagreining ehf., dated December 15, 1998 (Incorporated by reference to Exhibit 10.24 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000).
10.12*	Form of Employee Confidentiality, Invention Assignment and Non-Compete Agreement executed by certain officers (Incorporated by reference to Exhibit 10.44 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000).
10.13*	Employment and Amended and Restated Employee Confidentiality, Invention Assignment and Non-Compete Agreement between deCODE genetics, Inc. and Mark Gurney, dated as of August 21, 2000 and signed on August 13, 2001 (Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed on August 14, 2001).
10.14*	Employment and Employee Confidentiality, Invention Assignment and Non-Compete Agreement between deCODE genetics, Inc. and Lance Thibault, dated February 1, 2001 and signed on June 20, 2001 (Incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed on August 14, 2001).
10.15*	Employment Agreement between deCODE genetics, Inc. and Michael W. Young dated June 4, 2001 (Incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q filed on August 14, 2001).
10.16+	Collaboration and Cross-License Agreement Re. Diagnostics between F.Hoffman-La Roche Ltd. AG and deCODE genetics, ehf dated as of June 29, 2001 (Incorporated by reference to Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q filed on August 14, 2001).
10.17	Contract on Financial Leasing between Lysing hf, and Islensk erfdagreining ehf., dated as of December 13, 2001. (Incorporated by reference to Exhibit 10.36 to the Company's Annual Report on Form 10-K filed March 27, 2002).
10.18	Land Lease Agreement between the City of Reykjavik and Islensk erfdagreining ehf., dated as of December 21, 2001. (Incorporated by reference to Exhibit 10.37 to the Company's Annual Report on Form 10-K filed March 27, 2002).
10.19	Agreement on the Details of the Arrangement of Encumbrances in the Site Agreement between the University of Iceland and Islensk erfdagreining ehf., dated as of December 21, 2001. (Incorporated by reference to Exhibit 10.38 to the Company's Annual Report on Form 10-K filed March 27, 2002).
10.20	Annex to the Agreement on the Details of the Arrangement of Encumbrances in the Site Agreement between the University of Iceland and Islensk erfdagreining ehf., dated as of January 4, 2002. (Incorporated by reference to Exhibit 10.39 to the Company's Annual Report on Form 10-K filed March 27, 2002).
10.21#	Loan Agreement between Sturlugata 8 ehf. (now named Vetrargardurinn ehf.) and Islandsbanki-FBA hf., dated as of December 21, 2001. (Incorporated by reference to Exhibit 10.40 to the Company's Annual Report on Form 10-K filed March 27, 2002).
10.22	Currency Exchange Agreement between Sturlugata 8 ehf. (now named Vetrargardurinn ehf.) and Islandsbanki-FBA hf., dated as of December 21, 2001. (Incorporated by reference to Exhibit 10.42 to the Company's Annual Report on Form 10-K filed March 27, 2002).
10.23	General Bond with Consumer Price Index between Islandsbanki-FBA, hf. and Sturlugata 8 ehf., (now named Vetrargardurinn ehf.) dated as of December 21, 2001. (Incorporated by reference to Exhibit 10.44 to the Company's Annual Report on Form 10-K filed March 27, 2002).

10.24	General Bond with Consumer Price Index between Islandsbanki-FBA hf. and Sturlugata 8 ehf., (now named Vetrargardurinn ehf.) dated as of December 21, 2001. (Incorporated by reference to Exhibit 10.45 to the Company's Annual Report on Form 10-K filed March 27, 2002).
10.25#	Research Collaboration and Cross-License Agreement among F.Hoffman-La Roche Ltd and Hoffman-La Roche Inc. and deCODE genetics, ehf. (Islensk erfdagreining), effective as of February 1, 2002. (Incorporated by reference to Exhibit 10.46 to the Company's Annual Report on Form 10-K filed March 27, 2002).
10.26	Currency Exchange Agreement between Vetrargardurinn ehf. and Islandsbanki-FBA hf., dated as of March 13, 2002 (Incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q filed on May 15, 2002).
10.27	General Bond with Consumer Price Index between Islandsbanki-FBA hf. and Vetrargardurinn ehf., dated as of February 8, 2002 (Incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q filed on May 15, 2002).
10.28+	Loan Agreement between Islandsbanki-FBA hf. and Vetrargardurinn ehf., dated as of March 13, 2002 (Incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q filed on May 15, 2002).
10.29+	Research Collaboration and License Agreement, dated September 26, 2002, between deCODE genetics, Inc., deCODE genetics, ehf., and Merck & Co., Inc. (Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed on November 14, 2002).
10.30	Nondisclosure Agreement executed by Vane Associates as of December 1, 1997, as amended (Incorporated by reference to Exhibit 10.7 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000).
10.31*	2002 Equity Incentive Plan (Incorporated by reference to Exhibit 10.40 to the Company's Annual Report on Form 10-K filed on April 15, 2003).
10.32#	License Agreement, dated as of October 17, 2003, between deCODE genetics, ehf. and Bayer AG
10.33#	License and Research Collaboration Agreement, dated February 25, 2004, between deCODE genetics, ehf and Merck & Co., Inc.
10.34*#	Employment Agreement between Islensk erfdagreining ehf. and Hakon Hakonarson dated as of July 23, 2003 (Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on From 10-Q filed on November 13, 2003).
10.35*	Agreement between deCODE genetics, Inc. and J. Neal Armstrong dated as of August 18, 2003 and effective as of October 3, 2003 Incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on From 10-Q filed on November 13, 2003).
10.36	Stock and Warrant Purchase Agreement dated February 25, 2004, between deCODE genetics, Inc., and Merck & Co., Inc.
21.1	Subsidiaries of deCODE genetics, Inc.
23.1	Consent of PricewaterhouseCoopers LLP, independent accountants.
23.2	Consent of PricewaterhouseCoopers hf, independent accountants.
31.1	Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

+

Certain portions of this exhibit have been granted confidential treatment by the Commission. The omitted portions have been separately filed with the Commission.

*

Constitutes a management contract or compensatory plan or arrangement.

#

A request for confidential treatment had been submitted with respect to this exhibit. The copy which was filed as an exhibit omits the information subject to the request for confidential treatment.

Note: Unless otherwise noted, the SEC File number of each of the above referenced documents is 000-30469.

QuickLinks

PART I

Item 1. Business

RISK FACTORS, FORWARD-LOOKING STATEMENTS, AND CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS

Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders

PART II

Item 5. Market for the Company's Common Equity and Related Stock holder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures

PART III

Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation

Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions
Item 14. Principal Accountant Fees and Services

PART IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

SIGNATURES
deCODE genetics, Inc. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS
REPORT OF INDEPENDENT AUDITORS
deCODE genetics, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS
deCODE genetics, Inc. CONSOLIDATED BALANCE SHEETS
deCODE genetics, Inc. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
deCODE genetics, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS
deCODE genetics, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (tabular amounts in thousands, except share and per share amounts)
EXHIBIT INDEX

EX-4.7

                                                                     Exhibit 4.7

NO. M-1

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT
AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE
SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE
OF SUCH REGISTRATION OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY TO THE
EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED.

                      WARRANT TO PURCHASE 1,724,257 SHARES
                               OF COMMON STOCK OF
                              DECODE GENETICS, INC.
                           (VOID AFTER 26 MARCH, 2009)

       This certifies that Merck & Co., Inc. or its permitted assigns (the
"Holder"), for value received, is entitled to purchase from deCODE genetics,
Inc., a Delaware corporation (the "Company"), a maximum of 1,724,257 fully paid
and nonassessable shares of the Company's Common Stock ("Common Stock") for cash
at a price of $29.00 per share (the "Stock Purchase Price") at any time or from
time to time up to and including 5:00 p.m. (Greenwich Mean Time) at the times
and upon the terms described herein, upon delivery to the Company, FAO Corporate
Counsel, at its principal office (or at such other location as the Company may
advise the Holder in writing) of the Form of Subscription attached hereto duly
filled in and signed and, if applicable, upon payment in cash or by check of the
aggregate Stock Purchase Price for the number of shares for which this Warrant
is being exercised determined in accordance with the provisions hereof.

       This Warrant is subject to the following terms and conditions:

       1.     EXERCISE; ISSUANCE OF CERTIFICATES; PAYMENT FOR SHARES. This
Warrant shall be exercisable at the option of the Holder as to 344,851 shares
for a period of 30 days commencing on the first, second, third, fourth and fifth
anniversaries hereof (each an "Exercise Period."). Any portion of this Warrant
that is not exercised during an applicable Exercise Period shall expire and be
of no further force or effect. For purposes of illustration, this Warrant shall
be exercisable as to 344,851 shares on the first anniversary hereof. The Warrant
shall expire with respect to any portion of such 344,851 shares as to which the
Warrant is not exercised within 30 days after such first anniversary. Following
the exercise or expiration of any part of this Warrant, this Warrant shall
represent a warrant for the purchase of the balance of the shares purchasable
hereunder and no new warrant shall be issued for such balance in lieu of this
Warrant. The Company agrees that the shares of Common Stock purchased under this
Warrant shall be and are deemed to be issued to the Holder hereof as the record
owner of such shares as of the close of business on the date on which the
executed Form of Subscription shall have been delivered and payment made for
such shares. Certificates for the shares of Common Stock so purchased, together
with any other securities or property to which the Holder hereof is entitled
upon such exercise, shall be delivered to the Holder hereof by the Company at
the Company's expense within a reasonable time after the rights represented by
this Warrant have been so exercised. Each stock certificate so delivered shall
be in such denominations of Common Stock as may be requested by the Holder
hereof and shall be registered in the name of such Holder.

                                        1


       2.     SHARES TO BE FULLY PAID; RESERVATION OF SHARES. The Company
covenants and agrees that all shares of Common Stock which may be issued upon
the exercise of the rights represented by this Warrant will, upon issuance, be
duly authorized, validly issued, fully paid and nonassessable and free from all
preemptive rights of any shareholder and free of all taxes, liens and charges
with respect to the issue thereof. The Company further covenants and agrees
that, during the period within which the rights represented by this Warrant may
be exercised, the Company will at all times have authorized and reserved, for
the purpose of issue or transfer upon exercise of the rights evidenced by this
Warrant, a sufficient number of shares of authorized but unissued Common Stock,
or other securities and property, when and as required to provide for the
exercise of the rights represented by this Warrant. The Company will take all
such action as may be necessary to assure that such shares of Common Stock may
be issued as provided herein without violation of any applicable law or
regulation, or of any requirements of any domestic securities exchange upon
which the Common Stock may be listed; provided, however, that the Company shall
not be required to effect a registration under any securities laws with respect
to such exercise except as otherwise required by an agreement between the
Company and the Holder.

       3.     ADJUSTMENT OF STOCK PURCHASE PRICE AND NUMBER OF SHARES. The Stock
Purchase Price and the number of shares purchasable upon the exercise of this
Warrant shall be subject to adjustment from time to time upon the occurrence of
certain events described in this Section 3. Upon each adjustment of the Stock
Purchase Price, the Holder of this Warrant shall thereafter be entitled to
purchase, at the Stock Purchase Price resulting from such adjustment, the number
of shares obtained by multiplying the Stock Purchase Price in effect immediately
prior to such adjustment by the number of shares purchasable pursuant hereto
immediately prior to such adjustment, and dividing the product thereof by the
Stock Purchase Price resulting from such adjustment.

              3.1    SUBDIVISION OR COMBINATION OF STOCK. In case the Company
shall at any time subdivide its outstanding shares of Common Stock into a
greater number of shares, the Stock Purchase Price in effect immediately prior
to such subdivision shall be proportionately reduced, and conversely, in case
the outstanding shares of Common Stock of the Company shall be combined into a
smaller number of shares, the Stock Purchase Price in effect immediately prior
to such combination shall be proportionately increased.

              3.2    REORGANIZATION, RECLASSIFICATION, CONSOLIDATION, MERGER OR
SALE. If any recapitalization, reclassification or reorganization of the capital
stock of the Company, or any consolidation or merger of the Company with another
corporation, or the sale of all or substantially all of its assets or other
transaction shall be effected in such a way that holders of Common Stock shall
be entitled to receive stock, securities, or other assets or property (an
"Organic Change"), then, as a condition of such Organic Change, lawful and
adequate provisions shall be made by the Company whereby the Holder hereof shall
thereafter have the right to purchase and receive (in lieu of the shares of the
Common Stock of the Company immediately theretofore purchasable and receivable
upon the exercise of the rights represented hereby) such shares of stock,
securities or other assets or property as may be issued or payable with respect
to or in exchange for a number of outstanding shares of such Common Stock equal
to the number of shares of such stock immediately theretofore purchasable and
receivable upon the exercise of the rights represented hereby; In the event of
any Organic Change, appropriate provision shall be made by the Company with
respect to the rights and interests of the Holder of this Warrant to the end
that the provisions hereof (including, without limitation, provisions for
adjustments of the Stock Purchase Price and of the number of shares purchasable
and receivable upon the exercise of this Warrant) shall thereafter be
applicable, in relation to any shares of stock, securities or assets thereafter
deliverable upon the exercise hereof. The Company will not effect any such
consolidation, merger or sale unless, prior to the consummation thereof, the
successor corporation (if other than the Company) resulting from such
consolidation or the corporation purchasing such assets shall assume the
obligation to deliver to such

                                        2


Holder such shares of stock, securities or assets as, in accordance with the
foregoing provisions, such Holder may be entitled to purchase.

              3.3    CERTAIN EVENTS. If any change in the outstanding Common
Stock of the Company or any other event occurs as to which the other provisions
of this Section 3 are not strictly applicable or if strictly applicable would
not fairly protect the purchase rights of the Holder of the Warrant in
accordance with such provisions, then the Board of Directors of the Company
shall make an adjustment in the number and class of shares available under the
Warrant, the Stock Purchase Price or the application of such provisions, so as
to protect such purchase rights as aforesaid. The adjustment shall be such as
will give the Holder of the Warrant upon exercise for the same aggregate Stock
Purchase Price the total number, class and kind of shares as he would have owned
had the Warrant been exercised prior to the event and had he continued to hold
such shares until after the event requiring adjustment.

              3.4    NOTICES OF CHANGE.

                     (a)    Immediately upon any adjustment in the number or
class or shares subject to this Warrant and of the Stock Purchase Price, the
Company shall give written notice thereof to the Holder, setting forth in
reasonable detail and certifying the calculation of such adjustment.

                     (b)    The Company shall give written notice to the Holder
at least 10 business days prior to the date on which the Company closes its
books or takes a record for determining rights to receive any dividends or
distributions.

                     (c)    The Company shall also give written notice to the
Holder at least 30 business days prior to the date on which an Organic Change
shall take place.

       4.     ISSUE TAX. The issuance of certificates for shares of Common Stock
upon the exercise of the Warrant shall be made without charge to the Holder of
the Warrant for any issue tax (other than any applicable income taxes) in
respect thereof, provided, however, that the Company shall not be required to
pay any tax which may be payable in respect of any transfer involved in the
issuance and delivery of any certificate in a name other than that of the then
Holder of the Warrant being exercised.

       5.     CLOSING OF BOOKS. The Company will at no time close its transfer
books against the transfer of any warrant or of any shares of Common Stock
issued or issuable upon the exercise of any warrant in any manner which
interferes with the timely exercise of this Warrant.

       6.     NO VOTING OR DIVIDEND RIGHTS; LIMITATION OF LIABILITY. Nothing
contained in this Warrant shall be construed as conferring upon the Holder
hereof the right to vote or to consent or to receive notice as a shareholder of
the Company or any other matters or any rights whatsoever as a shareholder of
the Company. No dividends or interest shall be payable or accrued in respect of
this Warrant or the interest represented hereby or the shares purchasable
hereunder until, and only to the extent that, this Warrant shall have been
exercised. No provisions hereof, in the absence of affirmative action by the
Holder to purchase shares of Common Stock, and no mere enumeration herein of the
rights or privileges of the Holder hereof, shall give rise to any liability of
such Holder for the Stock Purchase Price or as a shareholder of the Company,
whether such liability is asserted by the Company or by its creditors.

       7.     TRANSFER. This Warrant may not be sold, assigned or otherwise
transferred voluntarily by the Holder, other than to a successor of the Holder
or an Affiliate (as defined in the License and Research

                                        3


Collaboration Agreement between Holder and deCODE genetics, ehf. dated 23
February 2004), without the consent of the Company. The Company shall register
upon its books any permitted transfer of this Warrant, upon surrender of same to
the Company with a written instrument of transfer duly executed by the
registered Holder. Upon any such registration of a permitted transfer, a new
Warrant shall be issued to the transferee and the surrendered Warrant shall be
canceled by the Company.

       8.     MODIFICATION AND WAIVER. This Warrant and any provision hereof may
be changed, discharged or terminated only by an instrument in writing signed by
the party against which enforcement of the same is sought.

       9.     NOTICES. Any notice, request or other document required or
permitted to be given or delivered to the Holder hereof or the Company shall be
deemed to have been given when delivered personally or sent by facsimile or
certified mail, postage prepaid, to each such Holder at its address as shown on
the books of the Company or to the Company at the address indicated therefore in
the first paragraph of this Warrant or such other address as either may from
time to time provide to the other.

       10.    BINDING EFFECT ON SUCCESSORS. This Warrant shall be binding upon
any corporation succeeding the Company by merger, consolidation or acquisition
of all or substantially all of the Company's assets. All of the covenants and
agreements of the Company shall inure to the benefit of the successors and
permitted assigns of the Holder hereof, and the word "Holder" as used herein
shall be deemed to include such successors and permitted assigns, provided that
any transfer of this Warrant is made in accordance with the requirements hereof.

       11.    DESCRIPTIVE HEADINGS AND GOVERNING LAW. The description headings
of the several sections and paragraphs of this Warrant are inserted for
convenience only and do not constitute a part of this Warrant. This Warrant
shall be construed and enforced in accordance with, and the rights of the
parties shall be governed by, the laws of the State of New Jersey.

       12.    LOST WARRANTS. The Company represents and warrants to the Holder
hereof that upon receipt of evidence reasonably satisfactory to the Company of
the loss, theft, destruction, or mutilation of this Warrant and, in the case of
any such loss, theft or destruction, upon receipt of an indemnity reasonably
satisfactory to the Company, or in the case of any such mutilation upon
surrender and cancellation of such Warrant, the Company, at its expense, will
make and deliver a new Warrant, of like tenor, in lieu of the lost, stolen,
destroyed or mutilated Warrant.

       13.    FRACTIONAL SHARES. No fractional shares shall be issued upon
exercise of this Warrant. The Company shall, in lieu of issuing any fractional
share, pay the Holder entitled to such fraction a sum in cash equal to such
fraction multiplied by the then effective Stock Purchase Price.


                      [THIS SPACE INTENTIONALLY LEFT BLANK]

                                        4


       IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed by its officer, thereunto duly authorized this 25 day of February,
2004.


                                                     DECODE GENETICS, INC.
                                                     a Delaware corporation


                                                    By: /s/ Kari Stefansson
                                                        -------------------
                                                        Kari Stefansson
                                                        President and CEO

                                        5


                                    EXHIBIT A

                                SUBSCRIPTION FORM


                                                Date:


deCODE genetics, Inc.
Sturlugata 8
101 Reykjavik
Iceland


Attn:  Corporate Counsel


Ladies and Gentlemen:

       The undersigned hereby elects to exercise the warrant issued to it by
deCODE genetics, Inc. (the "Company") and dated ______________, Warrant No.
______, (the "Warrant") and to purchase thereunder ___________ shares of the
Common Stock of the Company (the "Shares") at a purchase price of ______________
per Share or an aggregate purchase price of $________________ (the "Purchase
Price").

       Pursuant to the terms of the Warrant the undersigned has delivered the
Purchase Price herewith in full in cash or by certified check or wire transfer.
The undersigned also makes the representations set forth on the attached Exhibit
B of the Warrant.

                                         Very truly yours,


                                         By:

                                         Title:

                                        6


                                    EXHIBIT B

                            INVESTMENT REPRESENTATION


THIS AGREEMENT MUST BE COMPLETED, SIGNED AND RETURNED TO DECODE GENETICS, INC.
ALONG WITH THE SUBSCRIPTION FORM BEFORE THE COMMON STOCK ISSUABLE UPON EXERCISE
OF THE WARRANT DATED _______________ WILL BE ISSUED.

                                                Date:


deCODE genetics, Inc.


Attn:  President


Ladies and Gentlemen:

       The undersigned, __________________________ ("Purchaser"), intends to
acquire up to __________ shares of the Common Stock (the "Common Stock") of
deCODE genetics, Inc. (the "Company") from the Company pursuant to the exercise
or conversion of a certain Warrant to purchase Common Stock held by Purchaser.
The Common Stock will be issued to Purchaser in a transaction not involving a
public offering and pursuant to an exemption from registration under the
Securities Act of 1933, as amended (the "Securities Act") and applicable state
securities laws. In connection with such purchase and in order to comply with
the exemptions from registration relied upon by the Company, Purchaser
represents, warrants and agrees as follows:

       Purchaser is acquiring the Common Stock for its own account, to hold for
investment, and Purchaser shall not make any sale, transfer or other disposition
of the Common Stock in violation of the Securities Act or the General Rules and
Regulations promulgated thereunder by the Securities and Exchange Commission
(the "SEC") or in violation of any applicable state securities law.

       Purchaser has been advised that the Common Stock has not been registered
under the Securities Act or state securities laws on the ground that this
transaction is exempt from registration, and that reliance by the Company on
such exemptions is predicated in part on Purchaser's representations set forth
in this letter.

       Purchaser has been informed that under the Securities Act, the Common
Stock must be held indefinitely unless it is registered under the Securities Act
or unless an exemption from such registration (such as Rule 144) is available
with respect to any proposed transfer or disposition by Purchaser of the Common
Stock. Purchaser further agrees that the Company may refuse to permit Purchaser
to sell, transfer or dispose of the Common Stock (except as permitted under Rule
144) unless there is in effect a registration statement under the Securities Act
and any applicable state securities laws covering such transfer, or unless
Purchaser furnishes an opinion of counsel reasonably satisfactory to counsel for
the Company, to the effect that such registration is not required.

                                        7


       Purchaser also understands and agrees that there will be placed on the
certificate(s) for the Common Stock, or any substitutions therefor, a legend
stating in substance:

       "The shares represented by this certificate have not been
       registered under the Securities Act of 1933, as amended (the
       "Securities Act"), or any state securities laws. These shares
       have been acquired for investment and may not be sold or
       otherwise transferred in the absence of an effective registration
       statement for these shares under the Securities Act and
       applicable state securities laws, or an opinion of counsel
       satisfactory to the Company that registration is not required and
       that an applicable exemption is available."

       Purchaser has carefully read this letter and has discussed its
requirements and other applicable limitations upon Purchaser's resale of the
Common Stock with Purchaser's counsel.

                                         Very truly yours,


                                         By:

                                         Title:

                                        8

EX-10.32

                                                                   Exhibit 10.32

[NOTE: CERTAIN PORTIONS OF THIS DOCUMENT HAVE BEEN MARKED TO INDICATE THAT
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR CONFIDENTIAL INFORMATION CONTAINED
IN THIS DOCUMENT. THE CONFIDENTIAL PORTIONS HAVE BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.]

                                LICENSE AGREEMENT

This Agreement is entered into and effective as of October 17, 2003 by and

between


Bayer HealthCare AG
D-51368 Leverkusen
Federal Republic of Germany

     - hereinafter referred to as "BAYER" -


and

deCode Genetics, Ehf.
Sturlugotu 8
IS-101 Reykjavik
Iceland

     - hereinafter referred to as "deCODE" -.


WHEREAS, BAYER has identified and pre-clinically and clinically developed to a
certain degree - including most of the requirements to fulfill the criteria of
Phase II - the pharmaceutically active compound having BAYER's code numbers BAY
X 1005, and pharmaceutical products containing such compound;

WHEREAS, BAYER is the exclusive owner of proprietary rights including
patents/patent applications and know how concerning BAY X 1005 and the
pharmaceutical products containing such compound;

WHEREAS, deCODE has received and evaluated confidential information upon BAYER's
compound under a Secrecy AGREEMENT dated October 29, 2002, concluded between
BAYER and deCODE and deCODE wishes to acquire from



                                        1

BAYER an exclusive worldwide license under BAYER's proprietary rights related to
BAY X 1005 for use in the defined field of application;

WHEREAS, BAYER is willing to grant to deCODE such licenses, subject to the terms
of and conditioned upon the provisions of this AGREEMENT;

NOW, THEREFORE, BAYER and deCODE agree as follows:


ARTICLE 1 - DEFINITIONS


1.1      AFFILIATE shall mean any business entity which directly or indirectly
         controls, is controlled by, or is under common control with a PARTY of
         this AGREEMENT, for only so long as such control exists. A business
         entity shall be deemed to "control" another business entity, if it (i)
         owns directly or indirectly at least fifty percent of the outstanding
         voting security, capital stock, or other comparable equity or ownership
         interest of such business entity, or (ii) possess, directly or
         indirectly, the power to direct the management or policies of an
         entity, whether through the ownership of voting securities, by contract
         or otherwise. If the laws of the jurisdiction in which such entity
         operates prohibit ownership by a PARTY of more than 50% "control" shall
         be deemed to exist at the maximum level of ownership allowed by such
         jurisdiction.

1.2      AGREEMENT means this formal agreement, all written amendments and
         supplements to this agreement and all schedules to this agreement,
         including but not limited to the following:

         Schedule A - BAYER PATENTS
         Schedule B - Specifications of COMPOUND and Certificate of Analysis
         Schedule C - deCODE's DEVELOPMENT PLAN for Asthma and new indications;
         Schedule D - Study plan for evaluation of QTc interval prolongation in
                      dog
         Schedule E - BAYER BAY X1005 Regulatory Filings



                                        2

1.3      BAYER IND shall mean the IND filed previously by BAYER with the FDA and
         comparable regulatory filings in any other country of the TERRITORY, as
         specified in Schedule E hereof.

1.4      BAYER KNOW HOW shall mean the scientific and technical information,
         trade secrets, inventions (whether patentable or not), data (including
         Confidential Information), improvements, discoveries, claims, formulae,
         processes, , copyright and know how, including, without limitation, all
         chemical, pharmacological, toxicological, preclinical, clinical data
         studies, manufacture, formulation, handling and control information
         relating to COMPOUND and PRODUCT that is required and/or useful within
         the FIELD (i) for manufacture, formulation, and handling COMPOUND, and
         (ii) developing, registering, marketing and selling PRODUCT in the
         TERRITORY, which information is or will be in the possession of BAYER
         and which BAYER is free to disclose during the term of this AGREEMENT.

1.5      BAYER PATENTS shall mean any and all patents and patent applications
         owned or licensed by BAYER in the TERRITORY covering COMPOUND and
         PRODUCT, and process for manufacturing COMPOUND and PRODUCT, and any
         reissues or extension thereof, including respective supplementary
         protection certificates; BAYER PATENTS existing at the EFFECTIVE DATE
         being specified and included without limitation , in Schedule A to this
         AGREEMENT.

1.6      CALENDAR QUARTER means any of the three-months periods beginning
         January 1, April 1, July 1, and October 1 in any year;

1.7      COMPOUND shall mean
         R-(-)-2-[4-quinolin-2-yl-methoxy)-phenyl]-2-cyclopentyl acetic acid]
         having the molecular formula C23H23NO3 (BAY X 1005). The specification
         of the COMPOUND (which may be modified after the date hereof) is
         identified in Schedule B attached to this AGREEMENT.



                                        3

1.8      DEVELOPMENT PLAN means the identification of the development targets
         and topics to be performed for the development of PRODUCTS including
         the definition of milestones and timelines to be fulfilled, as outlined
         in Schedule C, and potential adjustments thereof made from time to
         time. In case of the development of additional indications in the
         FIELD, the corresponding DEVELOPMENT PLANS will be added to this
         AGREEMENT as Schedule C1, C2, etc.

1.9      EFFECTIVE DATE shall mean the date first written above.

1.10     FDA shall mean the United States Food and Drug Administration.

1.11     FIELD shall mean the use of PRODUCT for the inhibition of leukotrienes
         in humans in connection with the prevention or treatment of any
         condition or indication, e.g. for treatment of inflammatory diseases
         such as Asthma, rheumatoid arthritis and inflammatory Bowel disease,
         etc.

1.12     FIRST COMMERCIAL SALE shall mean the first sale of PRODUCT in
         commercial quantities by deCODE and/or its SUBLICENSEEs to THIRD
         PARTIES in the first country of the TERRITORY.

1.13     IND shall mean any filing made with an appropriate Regulatory Authority
         in the respective jurisdiction within the TERRITORY for initiating
         clinical trials in such jurisdiction with respect to a PRODUCT.

1.14     LICENSE has the meaning ascribed to it in Art. 2 of this AGREEMENT.

1.15     NET SALES shall mean the total gross sales (number of units shipped
         times the invoiced price per unit) of PRODUCT sold by deCODE and/or its
         SUBLICENSEEs (which term does not include distributors) to unaffiliated
         THIRD PARTIES in bona fide arms-length commercial transactions less
         certain deductions explained below, but only to the extent that such



                                        4

         deductions are in the amount invoiced or received, borne by deCODE and
         related to PRODUCT sold under the terms of this AGREEMENT:

         (a)      Allowances actually granted such as ordinary and customary
                  trade discounts, quantity and cash discounts, rebates
                  (including rebates to social and welfare systems and
                  administrative fees in lieu of rebates paid to managed care
                  and similar institutions, wholesaler charge-backs and
                  retroactive price adjustments). Allowances and discounts on
                  PRODUCT sold as part of a multi-product transaction or
                  agreement shall be proportionally allocated to the value of
                  all products included in such transaction or agreement.
         (b)      Government mandated rebates.
         (c)      Sales taxes, excise taxes, and consumption taxes, which are
                  imposed on PRODUCT and borne by the seller of the PRODUCT.
         (d)      Credits and/or allowances actually given for rejection, return
                  or recall of previously sold PRODUCT, but not in excess of the
                  original selling price of the PRODUCT rejected, returned or
                  recalled,
         (e)      Amounts equivalent to [**] of said gross sales as an allowance
                  for expenses such as transportation, insurance and the like.
         (f)      chargebacks and other amounts paid on sale or dispensing of
                  PRODUCT,
         (g)      retroactive price reductions that are actually allowed or
                  granted, and
         (h)      sales commissions paid to distributors and/or selling agents.

1.16     NDA shall mean a New Drug Application for PRODUCT as required under the
         U.S. Food, Drug and Cosmetics Act and the regulations promulgated
         thereunder, or a comparable filing for marketing approval for PRODUCT
         in any other country, including pricing approvals where applicable.

1.17     PARTIES shall mean deCODE and BAYER, and PARTY means any one of them.



                                        5

1.18     PHASE II (IIa, IIb) means that part of the clinical development program
         which provides for the first use of PRODUCT on sufficient numbers of
         patients in pilot studies (IIa) and controlled studies (IIb) to
         establish the dose range for single dose, repeated dose, and
         administration intervals, tolerability, specific pharmaco-kinetic and
         pharmaco-dynamic data of such product for the desired claims and
         indications, as more closely defined by the rules and regulations of
         the FDA and corresponding rules and regulations in other major
         countries. It finally implies the decision whether to continue the
         clinical investigation.

1.19     PHASE III means a wide-ranging clinical investigation of PRODUCT on
         sufficient numbers of patients with the target indications under the
         conditions of general practice in clinics and with general
         practitioners in controlled and uncontrolled studies to establish the
         dose-response relationship, indications and contraindications, the
         type, duration and frequency of adverse drug events known, the safety
         profile, the relationship (comparable or superior) of PRODUCT to
         standard treatments, as more closely defined by the rules and
         regulations of the FDA and corresponding rules and regulations in other
         major countries. It finally implies the application for drug
         approval/registration at the respective authority, e.g. FDA.

1.20     PRODUCT shall mean any pharmaceutical preparation for use in the FIELD,
         containing COMPOUND as an active ingredient.

1.21     [CONFIDENTIAL TREATMENT REQUESTED].

1.22     SUBLICENSEE shall mean any THIRD PARTY acting pursuant to a sublicense
         (including a distribution agreement) granted to it by deCODE under the
         terms of this AGREEMENT.

1.23     TERRITORY shall mean all countries in the world.



                                        6

1.24     THIRD PARTY means any party other than PARTY and their AFFILIATES.

1.25     US $ shall mean United States dollars, the official currency of the
         United States of America.


ARTICLE 2 - GRANT OF LICENSES, DELIVERY OF COMPOUND AND TRANSFER OF BAYER
       KNOW-HOW.


2.1      BAYER hereby grants to deCODE the following LICENSES and rights

2.1.1    regarding BAYER PATENTS:

         (i)    an exclusive LICENSE for the TERRITORY to perform research, to
                make, have made, develop, sell, have sold and use the COMPOUND
                in the FIELD.

         (ii)   an exclusive LICENSE for the TERRITORY, to develop, to register,
                to make, have made, use, import, sell and have sold PRODUCTS in
                the FIELD.

2.1.2    regarding BAYER KNOW HOW:

         an exclusive LICENSE for the TERRITORY to make, have made, develop,
         sell, have sold and use the COMPOUND and PRODUCT in the FIELD .

2.1.3    regarding Sublicensing:

         (i)    the right to sublicense in the FIELD all or any portion of the
                rights to the BAYER PATENTS, the BAYER KNOW-HOW, granted to it



                                        7

                pursuant to this AGREEMENT to any or all of its AFFILIATES or
                THIRD PARTIES. deCODE will identify its SUBLICENSEE to BAYER and
                will inform BAYER on the principles of the collaboration, the
                development strategy and the TERRITORY, in writing, within a
                reasonable time.

         (ii)   Except as otherwise set forth herein, deCODE may grant
                sublicenses, in its sole discretion, informing BAYER, to such
                THIRD PARTIES on such terms and conditions as it deems
                appropriate; provided, that deCODE for itself and its
                SUBLICENSEEs shall at all times remain obligated to comply with
                terms hereof.

2.2      Delivery of COMPOUND:
         BAYER will deliver to deCODE existing batches of COMPOUND at no costs
         to deCODE within a reasonable time following the EFFECTIVE DATE.

2.3      Transfer of Know-How:
         Within 90 days of the Effective Date, BAYER shall transfer such items
         of BAYER Know-How to deCODE as requested by deCODE and reasonably
         practicable and available.

ARTICLE 3 - DEVELOPMENT AND COMMERCIALIZATION

3.1      Development and Commercialization Efforts

3.1.1    deCODE shall exercise diligent efforts at its own cost to have the QT
         PROLONGATION EVALUATION completed as soon as possible after receipt of
         COMPOUND and BAYER KNOW HOW according to the timeline and study plan
         contained in Schedule D.

3.1.2    deCODE shall exercise reasonable development efforts ("reasonable
         development efforts" shall mean the same degree of diligence that
         deCODE, in its business judgment, would exercise in pursuing the
         development and registration of comparable products for comparable



                                        8

         indications with comparable sales potential in comparable markets, it
         being understood that reasonable development efforts will in no event
         require deCODE to take any action that would be reasonably likely to
         result in a breach of any other provision of this Agreement or any
         other agreement to which deCODE is a party existing on the Effective
         Date, or that deCODE in good faith believes may violate any applicable
         law, regulation, rule, order, permit, direction or license of any court
         or governmental authority having appropriate jurisdiction over deCODE)
         to obtain necessary approvals to market PRODUCT (including, as the case
         may be, pricing approval).

3.1.3    deCODE shall use reasonable efforts to comply with all applicable Good
         Laboratory-, Good Clinical- and Good Manufacturing Practices in the
         development of PRODUCT, and shall commit its AFFILIATES and
         SUBLICENSEEs and subcontractors to do the same.

3.1.4    To support deCODE in achieving approvals and registrations for clinical
         trials and PRODUCTS, BAYER will transfer ownership of the BAYER IND and
         corresponding documents to deCODE effective as of the signature of the
         Agreement.

3.2      Development and Approval Reports for PRODUCT(s)

3.2.1    During the term of this AGREEMENT, deCODE will regularly inform BAYER,
         not less frequently than semi-annually, through written reports (in a
         form to be agreed between the parties in good faith), of progress of
         the PRODUCT development and provide a summary of results achieved
         according to the Development Plan which is incorporated by reference
         and made part of this AGREEMENT as Schedule C for [CONFIDENTIAL
         TREATMENT REQUESTED] in additional Schedules C1, C2 , etc.

3.2.2    deCODE will promptly inform BAYER in writing, if and when its
         development of a PRODUCT has met a milestone according to Article 4.1
         and Schedule C hereinafter.



                                        9

3.2.3    Moreover, deCODE will inform BAYER within thirty (30) days of receipt
         by deCODE of an approval for registration and/or marketing of PRODUCT
         in any individual country.

3.3      Commercialization of PRODUCT

3.3.1    deCODE shall exercise reasonable commercial efforts ("reasonable
         commercial efforts" shall mean the same degree of diligence that
         deCODE, in its business judgment, would exercise in pursuing the
         commercialization of comparable products with comparable sales
         potential in comparable markets, it being understood that reasonable
         commercial efforts will in no event require deCODE to take any action
         that would be reasonably likely to result in a breach of any other
         provision of this Agreement or any other agreement to which deCODE is a
         party existing on the Effective Date, or that deCODE in good faith
         believes may violate any applicable law, regulation, rule, order,
         permit, direction or license of any court or governmental authority
         having appropriate jurisdiction over deCODE ) to market PRODUCT in the
         TERRITORY.

ARTICLE 4 - MILESTONES AND ROYALTIES

4.1    License Fee and Milestone Payments

4.1.1. In consideration of the rights and licenses granted hereunder to deCODE,
       deCODE shall pay BAYER the following license fee:

         [CONFIDENTIAL TREATMENT REQUESTED] will be due upon signature of this
         AGREEMENT within 30 days, and the remaining balance [**] will be due
         within 30 days at satisfaction or removal of the contingencies set
         forth in Article 11.2.3;



                                       10

4.1.2    deCODE shall further make to BAYER the following milestone payments
         within thirty (30) days after the first occurrence of each event set
         forth below with respect to the first PRODUCT for [CONFIDENTIAL
         TREATMENT REQUESTED] for which such event is achieved, irrespective of
         whether such events are achieved by deCODE, or its SUBLICENSEEs in any
         country of the TERRITORY:

         (ii)     [**] at initiation of clinical PHASE III trial;
         (iii)    [**] at NDA filing;
         (iv)     [**] at NDA approval;

4.1.3    The milestone payments set forth in Article 4.1.2 (ii) through (iv)
         above shall be payable for each individual event with respect to the
         first PRODUCT for each new indication within the FIELD for which such
         event is achieved and shall be non-refundable and non-creditable
         against royalties payable by deCODE to BAYER under the Article 4.2
         hereinafter.

4.2      Running Royalty Payments

4.2.1    Subject to Article 4.2.2, from the FIRST COMMERCIAL SALE until the
         expiration or termination of this AGREEMENT, deCODE shall pay to BAYER
         the following royalties on the NET SALES obtained for each PRODUCT
         during the term of this AGREEMENT, irrespective of whether such NET
         SALES are achieved by deCODE or SUBLICENSEEs in any country of the
         TERRITORY:

         (i)      [**] of NET SALES of marketed PRODUCTS in the indications
         [CONFIDENTIAL TREATMENT REQUESTED].

         (ii)     [**] of NET SALES of marketed PRODUCTS in the indications
         [CONFIDENTIAL TREATMENT REQUESTED].



                                       11

         (iii)    [**] of NET SALES of marketed PRODUCTS in all indications in
the FIELD other than those identified under Article 4.2.1 (i) and (ii) .

4.2.2    deCODE may deduct from the royalties it would otherwise owe pursuant to
         Article 4.2.1 (i) through (iii), an amount equal to [CONFIDENTIAL
         TREATMENT REQUESTED] paid by deCODE, its AFFILIATES and SUBLICENSEES to
         THIRD PARTIES with respect to commercially reasonable licenses to
         intellectual property rights pertaining to the development,
         manufacture, sale or use of the COMPOUND or the PRODUCT (but excluding
         licenses to trademarks and tradedresses pertaining thereto), but
         excluding intellectual property rights specifically pertaining to the
         condition or indication for which the COMPOUND or the PRODUCT receives
         NDA approval. Notwithstanding the previous sentence, the minimum
         royalty rate paid by deCODE pursuant to Article 4.2.1 (i) through (iii)
         shall be [CONFIDENTIAL TREATMENT REQUESTED] of the applicable rate of
         NET SALES.

4.2.3    If the sum of competing products containing the COMPOUND will gain a
         market share of [**] or more in a specific country, the corresponding
         royalty rate owed to BAYER will be reduced for the applicable time by
         [**] for such country.

4.2.4    If the events envisioned under Article 4.2.3 have not materialized, and
         if the sum of competing products representing the same mode of action
         [CONFIDENTIAL TREATMENT REQUESTED] compounds) will gain a market share
         of at least [**] in a specific country, there will be proportionate
         reduction in the corresponding royalty rate owed to BAYER until a
         maximum reduction of [**] is reached, e.g., if competing products gain
         a market share of [**] there will be a [**] reduction in royalty, for
         [**] market share a [**] reduction in royalty etc., up to a maximum of
         [**] reduction in royalty for competing products that gain market share
         of [**] or greater. However, the foregoing reduction described in this
         Article 4.2.4 will only become effective in the country in question,
         AFTER the expiry of the applicable BAYER PATENT covering COMPOUND in
         such country. For the avoidance of doubt; the



                                       12

         reduction may take place while the BAYER PATENT covering the process
         for manufacturing COMPOUND is still in effect, as long as the BAYER
         PATENT covering COMPOUND has expired.

ARTICLE 5 - ROYALTY REPORTS AND ACCOUNTING

5.1      Reports, Exchange Rates

5.1.1    Following the FIRST COMMERCIAL SALE and for the remaining term of this
         AGREEMENT, deCODE shall furnish to BAYER, with respect to each Calendar
         Quarter, a written report showing in reasonably specific detail, on a
         country-by-country basis and based on local currency,

         (a)      the gross sales of each PRODUCT sold by deCODE and its
                  SUBLICENSEES in the TERRITORY during the corresponding
                  Calendar Quarter and the calculation of NET SALES from such
                  gross sales;
         (b)      the royalties payable in local currency, if any, which shall
                  have accrued hereunder based upon NET SALES of PRODUCT;
         (c)      the withholding taxes, if any, required by law;
         (d)      the date of the FIRST COMMERCIAL SALE of each PRODUCT in each
                  country in the TERRITORY during the applicable Calendar
                  Quarter,

         The exchange rates to be used with respect to this Article 5.1.1 shall
         be the official closing buying rates against US Dollars (US $) for such
         currencies reported by the Wall Street Journal for the last business
         day of the applicable calendar quarter.

         Reports shall be due within forty five (45) days following the close of
         each Calendar Quarter. deCODE shall keep complete and accurate records
         in sufficient detail to properly reflect all gross sales and NET SALES
         and to



                                       13

         enable the royalties payable hereunder to be determined for a period of
         five (5) years after the year in which the sales occurred.

5.1.2    In the event payment of all or part of the payments is not made by
         deCODE within ten (10) days of the due date of the reports according to
         Article 5.1.1, under this AGREEMENT, an interest rate per annum for
         late payment at two (2) percent points above the interbank offering
         rate of the US Federal Reserve Bank of the unpaid amount shall be
         automatically due and become payable by deCODE without further notice.
         The interbank offering rate of the US Federal Reserve Bank shall be
         derived from the Wall Street Journal of the due date.

5.2      AUDITS

5.2.1    Upon the written request of BAYER, deCODE shall permit an independent
         certified public accounting firm of internationally recognized
         standing, selected by BAYER and reasonably acceptable to deCODE, and
         subject to the confidentiality provisions of this AGREEMENT, to have
         access during normal business hours and upon reasonable notice to such
         of the records of deCODE as may be reasonably necessary to verify the
         accuracy of the value and execution of NET SALES and royalty reports
         hereunder for any year ending not more than five (5) years prior to the
         date of such request. The accounting firm shall disclose to BAYER only
         whether the records are correct or not and the specific details
         concerning any discrepancies. No other information shall be shared.

5.2.2    If such accounting firm concludes that additional royalties were owed
         during such period, deCODE shall pay the additional royalties within
         thirty (30) days of the date BAYER delivers to deCODE such accounting
         firm's written report so concluding. The fees charged by such
         accounting firm shall be paid by BAYER; provided, however, that if the
         audit discloses that the royalties payable by deCODE differ by more
         than [**] of the royalties actually paid for such period, then deCODE
         shall pay the reasonable



                                       14

         expenses as well as duties and fees charged by such accounting firm. In
         the event that such audit discloses an overpayment of royalties by
         deCODE, deCODE shall deduct the amount of such overpayment from
         subsequent royalty payments.

5.2.3    deCODE shall include in each AGREEMENT with a SUBLICENSEE granted by it
         pursuant to this AGREEMENT a provision requiring the SUBLICENSEE to
         make reports to deCODE to keep and maintain records of sales made
         pursuant to such AGREEMENT and to grant access to such records by
         BAYER's independent accountant to the same extent required with respect
         to deCODE's records and obligations under this Article 5 and under this
         AGREEMENT.

5.2.4    Upon the expiration of three (3) calendar years following the end of
         the most recent full calendar year, the calculation of royalties
         payable with respect to such year shall be binding and conclusive upon
         BAYER, and deCODE, the respective SUBLICENSEEs shall be released from
         any liability or accountability with respect to royalties for such
         year.

ARTICLE 6 - PAYMENTS

6.1      Payment Terms

         Milestones will be paid in accordance with Article 4.1.2. Royalties
         accrued in each CALENDAR QUARTER presented by the corresponding royalty
         report according to Art. 5 of this AGREEMENT shall be due and effected
         ten (10) days after the date such royalty report according to Article
         5.1.1 is to be transmitted to BAYER. Payments of royalties in whole or
         in part may be made in advance of such due date.

         All payments to be made to the account:
         [CONFIDENTIAL TREATMENT REQUESTED]



                                       15

6.2      Exchange Control

         If at any time legal restrictions prevent the prompt remittance of part
         or all royalties with respect to any country in the TERRITORY where
         PRODUCT is sold, payment shall be made through such lawful means or
         method as the PARTIES reasonably shall determine.

6.3      Withholding Taxes

         deCODE shall have the right to withhold from the royalty payments the
         tax which BAYER is liable to under the appropriate local tax laws and
         for the payments of which deCODE is responsible. BAYER shall
         immediately be sent tax receipts by deCODE certifying the payments of
         the tax, so that BAYER may use it for claiming a credit on the tax
         payable by BAYER in Germany on such payments. No deduction shall be
         made or a reduced amount shall be deducted if BAYER furnishes a
         document from the appropriate tax authorities to deCODE by the time of
         the payments certifying that the payments are exempt from tax in the
         country of the TERRITORY or subject to a reduced tax rate according to
         the convention for the avoidance of double taxation between the Federal
         Republic of Germany and the respective country. Except for such
         withholding taxes, any taxes, assessments, fees and charges imposed
         against payments due BAYER hereunder shall be borne by deCODE.

ARTICLE 7- RIGHTS OF AND OPTION TO BAYER

7.1      Rights of BAYER

7.1.1    BAYER receives the right to review of deCODE's results and know-how
         achieved under the LICENSE AGREEMENT, these results to be kept
         confidential by BAYER for use solely in connection with the
         back-license referenced in Article 7.2 below, and, moreover, to use
         COMPOUND for internal research purposes only excluding human clinical
         trials.



                                       16

7.1.2    deCODE agrees to give BAYER the first right and opportunity to be
         deCODE's primary supplier of COMPOUND and to negotiate the terms and
         conditions of a supply and manufacturing agreement, which terms and
         conditions shall be documented in separate SUPPLY & MANUFACTURING
         AGREEMENT, subject to meeting deCODE's needs with regards to local
         government reimbursement and regulatory issues, timeline, quantity and
         quality assurance certification at a reasonable price structure. In the
         event the PARTIES cannot reach an agreement with respect to supply and
         manufacture of COMPOUND, deCODE may contract with a THIRD PARTY to be
         the primary supplier of COMPOUND, provided that: (i) the terms and
         conditions of any such supply and manufacturing agreement are equally
         or more favorable to deCODE than those last offered in writing by BAYER
         to deCODE, and (ii) if the terms and conditions of any such supply and
         manufacturing agreement are equally or more favorable to deCODE
         considered as a whole than those last offered in writing by BAYER,
         BAYER shall have a right of first refusal, exercisable within thirty
         (30) days after deCODE provides notice to BAYER of such equally or more
         favorable terms and conditions, to supply and manufacture COMPOUND on
         such terms and conditions. Nothing in this AGREEMENT shall prevent
         deCODE from contracting with more than one supplier of COMPOUND.

7.2      Option and Right to BAYER

7.2.1    deCODE agrees to give BAYER the first right and opportunity to market
         PRODUCTS and to negotiate the terms and conditions of a marketing
         agreement, which terms and conditions shall be documented in separate
         MARKETING AGREEMENT to be executed within six (6) months after BAYER's
         receipt of a corresponding written notice, if deCODE elects to contract
         with a THIRD PARTY that is not a SUBLICENSEE to co-market a PRODUCT or
         PRODUCTS in certain countries of the TERRITORY.



                                       17

7.2.2    If deCODE elects not to market PRODUCT in certain countries of the
         TERRITORY either directly, by AFFILIATE, or by establishment of a
         competent SUBLICENSEE(s) to do so, deCODE shall notify BAYER to that
         effect, and, BAYER will then have the right to market such PRODUCT in
         such countries of the TERRITORY.

7.2.3    BAYER shall have the right to a grant-back of the LICENSE including the
         right in using and exploiting the results, inventions and PRODUCTS
         generated under this AGREEMENT including corresponding patent
         applications and granted patents and formal approvals generated under
         the LICENSE, if deCODE materially breaches a material term of the
         AGREEMENT and does not cure or take steps to cure such breach within
         ninety (90) days after BAYER's notice on such breach.

7.2.4    In the event BAYER elects to exercise its right to market any PRODUCT
         in any country as permitted under Articles 7.2.2 or 7.2.3, it shall pay
         to deCODE a running royalty on its NET SALES at a reasonable rate to be
         negotiated based upon the relative efforts made by BAYER and deCODE in
         the development and marketing of such PRODUCT, which rate shall be no
         less than [**], on the same terms and conditions and for the same term
         as otherwise contemplated by this AGREEMENT (if BAYER were the licensee
         and deCODE were the licensor).

ARTICLE 8 - INFRINGEMENT ACTIONS OF THIRD-PARTIES

8.1      In the event that BAYER, deCODE, deCODE AFFILIATES or SUBLICENSEES,
         practicing of BAYER PATENTS licensed hereunder in connection with the
         development or the making, having made, importing, using, distributing,
         marketing, promoting, offering for sale or selling PRODUCT will
         infringe or is alleged to infringe a THIRD PARTY'S patent, the PARTY
         becoming aware of same shall promptly notify the other PARTY.



                                       18

8.2      BAYER shall negotiate with said THIRD PARTY for a suitable license, if
         the THIRD PARTY's claim is related to the manufacture of COMPOUND
         and/or Compound's use for the manufacture of PRODUCT. In the event that
         such negotiations result in a consummated agreement, then any lump sum
         payment made thereunder shall be paid by BAYER. Should such agreement
         require the payment of royalties, deCODE shall continue to pay
         royalties due BAYER hereunder and BAYER shall pay any royalties due
         said THIRD PARTY.

8.3      Except as set forth in Article 8.2, above, deCODE shall negotiate with
         said THIRD PARTY for a suitable license, if the THIRD PARTY's claim is
         related to making, having made, importing, using, distributing,
         marketing, promoting, offering for sale or selling PRODUCT. In the
         event that such negotiations result in a consummated agreement, then
         any lump sum payment made thereunder shall be paid by deCODE. Should
         such agreement require the payment of royalties, deCODE shall continue
         to pay royalties due BAYER hereunder and deCODE shall pay any royalties
         due said THIRD PARTY. Notwithstanding the foregoing, no license
         agreement or other settlement shall be entered into by deCODE without
         the prior consultation of BAYER.

8.4      If deCODE, BAYER, their respective AFFILIATES, or SUBLICENSEES, is
         (are) sued by a THIRD PARTY for infringement of a THIRD PARTY's patent
         because of the manufacture, use or sale of PRODUCT or manufacture or
         use of COMPOUND, the PARTY which has been sued shall promptly notify
         the other PARTY in writing of the institution of such suit. deCODE
         shall have the first right, but not the duty, in its sole discretion,
         to control the defense of such suit at its own expense, in which event
         BAYER shall have the right to be represented by advisory counsel of its
         own selection, at its own expense, and shall cooperate in the defense
         of such



                                       19

         suit and furnish to deCODE reasonable evidence and assistance in its
         control.


ARTICLE 9 - CONFIDENTIALITY

9.1      Non-disclosure Obligation and Use Restriction

         Except as otherwise provided in this Article 9, during the term of this
         AGREEMENT and for a period of ten (10) years thereafter, each PARTY
         shall maintain in confidence, and use only for purposes as expressly
         authorized and contemplated by this AGREEMENT, all information and data
         supplied by the other PARTY under THE CONFIDENTIALITY AGREEMENT OF
         OCTOBER 29, 2002 and under this AGREEMENT. The provisions of this
         Article 9 supercede and replace, in their entirety, the provisions of
         the said CONFIDENTIALITY AGREEMENT, between the PARTIES. For purposes
         of this Article 9 the information and data exchanged under said
         agreement and information regarding the terms and performance of this
         AGREEMENT, shall be hereinafter included and referred to as
         "CONFIDENTIAL INFORMATION".

9.2      Permitted Disclosures

9.2.1    To the extent it is reasonably necessary or appropriate to fulfill its
         obligations or exercise its rights under this AGREEMENT, (a) a PARTY
         may disclose CONFIDENTIAL INFORMATION it is otherwise obligated under
         this Article 9 not to disclose, to its AFFILIATES, SUBLICENSEES,
         consultants, outside contractors and clinical investigators
         (hereinafter collectively referred to as PERSONS), on a need-to-know
         basis, provided that such PERSONS agree to keep the CONFIDENTIAL
         INFORMATION confidential and not use the CONFIDENTIAL INFORMATION to
         the same extent as such PARTY is required pursuant to this AGREEMENT;
         and (b) a PARTY may disclose such CONFIDENTIAL INFORMATION to
         government



                                       20

         or other regulatory authorities to the extent that such disclosure is
         required by applicable law, regulation of court order, or is reasonably
         necessary to obtain patents copyrights or authorizations to conduct
         clinical trials with, and the commercially market PRODUCT, provided
         that the disclosing PARTY shall provide written notice to the other
         PARTY and sufficient opportunity to object to such disclosure or to
         request confidential treatment thereof.

9.2.2    Following the EFFECTIVE DATE, each of the PARTIES shall have the right
         to issue press releases and similar public announcements about the
         relationship of the PARTIES, with the prior consent of the other Party,
         which shall not be unreasonably withheld. The PARTY making such
         announcement shall exercise reasonable efforts not to divulge
         CONFIDENTIAL INFORMATION, and provide the other PARTY with a copy of
         the proposed text prior to such announcement, sufficiently in advance
         of the scheduled release, to afford such other PARTY a reasonable
         opportunity to review and comment upon the proposed text.

9.2.3    The obligation not to disclose or use CONFIDENTIAL INFORMATION shall
         not apply to any part of such CONFIDENTIAL INFORMATION that

         (i)      is or becomes published or otherwise part of the public domain
                  or publicly available other than by acts of the PARTY
                  obligated not to disclose such CONFIDENTIAL INFORMATION, or of
                  its AFFILIATES or SUBLICENSEES in contravention of the
                  AGREEMENT;
         (ii)     is disclosed to the receiving PARTY or its AFFILIATES or
                  SUBLICENSEES by a THIRD PARTY, provided such CONFIDENTIAL
                  INFORMATION was not obtained by such THIRD PARTY directly or
                  indirectly from the other PARTY under this AGREEMENT on a
                  confidential basis;
         (iii)    prior to disclosure under the AGREEMENT, was already in the
                  possession of the receiving PARTY or its AFFILIATES or
                  SUBLICENSEES, provided such CONFIDENTIAL INFORMATION was



                                       21

                  not obtained directly or indirectly from the other PARTY under
                  the AGREEMENT; or

         (iv)     both PARTIES have agreed in writing to publish certain
                  CONFIDENTIAL INFORMATION.


ARTICLE 10 - INVENTIONS AND PATENTS

10.1     Patent Prosecution, Maintenance, and Extension

10.1.1   BAYER shall be responsible for and shall control the preparation,
         filing, prosecution, grant and maintenance of all BAYER PATENTS. BAYER
         shall prepare, file, prosecute and maintain such BAYER PATENTS in good
         faith consistent with its customary patent policy and its reasonable
         business judgment, and shall consider in good faith the interests of
         deCODE in so doing. BAYER shall not delegate such responsibility or
         control to any party other than deCODE without deCODE's prior written
         consent. BAYER shall inform deCODE of all actions taken or pending
         under Article 10.1.1. and Article 10.1.2., furnishing deCODE with
         copies of patent documents, e.g., draft applications and office actions
         from patent authorities.

10.1.2   As soon as deCODE obtains NDA approval, deCODE shall so inform BAYER,
         obligating BAYER to ensure the complete and timely filing and
         prosecution of application for extension of BAYER PATENTS as specified
         under the Drug Price Competition and Patent Term Restoration Act of
         1984 (Hatch-Waxman Act) in the United States, and in other
         jurisdictions and countries in TERRITORY as permissible under such the
         laws and regulation as may apply in such countries and jurisdictions,
         e.g. European Supplementary Protection Certificates.

10.1.3   BAYER shall give deCODE notice of any decision by BAYER to cease
         prosecution, maintenance, and or extension of BAYER PATENTS and in



                                       22

         such case permit deCODE, at its sole discretion, to continue
         prosecution, maintenance and/or extension at its sole expense. Such
         notice shall be sufficiently far in advance of the abandonment or lapse
         of a BAYER PATENT to permit deCODE reasonable time to continue
         prosecution, maintenance and/or extension. If deCODE elects to continue
         prosecution, maintenance and/or extension, BAYER shall execute such
         documents and perform such acts, at deCODE's expense, as may reasonably
         be necessary to effect an assignment of such BAYER PATENTS to deCODE.
         Any such assignment shall be completed in a timely manner to allow
         deCODE to continue such prosecution, maintenance and/or extension. Any
         patents or patent applications so assigned hereunder shall not be
         considered BAYER PATENTS under this AGREEMENT.

10.2     Enforcement of BAYER PATENTS

10.2.1   deCODE shall have the first right, but not obligation, at its sole
         expense, to determine the appropriate course of action to enforce the
         BAYER PATENTS or otherwise abate the infringement by THIRD PARTIES
         thereof, to take (or refrain from taking) appropriate action to enforce
         the BAYER PATENTS, to control any litigation or other enforcement
         action and to enter into, or permit, the settlement of any such
         litigation or other enforcement action with respect to the BAYER
         PATENTS, and in good faith shall consider the interests of BAYER in so
         doing.

10.2.2   In the event that deCODE does not decide within ninety (90) days after
         notice of any such infringement to take appropriate legal action to
         protect BAYER PATENTS and deCODE license rights hereunder, or does not
         diligently pursue such action after making a decision to take such
         action, BAYER, at BAYER's cost, shall have the right, in its sole
         discretion, and at its expense to take such action as BAYER deems
         necessary to prevent any such infringement of BAYER PATENTS and recover
         any damages realized by or threatened to BAYER as a result of such
         infringement, and deCODE agrees to cooperate with and assist BAYER in
         its so doing.



                                       23

10.2.3   Notwithstanding the foregoing, deCODE and BAYER shall fully cooperate
         with each other in any action to enforce the BAYER PATENTS. Any award
         paid by THIRD PARTIES as a result of such an infringement action
         (whether by way of settlement or otherwise) shall be applied first to
         reimburse both PARTIES for [**] of all costs and expenses incurred by
         the PARTIES with respect to such action on a pro rata basis and, if
         after such reimbursement any funds shall remain from such award, deCODE
         shall be entitled to retain same; provided, however, that such
         remaining funds shall be deemed to constitute NET SALES for purposes of
         this Agreement, and deCODE shall be obligated to pay the royalty due
         and owing under this Agreement with respect thereto.

ARTICLE 11 - TERM AND TERMINATION

11.1     Term

         This AGREEMENT shall come into effect and full force on the EFFECTIVE
         DATE and, unless terminated earlier pursuant to the provisions of this
         AGREEMENT, shall expire on the later of
         (i)      the date all BAYER PATENTS expire, or
         (ii)     ten (10) years after the FIRST COMMERCIAL SALE in the first
                  country.

11.2     Termination and Contingencies.

11.2.1   Either PARTY may terminate this AGREEMENT at any time by giving written
         notice to the other PARTY in the event that:

         (i)      Any proceeding in bankruptcy or in reorganization (other than
                  internal reorganization) or for the appointment of a receiver
                  or trustee or any other proceedings under a law for the relief
                  of debtors shall be instituted by or against the other PARTY,
                  which proceedings are not dismissed within sixty (60) days and
                  prevent



                                       24

                  the other PARTY from performing the material obligations
                  imposed on it by this AGREEMENT;

         (ii)     the other PARTY defaults in the performance of any material
                  obligations imposed on it by this AGREEMENT and such default
                  is not remedied in all material respects within ninety (90)
                  days of receipt of written demand from the notifying PARTY to
                  cure the default.

11.2.2   deCODE may terminate this AGREEMENT at any time before the FIRST
         COMMERCIAL SALE upon ninety (90) days prior written notice to BAYER,
         giving BAYER the relevant reasons for termination in writing. At the
         effective date of the termination, all rights, KNOW HOW and the LICENSE
         granted under the AGREEMENT to deCODE will expire.

11.2.3.  Notwithstanding the foregoing, deCODE may terminate this Agreement by a
         written notice no later than [**] after the Effective Date, if the
         following contingencies still exist at such time:
         i)       In preclinical studies [CONFIDENTIAL TREATMENT REQUESTED];
         ii)      In clinical trials (Phase I or later) clinically relevant
                  [CONFIDENTIAL TREATMENT REQUESTED].
         iii)     deCODE's due diligence on BAYER KNOW-HOW has not been
                  completed in a satisfactory manner, e.g., unexpected
                  materially adverse circumstances pertaining to the BAYER
                  KNOW-HOW have been discovered.

         Once the foregoing contingencies have been removed, deCODE's right to
         terminate the AGREEMENT under this Article will expire. deCODE shall
         exercise diligent efforts to have the contingencies removed as soon as
         possible following the EFFECTIVE DATE, provided that the obligations
         under Articles 2.2 and 2.3 hereof have been met.



                                       25

         No payment under the AGREEMENT executed to BAYER until the date of
         termination will be refundable.

11.2.4   If this AGREEMENT is terminated, such expiration or termination shall
         neither release the other PARTY from any obligation to make payments
         accrued hereunder prior to the date of such expiration or termination
         and shall not release the PARTIES from the secrecy obligations as
         provided herein, or from the indemnity obligations.

         If the AGREEMENT is terminated by BAYER according to Article 11.2.1, or
         Article 14.2, or by deCODE according to Article 11.2.1 or Article
         11.2.2, deCODE shall, upon request of BAYER, immediately reassign its
         NDA approvals for PRODUCT in the TERRITORY to BAYER or to a party
         designated by BAYER. deCODE shall also provide BAYER with all
         information and results developed during the license term reasonably
         necessary for maintaining regulatory approvals for sale of COMPOUND
         which BAYER may use at its sole discretion. The royalty provision of
         Article 7.2.4 shall apply.

11.2.5   If this AGREEMENT expires pursuant to Article 11.1 or is terminated by
         either PARTY as provided in Article 11.2 or Article 14.2, all rights,
         access to and use of KNOW HOW and the LICENSE granted under the
         AGREEMENT to deCODE shall expire.

11.2.6   If this Agreement is terminated, and in the event that the ownership of
         the BAYER IND has been transferred to deCODE under Article 3.1.4 hereof
         at the time of such termination, deCODE will transfer ownership of the
         BAYER IND back to BAYER.

11.2.7   The expiration or termination of this AGREEMENT shall not affect the
         following Articles or Articles which shall remain in force unlimited or
         as defined in such Articles or Articles: Article 1; Article 5.2;
         Article 7.2.4, Article 7.8; Article 9; Articles 11.2.4-11.2.6; Article
         12; Article 14.5 and 14.6



                                       26

ARTICLE 12 - LIABILITY

12.1     deCODE shall bear full liability for PRODUCT developed, manufactured,
         packaged, promoted, distributed and sold in the TERRITORY hereunder and
         for its other activities related thereto.

12.2     BAYER shall not be responsible for any damages, claims or losses that
         deCODE, its AFFILIATES, SUBLICENSEES or THIRD PARTIES may suffer by
         reason of licensed exploitation of the BAYER PATENTS and of the BAYER
         KNOW HOW or by manufacture, use and sale of PRODUCT or by reason of
         acts of commission or omission on the part of deCODE or its employees
         or agents with regard to the processing, use and sale of PRODUCT.

         deCODE shall hold harmless and fully indemnify BAYER, its AFFILIATES,
         and each of its and their respective employees, officers, directors and
         agents (each a "BAYER Indemnified PARTY") from and against all damages,
         claims or losses which may be made against BAYER by reason of deCODE's
         manufacture, use and sale of PRODUCT or by reasons of acts of
         commission or omission of deCODE's employees or agents with regard to
         processing, use or sale of PRODUCT.

12.3     Notwithstanding the foregoing, BAYER shall be responsible for damages
         incurred to THIRD PARTIES based on product liability if deCODE or the
         THIRD PARTY can prove that the damage results from

         -        the restricted use of certain batches of COMPOUND - as to be
                  identified by BAYER in Schedule B - which will only be
                  released for use outside of any clinical trials or any human
                  application; or
         -        the non-conformity of COMPOUND delivered by BAYER released for
                  use in clinical trials - as to be identified by BAYER in
                  Schedule B - with specifications as set forth in Schedule B,
                  provided that such



                                       27

                  non-conformity could not be detected by deCODE through quality
                  control tests agreed upon between the PARTIES; or
         -        intentional or gross negligence of BAYER during the
                  development or manufacture of the delivered COMPOUND.

12.4     deCODE shall have no obligation under this AGREEMENT to hold harmless
         and fully indemnify any BAYER Indemnified PARTY from and against all
         damages, claims or losses which result from willful misconduct or
         negligent acts or omissions of BAYER, its AFFLILIATES, or any of its or
         their respective employees, officers, directors or agents related to
         the testing of COMPOUND.


ARTICLE 13 - REPRESENTATIONS AND WARRANTIES

13.1     deCODE represents and warrants that the execution and performance of
         this AGREEMENT is within the corporate power of deCODE and has been
         duly authorized by all necessary corporate action. BAYER represents and
         warrants that the execution, delivery and performance of this AGREEMENT
         is within the corporate power of BAYER and has been duly authorized by
         all necessary corporate action. This AGREEMENT constitutes a valid and
         binding AGREEMENT between BAYER and deCODE.

13.2     deCODE represents and warrants that there are no contractual
         prohibitions or impediments including any claims, judgments,
         settlements against or owed by deCODE preventing it from entering into
         or performing its obligations under this AGREEMENT. BAYER represents
         and warrants that there are no contractual prohibitions or impediments
         including any claims, judgments, settlements against or owed by BAYER
         preventing it from entering into or performing its obligations under
         this AGREEMENT.



                                       28

13.3     deCODE and BAYER each undertakes to the other to strictly adhere to all
         applicable laws and regulations with respect to COMPOUND and PRODUCT.

13.4     BAYER does not represent or warrant that the BAYER PATENTS are or will
         be valid or that they will not infringe the rights of THIRD PARTIES or
         that the development, manufacture, use or sale of PRODUCT is not or
         will not be an infringement of the rights of THIRD PARTIES. At the
         EFFECTIVE DATE of this AGREEMENT, BAYER represents that to the best of
         its knowledge, BAYER does not have any information that BAYER PATENTS
         are not valid or that they will infringe the rights of THIRD PARTIES or
         that the development, manufacture, use or sale of PRODUCT is or will be
         an infringement of the rights of THIRD PARTIES. BAYER further
         represents that it is not aware of any (i) BAYER PATENTS or BAYER KNOW
         HOW that are required and/or useful within the FIELD (A) for
         manufacture, formulation, and handling COMPOUND, or (B) developing,
         registering, marketing and selling PRODUCT in the TERRITORY, which are
         not being licensed or otherwise provided to deCODE hereunder, or (ii)
         intellectual property rights of any THIRD PARTY that are required
         and/or useful within the FIELD for, or would prevent or otherwise limit
         or hinder deCODE's (A) manufacture, formulation, and handling COMPOUND,
         or (B) developing, registering, marketing and selling PRODUCT in the
         TERRITORY.

ARTICLE 14 - MISCELLANEOUS

14.1     Neither PARTY shall be responsible to the other for any failure or
         delay in performing any of its obligations under this AGREEMENT or for
         other non-performance hereof if such delay or non-performance is caused
         by an event of Force Majeure such as strike, stoppage of labor, lockout
         or other labor trouble, fire, flood, accident, act of God or of
         government or of the public enemy of a PARTY, regulations, or laws of
         any government; war, terrorist attack, civil commotion, epidemic,
         failure of public utilities or



                                       29

         common carriers or by any cause unavoidable or beyond the reasonable
         control of a PARTY ("FORCE MAJEURE").

14.2     However, the PARTY affected by such FORCE MAJEURE shall use its
         reasonable efforts to avoid, remove or remedy such circumstances.
         Either PARTY temporarily excused from performance hereunder by such
         circumstances shall resume performance with utmost dispatch when such
         circumstances are removed or remedied. Either PARTY claiming such
         circumstances as an excuse for delay in performance shall give prompt
         notice thereof and of the period for which such inability is expected
         to continue. in writing to the other PARTY.

14.3     Neither PARTY shall be entitled to assign its rights and obligations
         hereunder in whole or in part to a THIRD PARTY without the express
         written consent of the other PARTY hereto which consent shall not
         unreasonably be withheld, provided, however, that either party may,
         without such consent, assign the AGREEMENT and its rights and
         obligations but only IN TOTO, in connection with the transfer or sale
         of all or substantially all of the assets of its business (or that
         portion thereof to which this Agreement relates), or in the event of a
         merger or consolidation or change of control or similar transaction.
         This AGREEMENT shall be binding upon, and inure to the benefit of, each
         PARTY, its AFFILIATES and permitted successors and assigns.



                                       30

14.4     The invalidity or un-enforceability of an Article or any part of an
         Article of the AGREEMENT in any jurisdiction shall not cause the
         invalidity of the whole AGREEMENT as to such jurisdiction, and shall
         not affect the validity or enforceability of such Article or such part
         of an Article in any other jurisdiction. The PARTIES will replace any
         Article or part of an Article found invalid or unenforceable with an
         alternative which should as nearly as possible achieve the PARTIES
         original intent.

14.5     No amendment of this AGREEMENT shall be valid or binding upon the
         PARTIES hereto unless made in writing and duly executed on behalf of
         each PARTY hereto.

14.6     The PARTIES hereto agree that the validity of this AGREEMENT and their
         respective rights and obligations under it shall be governed by the
         laws of the State of Delaware.

14.7     The PARTIES agree that if any dispute or disagreement arises between
         them in respect to this AGREEMENT, they shall follow the following
         procedure in an attempt to resolve the dispute or disagreement
         amicably:

         a.   The PARTY claiming that such a dispute exists shall give notice in
              writing to the other PARTY of the nature of the dispute.

         b.   Within fourteen (14) business days of receipt of such notice, a
              nominee or nominees of deCODE and a nominee or nominees of BAYER
              shall jointly decide the steps to be taken. If they do not agree
              to a jointly accepted procedure, they shall meet at least once
              within additional thirty (30) business days, in person, and
              exchange written summaries reflecting, in reasonable detail, the
              nature and extent of the dispute, and at this meeting they shall
              use their reasonable endeavours to resolve the dispute.

         c.   If, within a further period of thirty (30) business days, the
              dispute has not been resolved, or if for any reason, the required
              meeting has not



                                       31

              been held, the PARTIES agree that any dispute may be referred to
              arbitration according to Article 14.8.

14.8     All disputes between the PARTIES arising in connection with this
         AGREEMENT shall, failing a settlement according to Section 14.7, be
         referred to arbitration composed of a panel of three (3) persons, who
         shall have knowledge of the pharmaceutical business. In such an event,
         each PARTY shall appoint one (1) independent arbitrator, who together
         shall jointly appoint a third arbitrator, who shall act as chairman. If
         either PARTY fails to appoint an arbitrator within 30 days of request
         by the other PARTY to so appoint, or if the arbitrators cannot agree on
         a chairman, either PARTY or both PARTIES jointly, may submit a request
         to the President of the Chamber of Commerce in Zurich, Switzerland, to
         so appoint. The foregoing arbitration shall take place in Zurich. The
         rules of procedure of the arbitration shall be governed by the Laws of
         the Canton of Zurich, Switzerland. The language of the arbitration
         shall be the English language. Judgment of the arbitration panel shall
         be final and legally binding upon the PARTIES.

14.9     Any notice required to be given hereunder shall be considered properly
         given if sent by registered letter or telex or telefax, prepaid, to the
         applicable PARTY at the address set forth below:


         Any notice to deCODE shall be addressed to:


         deCODE Genetics, Ehf.
         Mark Gurney, PhD
         Vice-President, Drug Discovery
         Sturlugotu 8
         IS-101 Reykjavik
         Iceland
         main:  +354-570-1900



                                       32

         GSM: [CONFIDENTIAL TREATMENT REQUESTED]
         fax:  +354-570-2902

         with a copy to:
         deCODE Genetics Ehf.
         Johann Hjartarson Esq.
         Sturlugotu 8
         IS-101 Reykjavik
         Iceland
         Phone: +354-570-1900


         Any notice to BAYER shall be addressed to:


         Bayer HealthCare AG
         Division Pharma - BPA ICL
         Gebaude Q 30
         D-51368 Leverkusen
         Germany
         Tel:     ++49-214-30-52119
         Fax:     ++49-214-30-64830


         with a copy to:
         Bayer HealthCare AG
         CAO - L&P PL
         Gebaude Q 18
         D-51368 Leverkusen
         Germany
         Tel:  ++49-214-30-66196
         Fax:  ++49-214-30-24186



                                       33

         or to such other address for such PARTY as it shall have furnished
         theretofore in writing to the other PARTY. If sent by mail, the date of
         receipt shall be deemed to be one week from the date of mailing.


IN WITNESS WHEREOF the PARTIES have caused this AGREEMENT to be duly executed as
of the day and year first written above.


Leverkusen                                                Reykjavik,
Date:                                                     Date:
Bayer HealthCare AG                                       deCode genetics, Ehf.


                                                       
/s/  Dr. D. Brocks            /s/ Dr. W. van den Kerckhoff   /s/ Dr. Kari Stefansson
Dr. D. Brocks                 Dr. W. van den Kerckhoff       Dr. Kari Stefansson
PH-Head of Int. Cooperation   Patents and Licensing          President & CEO
& Licensing Europe





                                       34

SCHEDULE A:       BAYER PATENTS


                  COMPOUND BAY X1005 (EP-B-344519 = LEA 26 119)



     COUNTRY         Filing Date                PATENT-NO.           EXPIRATION DATE
- ------------------------------------------------------------------------------------
                                                               
       DK                 30.05.1989             169544                 30.05.2009

       NO                 16.05.1989             174889                 16.05.2009

       FI                 29.05.1989              91635                 29.05.2009

       HU                 30.05.1989             207719                 30.05.2009

       HU                 31.05.1995             211570                 18.05.2009

       PT                 29.05.1989              90675                 29.05.2009

       IE                 12.06.1989              61922                 12.06.2009

       ZA                 30.05.1989             89-4093                30.05.2009

       IL                 29.05.1989              90435                 29.05.2009

       SG                 30.03.1995             9590127                18.05.2009

       PH                 31.05.1989             38723*                      -

       CN                 15.05.1989              31912                 15.05.2004

       HK                 16.03.1995             388-95                 18.05.2009

       KR                 30.05.1989             131202                 27.11.2012

       TW                 12.05.1989              44432                 31.01.2006

       JP                 29.05.1989             2693576                29.05.2006

       JP                 23.05.1997             3076003                29.05.2006

       US                 19.05.1989             4970215                19.05.2009

       CA                 29.05.1989             1333802                03.01.2012

       HN                 22.02.1995              3477                  22.02.2015




                                       35

                                                        
       PA                 10.08.1995              76772                 18.05.2009

       



                                       36



     COUNTRY         FILING DATE                PATENT-NO.           EXPIRATION DATE
- ------------------------------------------------------------------------------------
                                                               
       DO                 03.03.1995              5182                  16.11.2010

       AR                 15.03.1995             331346*                 Cancelled

       AU                 29.05.1989             616269                 29.05.2009

       NZ                 26.05.1989             229310                 26.05.2009

       DE                 18.05.1989             EDE 58904042.1         18.05.2009

       SE                 18.05.1989             ESE 89108895.7         18.05.2009

       AT                 18.05.1989                EAT 0344519         18.05.2009

       GR                 18.05.1989                EGR 0344519         18.05.2009

       CH                 18.05.1989                ECH 0344519         18.05.2009

       IT                 18.05.1989                EIT 0344519         18.05.2009

       ES                 18.05.1989                EES 0344519         18.05.2009

       FR                 18.05.1989                EFR 0344519         18.05.2009

       BE                 18.05.1989                EBE 0344519         18.05.2009

       NL                 18.05.1989                ENL 0344519         31.05.2009

       GB                 18.05.1989                EGB 0344519         18.05.2009




                                       37

MANUFACTURING PROCESS (EP-B-509359 = LEA 28 305)



                  COUNTRY     APPLICATION      APPLICATION       NUMBER OF        DATE OF
     NO.           CODE          NUMBER           DATE             ISSUE           ISSUE           TERM
- ----------------------------------------------------------------------------------------------------------
                                                                              
  LEA 28305         JP         118492-92       1992-04-13         3224271        2001-08-24     2012-04-13

  LEA 28305         US           866707        1992-04-10         5306820        1994-04-26     2012-04-26

  LEA 28305        US 01         164674        1993-12-08         5473076        1995-12-05     2012-12-05

  LEA 28305        E AT        92105894.7      1992-04-06       EAT 0509359                     2012-04-06

  LEA 28305        E BE        92105894.7      1992-04-06       EBE 0509359                     2012-04-06

  LEA 28305        E CH        92105894.7      1992-04-06       ECH 0509359                     2012-04-06

  LEA 28305        E DE        92105894.7      1992-04-06        59205422.5                     2012-04-06

  LEA 28305        E DK        92105894.7      1992-04-06       EDK 0509359                     2012-04-06

  LEA 28305        E EP        92105894.7      1992-04-06        92105894.7      1996-02-28     2012-04-06

  LEA 28305        E ES        92105894.7      1992-04-06       EES 0509359                     2012-04-06

  LEA 28305        E FR        92105894.7      1992-04-06       EFR 0509359                     2012-04-06

  LEA 28305        E GB        92105894.7      1992-04-06       EGB 0509359                     2012-04-06

  LEA 28305        E GR        92105894.7      1992-04-06       EGR 0509359                     2012-04-06

  LEA 28305        E IT        92105894.7      1992-04-06       EIT 0509359                     2012-04-06

  LEA 28305        E LU        92105894.7      1992-04-06       ELU 0509359                     2012-04-06

  LEA 28305        E NL        92105894.7      1992-04-06       ENL 0509359                     2012-04-30

  LEA 28305        E SE        92105894.7      1992-04-06        92105894.7                     2012-04-06




                                       38

SCHEDULE B:

SPECIFICATION OF COMPOUND AND CERTIFICATE OF ANALYSIS


[CONFIDENTIAL TREATMENT REQUESTED]



                                       39

SCHEDULE C:

DEVELOPMENT PLAN
[CONFIDENTIAL TREATMENT REQUESTED]



                                       40

SCHEDULE D:

STUDY PLANS FOR EVALUATION OF [CONFIDENTIAL TREATMENT REQUESTED]



                                       41

SCHEDULE E:

BAYER BAY X1005 REGULATORY FILINGS


              -   IND  Reference No: # 37 130

              -   CTX Reference No: # 0010/0197/A

              -   German Clinical Trial Application No: # 6373 40

EX-10.33

                                                                   Exhibit 10.33

[NOTE: CERTAIN PORTIONS OF THIS DOCUMENT HAVE BEEN MARKED TO INDICATE THAT
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR CONFIDENTIAL INFORMATION CONTAINED
IN THIS DOCUMENT. THE CONFIDENTIAL PORTIONS HAVE BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.]

                  LICENSE AND RESEARCH COLLABORATION AGREEMENT

                                     BETWEEN

                                MERCK & CO., INC.

                                       AND

                              DECODE GENETICS, EHF.



                  LICENSE AND RESEARCH COLLABORATION AGREEMENT

         THIS RESEARCH COLLABORATION AND LICENSE AGREEMENT (this "Agreement"),
which shall be effective as of February 25, 2004 (the "Effective Date"), is
entered into by and between deCODE genetics, Ehf., a corporation organized under
the laws of Iceland ("deCODE") and Merck & Co., Inc., a corporation organized
under the laws of the State of New Jersey, having an office located at One Merck
Drive, Whitehouse Station, New Jersey 08889 ("MERCK").

                             PRELIMINARY STATEMENTS

A.       deCODE has expertise in conducting research in the field of human
genetics and genomics and in the conduct of clinical trials.

B.       MERCK has certain expertise in drug development and in the design and
conduct of clinical trials to demonstrate the safety and efficacy of its
pharmaceutical products.

C.       deCODE and MERCK wish to collaborate on the design and conduct of
Information Rich Clinical Trials (terms with initial capitals as hereafter
defined) on selected MERCK compounds in specified Disease Areas in accordance
with the attached Work Plan.

D.       deCODE Parent (as hereinafter defined) and MERCK are simultaneously
entering into a separate Stock and Warrant Purchase Agreement whereby MERCK
shall purchase shares of stock of deCODE Parent pursuant to the terms and
conditions set forth in that agreement.

NOW, THEREFORE, in consideration of the foregoing Preliminary Statements and the
mutual agreements and covenants set forth herein, the Parties hereby agree as
follows:

1.       DEFINITIONS

         Unless specifically set forth to the contrary herein, the following
terms, whether used in the singular or plural, shall have the respective
meanings set forth below:

1.1      "AFFILIATE" shall mean as to deCODE or MERCK, as the case may be (i)
         any corporation or business entity of which fifty percent (50%) or more
         of the securities or other ownership interests representing the equity,
         the voting stock or general partnership interest are owned, controlled
         or held, directly or indirectly, by MERCK or deCODE; or (ii) any
         corporation or business entity which, directly or indirectly, owns,
         controls or holds fifty percent (50%) (or the maximum ownership
         interest permitted by law) or more of the securities or other ownership
         interests representing the equity, the voting stock or, if applicable,
         the general partnership interest, of MERCK or deCODE.

1.2      "ASSOCIATED INFORMATION" shall mean information about [CONFIDENTIAL
         TREATMENT REQUESTED] in an IRCT performed as part of the Research
         Program which [CONFIDENTIAL TREATMENT REQUESTED] in an Exclusive
         Disease Area or a Non-exclusive Disease Area where the [CONFIDENTIAL
         TREATMENT REQUESTED] is associated with the [CONFIDENTIAL TREATMENT
         REQUESTED] within the Disease Area being studied in that IRCT.

1.3      "BUDGET" shall mean the projected expenditures for the upcoming year
         set out in Schedule 2.6

                                        4


         and more fully described in Section 2.6.

1.4      "CALENDAR QUARTER" shall mean the respective periods of three (3)
         consecutive calendar months ending on March 31, June 30, September 30
         and December 31.

1.5      "CALENDAR YEAR" shall mean each successive period of twelve (12) months
         commencing on January 1 and ending on December 31.

1.6      A "CHANGE IN CONTROL" shall mean the occurrence of any of the
         following:

         (a) An acquisition of any voting securities of deCODE Parent (the
         "Voting Securities") by any "Person" (as the term "person" is used for
         purposes of Section 13(d) or 14(d) of the Securities Exchange Act of
         1934, as amended (the "Exchange Act")), immediately after which such
         Person has "Beneficial Ownership" (within the meaning of Rule 13d-3
         promulgated under the Exchange Act) of more than fifty percent (50%) of
         (1) the then-outstanding shares of common stock of deCODE Parent (or
         any other securities into which such shares of common stock are changed
         or for which such shares of common stock are exchanged) (the "Shares")
         or (2) the combined voting power of deCODE Parent's then-outstanding
         Voting Securities;

         (b) The individuals who, as of Effective Date, are members of the board
         of directors of deCODE Parent (the "Incumbent Board"), following a
         Merger (as hereinafter defined), do not for any reason constitute at
         least a majority of the members of the board of directors of (x) the
         corporation resulting from such Merger (the "Surviving Corporation"),
         if fifty percent (50%) or more of the combined voting power of the
         then-outstanding voting securities of the Surviving Corporation is not
         Beneficially Owned, directly or indirectly, by another Person (a
         "Parent Corporation") or (y) if there is one or more than one Parent
         Corporation, the ultimate Parent Corporation; PROVIDED, HOWEVER, that,
         any individual becoming a director subsequent to the date hereof whose
         election, or nomination for election by such company's shareholders,
         was approved by a vote of at least a majority of the directors then
         comprising the Incumbent Board shall be considered as though such
         individual were a member of the Incumbent Board, but excluding, for
         this purpose, any such individual whose initial assumption of office
         occurs as a result of an actual or threatened election contest with
         respect to the election or removal of directors or other actual or
         threatened solicitation of proxies or consents by or on behalf of a
         Person other than the board of directors of deCODE Parent (a "Proxy
         Contest"), including by reason of any agreement intended to avoid or
         settle any Proxy Contest;

         (c) At least eighty (80%) percent of voting securities of deCODE are no
         longer owned directly or indirectly by deCODE Parent; or

         (d) The consummation of:

                 (i)   A merger, consolidation or reorganization (1) with or
         into deCODE Parent or a direct or indirect subsidiary of deCODE Parent
         or (2) in which securities of deCODE Parent are issued (both
         1.5(c)(i)(1) and (2) are defined as a "Merger"), unless such Merger is
         a "Non-Control Transaction." A "Non-Control Transaction" shall mean a
         Merger in which:

                              (A) the stockholders of deCODE Parent immediately
         before such Merger own directly or indirectly immediately following
         such Merger at least fifty percent (50%) of the combined voting power
         of the outstanding voting securities of (x) the Surviving Corporation,
         if there is no Parent Corporation or (y) if there is one or more than
         one Parent Corporation, the

                                        4


         ultimate Parent Corporation;

                              (B) the individuals who were members of the
         Incumbent Board immediately prior to the execution of the agreement
         providing for such Merger constitute at least a majority of the members
         of the board of directors of (x) the Surviving Corporation, if there is
         no Parent Corporation, or (y) if there is one or more than one Parent
         Corporation, the ultimate Parent Corporation; and

                              (C) no Person other than (1) deCODE Parent, or
         (2) any Person who, immediately prior to the Merger had Beneficial
         Ownership of fifty percent (50%) or more of the then outstanding Shares
         or Voting Securities, has Beneficial Ownership, directly or indirectly,
         of fifty percent (50%) or more of the combined voting power of the
         outstanding voting securities or common stock of (x) the Surviving
         Corporation, if fifty percent (50%) or more of the combined voting
         power of the then outstanding voting securities of the Surviving
         Corporation is not Beneficially Owned, directly or indirectly by a
         Parent Corporation, or (y) if there is one or more than one Parent
         Corporation, the ultimate Parent Corporation; PROVIDED, HOWEVER, that
         any Person described in clause (2) of this subsection (C) may not,
         immediately following the Merger, Beneficially Own more than thirty
         percent (30%) of the combined voting power of the outstanding voting
         securities of the Surviving Corporation or the Parent Corporation, as
         applicable, for the Merger to constitute a Non-Control Transaction.

                              (ii) A complete liquidation or dissolution of
         deCODE Parent; or

                              (iii) The sale or other disposition of all or
         substantially all of the assets of deCODE Parent and its Subsidiaries
         taken as a whole to any Person (other than (x) a transfer under
         conditions that would constitute a Non-Control Transaction, with the
         disposition of assets being regarded as a Merger for this purpose or
         (y) the distribution to deCODE Parent's stockholders of any other
         assets).

         Notwithstanding the foregoing, a Change in Control shall not be deemed
         to occur solely because any Person (the "Subject Person") acquired
         Beneficial Ownership of more than the permitted amount of the then
         outstanding Shares or Voting Securities as a result of the acquisition
         of Shares or Voting Securities by deCODE Parent which, by reducing the
         number of Shares or Voting Securities then outstanding, increases the
         proportional number of shares Beneficially Owned by the Subject
         Persons; provided that if a Change in Control would occur (but for the
         operation of this sentence) as a result of the acquisition of Shares or
         Voting Securities by deCODE Parent and, after such share acquisition by
         deCODE Parent, the Subject Person becomes the Beneficial Owner of any
         additional Shares or Voting Securities and such Beneficial Ownership
         increases the percentage of the then outstanding Shares or Voting
         Securities Beneficially Owned by the Subject Person, then a Change in
         Control shall occur.

1.7      "COLLABORATION DATE" shall be February 25, 2004.

1.8      "COLLABORATION INFORMATION AND INVENTION" shall mean any discoveries,
         Improvements, processes, methods, protocols, formulas, data,
         inventions, know-how and trade secrets, patentable or otherwise, that
         arise from the Research Program.

1.9      "COLLABORATION PATENTS" shall mean any and all patents and patent
         applications in the Territory (which for the purposes of this Agreement
         shall be deemed to include certificates of invention

                                        4


         and applications for certificates of invention) that a Party or its
         Affiliates owns, Controls or through license or otherwise acquires
         rights during the term of this Agreement which claim, cover or relate
         to Collaboration Information and Inventions or are divisions,
         continuations, continuations-in-part, reissues, renewals, extensions,
         supplementary protection certificates, utility, models and the like of
         any such patents and patent applications and foreign equivalents
         thereof.

1.10     "COMBINATION PRODUCT" shall mean a Product which includes one or more
         active ingredients other than IRCT Compound or Related IRCT Compound in
         combination with IRCT Compound or Related IRCT Compound. All references
         to Product in this Agreement shall be deemed to include Combination
         Product.

1.11     "COMPETITIVE PRODUCT" shall mean a product containing the IRCT Compound
         or Related IRCT Compound which has or attains on a Calendar Year basis
         a market share of [CONFIDENTIAL TREATMENT REQUESTED] or more in a
         country of sale as measured by prescriptions or other similar
         information in the country of sale.

1.12     "COMPETITOR" shall mean a company in the pharmaceutical business sector
         with reported annual gross revenues from the sale of pharmaceuticals in
         excess [CONFIDENTIAL TREATMENT REQUESTED] for each of its [CONFIDENTIAL
         TREATMENT REQUESTED].

1.13     "CONTROL", "CONTROLS" OR "CONTROLLED BY" shall mean either (a) being an
         Affiliate of either MERCK or deCODE; or (b) with respect to any item of
         or right under Collaboration Patents, Patents or Know-How, the
         possession of (whether by ownership or license, other than pursuant to
         this Agreement) or the ability of a Party to grant access to, or a
         license or sublicense of, such items or right as provided for herein
         without violating the terms of any agreement or other arrangement with
         any Third Party existing at the time such Party would be required
         hereunder to grant the other Party such access or license or
         sublicense.

1.14     "deCODE INFORMATION AND INVENTIONS" shall mean all Collaboration
         Information and Inventions developed or invented solely by employees of
         deCODE or other persons not employed by MERCK acting on behalf of
         deCODE.

1.15     "deCODE KNOW-HOW" shall mean all secret, substantial and identified
         information and materials, including, but not limited to, discoveries,
         Improvements, processes, formulas, data, inventions(including without
         limitation deCODE's Information and Inventions and deCODE's rights in
         Joint Information and Inventions), know-how and trade secrets,
         patentable or otherwise, which arise from the Research Program and
         during the term of this Agreement (i) are in deCODE's possession or
         control, (ii) are not generally known and (iii) are necessary or useful
         to MERCK in connection with the Research Program or the research,
         development, manufacture, marketing, use or sale of IRCT Compound,
         Related IRCT Compound, Tests or Product in the

                                        4


         Territory.

1.16     "deCODE COLLABORATION PATENTS" shall mean Collaboration Patents that
         claim, cover or relate to deCODE Information and Inventions excluding
         deCODE Information and Inventions relating to deCODE Generalized
         Technology.

1.17     "deCODE COMPOUNDS" shall mean compounds[CONFIDENTIAL TREATMENT
         REQUESTED].

1.18     "deCODE GENERALIZED TECHNOLOGY" shall mean any Technical Information
         relating to generalized methods for conducting genomics research and
         characterizing the function of genes or any raw data useful in
         generalized genomics research tools which at any time is owned or
         controlled by deCODE or its Affiliates (provided deCODE or its
         Affiliates have the right to license or otherwise make available such
         Technical Information to MERCK).

1.19     "deCODE GENOMICS DATA" shall mean (a) [CONFIDENTIAL TREATMENT
         REQUESTED] as may be created, developed or acquired by deCODE from time
         to time during the term of this Agreement or as may be existing or have
         been created as of the Effective Date, and (b) deCODE's proprietary
         inventions, processes and other assets directly relating to the use,
         creation, maintenance, development, operation, access, analysis,
         reporting, storage, protection, and/or transmission of such proprietary
         databases, including proprietary methods, procedures and techniques,
         procedure manuals, personal and scientific data, computer technical
         expertise and software, in each case independently developed by or on
         behalf of deCODE and such software useful for the analysis of the
         information included in such databases.

1.20     "deCODE PARENT" shall mean deCODE genetics, Inc., a corporation
         organized and existing under the laws of the State of Delaware.

1.21     "deCODE PATENTS" shall mean Patents, that deCODE or its Affiliates
         Control prior to the Effective Date or during the term of this
         Agreement, including but not limited to those listed on Schedule 1.21,
         that are necessary or useful to MERCK in connection with the Research
         Program or the research, development, manufacture, marketing, use or
         sale of IRCT Compound, Tests or Product in the Territory including
         Patents claiming deCODE Genomics Data but excluding any part of Patents
         claiming deCODE Generalized Technology.

1.22     "deCODE PRIOR KNOW-HOW" shall mean all secret, substantial and
         identified information and materials, including, but not limited to,
         discoveries, Improvements, processes, formulas, data, inventions,
         know-how and trade secrets, patentable or otherwise, which existed
         prior to the Effective Date and during the term of this Agreement (i)
         are in deCODE's possession or control, (ii) are not generally known and
         (iii) are necessary or useful to MERCK in connection with the

                                        4


         Research Program or the research, development, manufacture, marketing,
         use or sale of IRCT Compound, Tests or Product in the Territory
         including deCODE Genomics Data but excluding deCODE Generalized
         Technology and deCODE Know-How.

1.23     "DISEASE AREAS" shall mean Exclusive Disease Areas and Non-exclusive
         Disease Areas.

1.24     "EXCLUSIVE DISEASE AREAS" shall mean at least one of the following:
         [CONFIDENTIAL TREATMENT REQUESTED].

1.25     [CONFIDENTIAL TREATMENT REQUESTED]

1.26     [CONFIDENTIAL TREATMENT REQUESTED]

1.27     [CONFIDENTIAL TREATMENT REQUESTED]

1.28     "NON-EXCLUSIVE DISEASE AREAS" shall mean [CONFIDENTIAL TREATMENT
         REQUESTED].

1.29     [CONFIDENTIAL TREATMENT REQUESTED]

1.30     "ELECTED DISEASE" shall have the meaning set out in Section 3.1(d).

1.31     "EXCLUSIVE LICENSE FEE" shall have the meaning set out in Section
         3.1(d).

1.32     "EXECUTIVE COMMITTEE" shall mean the committee made up of one senior
         executive of each Party as more fully described in Section 2.5.1.

1.33     "FILING" of an NDA shall mean the acceptance by a Regulatory Authority
         of an NDA for filing.

1.34     "FIRST COMMERCIAL SALE" shall mean, with respect to any Product or
         Test, the first sale for end use or consumption of such Product or Test
         in a country after all required approvals, including Marketing
         Authorization, have been granted by the Regulatory Authority of such
         country.

                                        4


1.35     "FULL TIME EQUIVALENT" or "FTE" shall mean the equivalent of a
         full-time scientist's work time over a twelve-month period (including
         normal vacations, sick days and holidays). The portion of an FTE year
         devoted by a scientist to the Research Program shall be determined by
         dividing the number of full days during any twelve-month period devoted
         by such employee to the Research Program by the total number of working
         days during such twelve-month period.

1.36     "IMPROVEMENT" shall mean any enhancement, whether or not patentable, in
         the manufacture, formulation, ingredients, preparation, presentation,
         means of delivery, dosage or packaging of IRCT Compound, Related IRCT
         Compound, Tests or Product.

1.37     "INFORMATION" shall mean any and all information and data, including
         without limitation all MERCK Know-How, deCODE Know-How, and all other
         scientific, pre-clinical, clinical, regulatory, manufacturing,
         marketing, financial and commercial information or data, whether
         communicated in writing or orally or by any other method, which is
         provided by one Party to the other Party in connection with this
         Agreement.

1.38     "INFORMATION RICH CLINICAL TRIAL OR IRCT" shall mean a clinical trial
         which includes the following, as specified in the protocol for such
         clinical trial: [CONFIDENTIAL TREATMENT REQUESTED]

1.39     "INVENTION" means any process, method, composition of matter, article
         of manufacture, discovery or finding that is conceived and reduced to
         practice.

1.40     "IRCT COMPOUND" shall mean a Selected Compound that has [CONFIDENTIAL
         TREATMENT REQUESTED] in accordance with the Agreement.

1.41     "JOINT INFORMATION AND INVENTIONS" shall mean all discoveries,
         Improvements, processes, methods, protocols, formulas, data,
         Inventions, know-how and trade secrets, patentable or otherwise,
         arising from the Research Program developed or invented jointly by
         employees of MERCK and deCODE or others acting on behalf of MERCK and
         deCODE.

1.42     "JOINT COLLABORATION PATENTS" shall mean Collaboration Patents that
         claim, cover or relate to Joint Information and Inventions.

1.43     "MARKETING AUTHORIZATION" shall mean any approval (including without
         limitation all applicable pricing and governmental reimbursement
         approvals) necessary to receive permission from the relevant Regulatory
         Authority to market and sell a Product or Test in any country.

1.44     "MERCK COMPOUND OPTION" shall have the meaning set out in Section
         3.1(e) (i).

1.45     "MERCK COMPOUND PATENT" shall mean any Patent that claims, covers or
         relates to an IRCT Compound, Related IRCT Compound, Test or Product
         Controlled by MERCK.

1.46     "MERCK EXERCISE NOTICE" shall have the meaning set out in Section
         3.1(e) (iii).

1.47     "MERCK INFORMATION AND INVENTIONS" shall mean all discoveries,
         Improvements, processes,

                                        4


         methods, protocols, formulas, data, Inventions, know-how and trade
         secrets, patentable or otherwise, arising from the Research Program
         developed or invented solely by employees of MERCK or other persons not
         employed by deCODE acting on behalf of MERCK.

1.48     "MERCK KNOW-HOW" shall mean any information and materials, including
         but not limited to, discoveries, Improvements, processes, methods,
         protocols, formulas, data, inventions (including without limitation
         MERCK's Information and Inventions and MERCK's rights in Joint
         Information and Inventions), know-how and trade secrets, patentable or
         otherwise, which arise from the Research Program and during the term of
         this Agreement, (i) are in MERCK's possession or control, (ii) are not
         generally known and (iii) are in MERCK's opinion necessary to deCODE in
         the performance of its obligations under the Research Program.

1.49     "MERCK COLLABORATION PATENTS" shall mean Collaboration Patents that
         claim, cover or relate to MERCK Information and Inventions.

1.50     "MERCK PATENTS" shall mean Patents Controlled by MERCK prior to the
         Effective Date or during the term of this Agreement (provided MERCK has
         the right to license or otherwise make available such Patents to
         deCODE) and are necessary or useful to deCODE in connection with the
         Research Program.

1.51     "MERCK PRIOR KNOW-HOW" shall mean any information and materials,
         including but not limited to, discoveries, Improvements, processes,
         methods, protocols, formulas, data, inventions, know-how and trade
         secrets, patentable or otherwise, which existed prior to the Effective
         Date and during the term of this Agreement, (i) are in MERCK's
         possession or control, (ii) are not generally known and (iii) are in
         MERCK's opinion necessary to deCODE in the performance of its
         obligations under the Research Program excluding MERCK Know-How.

1.52     "MERCK SHARE" [CONFIDENTIAL TREATMENT REQUESTED].

1.53     "NET SALES" shall mean the gross invoice price of Product or Tests sold
         by MERCK or its Related Parties to the first Third Party after
         deducting, if not previously deducted, from the amount invoiced or
         received:

         (a)     trade and quantity discounts other than early pay cash
                 discounts;

         (b)     returns, rebates, chargebacks and other allowances;

         (c)     retroactive price reductions that are actually allowed or
         granted;

         (d)     sales commissions paid to Third Party distributors and/or
         selling agents;

         (e)     a fixed amount equal to [CONFIDENTIAL TREATMENT REQUESTED] of
         the amount invoiced to cover bad debt, sales or excise taxes, early
         payment cash discounts, transportation and insurance, custom duties,
         and other governmental charges; and

         (f)     the standard inventory cost of devices or delivery systems used
         for dispensing or administering Product or Tests, as applicable. With
         respect to sales of Combination Products, Net Sales shall be calculated
         on the basis of the gross invoice price of Product(s) containing the
         same strength of IRCT Compound or Related IRCT Compound sold without
         other active ingredients. In the event that Product is sold only as a
         Combination Product, Net Sales shall be calculated on the basis of the
         gross invoice price of the

                                        4


         Combination Product multiplied by a fraction, the numerator of which
         shall be the inventory cost of IRCT Compound or Related IRCT Compound
         in the Product and the denominator of which shall be the inventory cost
         of all of the active ingredients in the Combination Product. Inventory
         cost shall be determined in accordance with MERCK's regular accounting
         methods, consistently applied. The deductions set forth in paragraphs
         (a) through (f) above will be applied in calculating Net Sales for a
         Combination Product. In the event that Product is sold only as a
         Combination Product and either Party reasonably believes that the
         calculation set forth in this Paragraph does not fairly reflect the
         value of the Product relative to the other active ingredients in the
         Combination Product, the Parties shall negotiate, in good faith, other
         means of calculating Net Sales with respect to Combination Products.

1.54     "PARTY OR PARTIES" shall mean either MERCK or deCODE or both as the
         context requires.

1.55     "PATENT RIGHTS" shall mean deCODE Collaboration Patents, and deCODE's
         interest in Joint Collaboration Patents.

1.56     "PATENTS" shall mean any and all patents and patent applications in the
         Territory (which for the purposes of this Agreement shall be deemed to
         include certificates of invention and applications for certificates of
         invention) that a Party owns, Controls or through license or otherwise
         acquires rights prior to the Effective Date or during the term of this
         Agreement which: (i) claim, cover or relate to a Selected Compound,
         Test and/or Product; or (ii) claim, cover or relate to Inventions; or
         (iii) are divisions, continuations, continuations-in-part, reissues,
         renewals, extensions, supplementary protection certificates, utility,
         models and the like of any such patents and patent applications and
         foreign equivalents thereof.

1.57     "PRODUCT(s)" shall mean any therapeutic preparation in final form
         containing (a) an IRCT Compound for sale by prescription,
         over-the-counter or any other method for any and all uses that arise
         from the [CONFIDENTIAL TREATMENT REQUESTED] in the Disease Area or (b)
         a Related IRCT Compound, including without limitation in the case of
         either 1.57(a) or (b) any Combination Product.

1.58     "RELATED PARTIES" shall mean a Party's Affiliates or sublicensees, but
         shall not mean a Party's distributors.

1.59     "REGULATORY AUTHORITY" shall mean any applicable government regulatory
         authority involved in granting approvals for the manufacturing,
         marketing, reimbursement and/or pricing of a Product or Test, as
         applicable, in the Territory, including, in the United States, the
         United States Food and Drug Administration and any successor
         governmental authority having substantially the same function.

1.60     "RELATED IRCT COMPOUND" shall mean a compound Controlled by MERCK that
         [CONFIDENTIAL TREATMENT REQUESTED].

1.61     "RESEARCH PROGRAM TERM" shall mean the duration of the Research Program
         and "Extended Research Program Term" shall mean any period of the
         Research Program as it may be extended by mutual agreement of the
         Parties, as described more fully in Section 2.10.

1.62     "RESEARCH PROGRAM" shall mean the research activities undertaken by the
         Parties hereto as set forth in Article 2 and Attachment 2.1.

1.63     "SELECTED COMPOUND" shall mean any compound proposed by MERCK and
         accepted by the

                                        4


         Operating Committee to be evaluated in Information Rich Clinical
         Trials.

1.64     "OPERATING COMMITTEE" shall mean the joint research committee
         established to facilitate the Research Program as more fully described
         in Section 2.5.1.

1.65     "SUCCESSFUL CLINICAL RESULT" shall mean result(s) [CONFIDENTIAL
         TREATMENT REQUESTED].

1.66     "TECHNICAL INFORMATION" shall mean information, data or know-how
         (whether patentable or unpatentable), including without limitation,
         formulas, manufacturing methods, procedures, designs, compositions of
         matter, plans, applications, specifications, drawings, techniques,
         materials (including without limitation biological materials such as
         tissue samples, plasma samples, cell lines, RNA, DNA, DNA fragments,
         organisms, proteins, polypeptides, plasmids, vectors and the like),
         compounds, samples, inventions, discoveries, and the like, as well as
         improvements related thereto.

1.67     "TERRITORY" shall mean all of the countries in the world, and their
         territories and possessions.

1.68     "THERAPEUTIC FIELD" shall mean any and all application of technology to
         [CONFIDENTIAL TREATMENT REQUESTED].

1.69     "TESTS" shall mean pharmacogenomic tests aimed at predicting the
         response or non-response and side-effects to an IRCT Compound that are
         developed, discovered or identified through the Research Program.

1.70     "THIRD PARTY" shall mean an entity other than MERCK and its Affiliates,
         and deCODE and its Affiliates.

1.71     "VALID PATENT CLAIM" shall mean a claim of an issued and unexpired
         patent included within the MERCK Compound Patent which claims IRCT
         Compound, Related IRCT Compound, Tests or Product as a composition of
         matter, which has not been revoked or held unenforceable or invalid by
         a decision of a court or other governmental agency of competent
         jurisdiction, and which is not appealable or has not been appealed
         within the time allowed for appeal, and which has not been disclaimed,
         denied or admitted to be invalid or unenforceable through reissue,
         re-examination or disclaimer or otherwise.

1.72     "WORK PLAN" shall mean Schedule 2.1-X describing the tasks to be
         performed by each of the Parties in furtherance of the Research
         Program. It is anticipated that there will be separate work plans
         relating to each IRCT conducted by the Parties which shall be appended
         to the Agreement in sequential order.

2.       RESEARCH PROGRAM

2.1      GENERAL

         deCODE and MERCK shall engage in the Research Program upon the terms
         and conditions set forth in this Agreement. The activities to be
         undertaken in the course of each IRCT pursuant to the Research Program
         will be set forth in a Work Plan (Schedule 2.1-X) wherein X shall begin
         with 1 continue in succession. Prior to the initiation of any IRCT
         herein the Parties shall agree in writing signed by members of the
         Executive Committee or their designees on what is a Successful Clinical
         Result and the signed writing shall become part of the corresponding
         Work

                                        4


         Plan for that IRCT. The Work Plan may be amended from time to time upon
         the mutual written agreement by authorized representatives of the
         Parties. All Work Plans including Schedule 2.1-0 attached hereto are
         part of the Agreement. Notwithstanding any provision of the Agreement
         to the contrary, neither Party shall be obligated to conduct any
         activities which it reasonably believes would be in violation of any
         statute, regulation, law, or terms of any ongoing deCODE project in a
         Non-exclusive Disease Area.

2.2      CONDUCT OF RESEARCH

         deCODE and MERCK each shall conduct the Research Program in good
         scientific manner, and in compliance in all material respects with all
         requirements of applicable laws, rules and regulations and all
         applicable good laboratory practices to attempt to achieve their
         objectives efficiently and expeditiously. deCODE and MERCK each shall
         proceed diligently with the work set out in the Work Plan by using
         their respective good faith efforts to allocate sufficient time,
         effort, equipment and facilities to the Research Program and to use
         personnel with sufficient skills and experience as are required to
         accomplish the Research Program in accordance with the terms of this
         Agreement and Work Plan.

         deCODE and MERCK shall be entitled to utilize the services of their
         Affiliates to perform their respective Research Program activities.
         Each Party shall also be entitled to utilized the services of Third
         Parties to perform their respective Research Program activities only
         upon the prior written consent of the other Party or as specifically
         set forth in Work Plan. Notwithstanding any such consent, both Parties
         shall remain at all times fully liable for its respective
         responsibilities under the Research Program.

2.3      INFORMATION RICH CLINICAL TRIALS

         Each IRCT shall be conducted in accordance with the Work Plan and a
         detailed protocol. A proposed protocol and a draft proposal for what a
         Successful Clinical Result will be, shall be prepared initially by the
         Operating Committee. These draft proposals shall be further reviewed
         internally by the appropriate committees within MERCK and deCODE. The
         draft proposals, with any changes or revisions made by MERCK or deCODE,
         shall then be considered and revised by the Operating Committee for
         submission to the Executive Committee. deCODE shall be obligated to
         provide support needed to conduct no more than five (5) IRCTs
         concurrently at any time during the Research Program. Each IRCT shall
         be conducted under the direction and control of the Operating Committee
         in accordance with the terms and conditions set forth in Schedule 2.3
         and a Study Protocol for that Selected Compound. In any given IRCT that
         is conducted under this Agreement the Parties may modify and/or
         supplement the terms and conditions set forth in Schedule 2.3 in
         accordance with Section 10.7 herein. All data and results pertaining to
         any Selected Compound may be used by MERCK in filings with Regulatory
         Authorities and all other rights to any intellectual property that are
         embodied by those data and results shall be governed by Article 3.

2.4      COMPOUND SELECTION

         MERCK shall nominate MERCK compounds during the Research Program for
         which Information Rich Clinical Trials shall be conducted by the
         Parties according to the Work Plan. deCODE shall be given the
         opportunity to review each proposed compound to confirm that deCODE's
         conduct of one or more IRCTs on such compound under this Agreement
         would not

                                        4


         conflict with any other ongoing deCODE project(s). The Operating
         Committee shall select which MERCK nominated compounds will become
         Selected Compounds; PROVIDED, HOWEVER, that solely with respect to
         compounds in the Non-exclusive Disease Area, deCODE shall not be
         obligated to perform development efforts with respect to any such
         compounds if it reasonably believes that the performance of such
         efforts will conflict with any ongoing deCODE project(s).

2.5      GOVERNANCE OF THE COLLABORATION.

         The Parties hereby establish process to govern the conduct of the
         Research Program and each party's contribution to the Research Program
         as follows:

2.5.1    MANAGERIAL OVERSIGHT.

         There will be two levels of managerial oversight of the Research
         Program. There will be an Executive Committee and an Operating
         Committee. In addition each Party shall designate Project Leaders for
         the Research Program.

                 (a)   EXECUTIVE COMMITTEE

                 The Executive Committee shall consist of one senior executive
                 from each of MERCK and deCODE. The Executive Committee shall
                 have the ultimate authority for decisions regarding the
                 Research Program. The matters that require approval by the
                 Executive Committee shall include approval of financial
                 statements such as the Budget and approval of the Work Plan.

                       (i)    Any disputes where the Executive Committee cannot
                       reach a mutually acceptable decision within thirty (30)
                       days after the matter was referred to them shall be
                       decided by the President of MERCK Research Laboratories
                       and the final determination of the issue that shall be
                       binding on the Parties and the Research Program;
                       PROVIDED, HOWEVER, as set forth below in Section 2.5.1
                       (a)(ii) regarding implementation of such decisions and in
                       all cases that to the extent such disputes materially
                       affect the rights or obligations of the Parties under
                       this Agreement, MERCK shall consult with deCODE and the
                       Parties shall agree on a course of action to lawfully
                       avoid or minimize such effects upon the rights or
                       obligations of the Parties, to the extent practicable.

                       (ii)   Any disputes arising with respect to the manner in
                       which decisions of the Operating Committee, the Executive
                       Committee or the President of Merck Research Laboratories
                       will be implemented that will affect relations with
                       patients participating in the Research Program, research
                       sites, consultants, investigators or vendors all of which
                       are in Iceland, or any governmental authority in Iceland
                       ("Implementation Disputes"), shall be decided by the
                       Chief Executive Officer of deCODE (or his designee) and
                       the final determination of the issue that shall be
                       binding on the Parties and the Research Program, who
                       shall give good faith consideration to the comments of
                       MERCK's Executive Committee member (or their respective
                       designees) in resolving such matter; PROVIDED, HOWEVER,
                       that to the extent such disputes materially affect the
                       rights or obligations of the Parties under this
                       Agreement, deCODE shall consult with MERCK and the
                       Parties shall agree on a course of action to lawfully
                       avoid or minimize such effects upon the rights or
                       obligations of the Parties, to the extent practicable.

                                        4


                 (b)   OPERATING COMMITTEE

                       The Operating Committee shall be based in Iceland and
                       composed of MERCK representatives and deCODE
                       representatives and shall exist for [**] after
                       termination or expiration of the Research Program Term.
                       The Operating Committee shall perform the following
                       functions (i) approve and, as the need arises, determine
                       the necessity to remove personnel working on the Research
                       Program, (ii) prepare the Budget, (iii) formulate and
                       adjust Work Plans, (iv) select Compounds; (v) oversee
                       progress of the Research Program and exchange of data
                       between the Parties; and (vi) appoint sub-committees of
                       equal representation to fulfill any of the enumerated
                       tasks set forth in this Section 2.5.1(b). Each Party
                       shall have 1 vote. Each Party shall appoint its
                       representatives to the Operating Committee from time to
                       time, and may substitute one or more of its
                       representatives, in its sole discretion, effective upon
                       notice to the other Party of such change. These
                       representatives shall have, individually or collectively,
                       appropriate technical credentials, experience and
                       knowledge, and ongoing familiarity with the Research
                       Program. Additional representatives or consultants may
                       from time to time, by mutual consent of the Parties, be
                       invited to attend Operating Committee meetings, in the
                       case of consultants subject to such consultant's written
                       agreement to comply with the requirements of Section 4.1.
                       Any member of the Operating Committee may designate a
                       substitute to attend and perform the functions of that
                       member at any meeting of the Operating Committee. A
                       chairperson and secretary of the Operating Committee
                       shall serve co-terminus one (1) year terms, commencing on
                       the Collaboration Date or an anniversary thereof, as the
                       case may be. deCODE shall have the right to name the
                       chairperson and MERCK shall have the right to name the
                       secretary of the Operating Committee. Decisions of the
                       Operating Committee shall be made unanimously by the
                       members. In the event that the Operating Committee cannot
                       or does not, after good faith efforts, reach agreement on
                       an issue, the resolution and/or course of conduct shall
                       be referred to the Executive Committee. Each Party shall
                       bear its own expenses related to the attendance of such
                       meetings by its representatives and invitees.

2.5.2    MEETINGS AND MINUTES.

         Meetings of the Operating Committee require the participation of at
         least one member of the Operating Committee from each Party. During the
         Research Program Term, the Operating Committee shall meet in person at
         least once during every Calendar Year. From time to time, a Party may
         give the other Party reasonable notice of its desire to hold a meeting
         of the Operating Committee. Unless otherwise agreed by the Parties,
         meetings of the Operating Committee shall be held in person and shall
         alternate between the offices of the Parties, or meet in such other
         place as agreed by the Parties. Instead of meeting in person, the
         members of the Operating Committee may, for purposes of holding a
         Operating Committee meeting, convene or be polled or consulted from
         time to time by means of telecommunications, video conferences,
         electronic mail or correspondence, as deemed necessary or appropriate
         by the Parties.

         With the sole exception of specific items of the meeting minutes to
         which the chairperson and the secretary cannot agree and which are
         escalated as provided below, definitive minutes of all Operating
         Committee meetings shall be finalized promptly after the meeting to
         which the minutes pertain, as follows:

         Promptly after each Operating Committee meeting, the secretary shall
         prepare and distribute to all members of the Operating Committee draft
         minutes of the meeting. Such minutes shall provide a description, in
         reasonable detail, of the discussions at the meeting and a list of any
         actions,

                                        4


         decisions or determinations approved by the Operating Committee and a
         list of any issues to be resolved by the Executive Officers.

         The chairperson shall then promptly after receiving such draft minutes
         collect comments thereon from the members of his or her Party and
         provide them to the secretary.

         The chairperson and the secretary of the Operating Committee shall then
         discuss each other's comments and finalize the minutes. The secretary
         and chairperson shall each sign and date the final minutes. The
         signature of the chairperson and the secretary upon the final minutes
         shall indicate each Party's assent to the minutes.

         If at any time during the preparation and finalization of the Operating
         Committee meeting minutes, the secretary and the chairperson do not
         agree on any issue with respect to the minutes, such issue shall be
         resolved by the decision making process as provided in Section
         2.5.1(a). The decision resulting from the decision making process shall
         be recorded by the secretary in amended finalized minutes for said
         meeting.

2.5.3    PROJECT LEADERS.

         MERCK and deCODE each shall appoint a person (a "Project Leader") from
         the Operating Committee to coordinate its part of the Research Program.
         The Project Leaders shall be the primary contact between the Parties
         and the Operating Committee with respect to the Research Program. Each
         Party shall notify the other within thirty (30) days of the date of the
         Agreement of the appointment of its Project Leader and shall notify the
         other Party as soon as practicable upon changing this appointment.

2.6      ANNUAL BUDGET .

         All costs in personnel time, expenses, goods and Third Party services
         shall be estimated in advance for the subsequent Calendar Year
         according to the Budget to be set forth in Schedule 2.6. The Budget
         shall be prepared by the Project Leaders under the direction and
         control of the Operating Committee by September 30th of the year
         preceding the Calendar Year of the Budget.

2.7      RECORDS AND REPORTS

2.7.1    RECORDS.

         Each Party shall maintain records, in sufficient detail and in good
         scientific manner appropriate for patent and regulatory purposes, which
         shall fully and properly reflect all work done and results achieved in
         the performance of the Research Program by that Party.

2.7.2    COPIES AND INSPECTION OF RECORDS.

         (a) MERCK shall have the right, during normal business hours and upon
         reasonable notice, to inspect and copy all such records of deCODE
         referred to in Section 2.7.1. MERCK shall maintain such records and the
         information disclosed therein in confidence in accordance with Section
         4.1. MERCK shall have the right to arrange for its employees and/or
         consultants involved in the activities contemplated hereunder to visit
         the offices and laboratories of deCODE and any of its Third Party
         contractors as permitted under Section 2.2 during normal business hours
         and upon reasonable notice, and to discuss the Research Program work
         and its results in

                                        4


         detail with the technical personnel and consultants of deCODE. Upon
         request, deCODE shall provide copies of the records described in
         Section 2.7.1 above.

         (b) At least once per Calendar Year during the term of the Agreement,
         MERCK shall provide deCODE with information about the status of any
         IRCT Compounds in development at MERCK including a review of any
         significant developmental milestones achieved or setbacks encountered
         since the previous year's review and such other information as may be
         reasonably requested by deCODE so as to enable deCODE to monitor or
         confirm MERCK's compliance with the provisions of Section 3.4 hereof.
         deCODE shall have the right, during normal business hours and upon
         reasonable notice, to inspect and copy all such records of MERCK
         referred to in Section 2.7.1 that are necessary to deCODE to perform
         its obligations under this Agreement. deCODE shall maintain such
         records and the information disclosed therein in confidence in
         accordance with Section 4.1.

2.8      COMPLIANCE

         deCODE shall conduct the Research in accordance with all applicable
         laws, rules and regulations, including, without limitation, all current
         governmental regulatory requirements concerning Good Laboratory
         Practices. In addition, if animals are used in research hereunder,
         deCODE will comply with the Animal Welfare Act or any other applicable
         local, state, national and international laws or regulations relating
         to the care and use of laboratory animals. MERCK encourages deCODE to
         use the highest standards, such as those set forth in the Guide for the
         Care and Use of Laboratory Animals (NRC, 1996), for the humane
         handling, care and treatment of such research animals. Any animals
         which are used in the course of the Research, or products derived from
         those animals, such as eggs or milk, will not be used for food
         purposes, nor will these animals be used for commercial breeding
         purposes. deCODE shall notify MERCK in writing of any deviations from
         applicable regulatory or legal requirements. deCODE hereby certifies
         that it will not and has not employed or otherwise used in any capacity
         the services of any person debarred under Section 21 USC 335a in
         performing any services hereunder.

2.9      RESEARCH PROGRAM TERM

         Except as otherwise provided herein, the term of the Research Program
         shall commence on the Collaboration Date and continue for a period of
         seven (7) years. Following the initial seven (7) year term, the
         Research Program will renew annually for successive one (1) year terms
         ("Extended Research Term") unless either Party sends a written notice
         of termination at any time to the other Party PROVIDED, HOWEVER, that
         MERCK may send such written notice of termination at any time beginning
         five (5) years after the Collaboration Date. Such notice of termination
         shall be sent at least [**] prior to the date of termination. In the
         event that deCODE exercises its right to terminate under this Section
         2.9, such termination shall not affect any ongoing IRCTs which shall be
         completed at MERCK's discretion, PROVIDED HOWEVER that deCODE shall not
         be obligated to begin any new IRCT which has been approved by the
         Operating Committee but not yet begun. From time-to-time, the Parties
         shall amend the Work Plan as applicable. In the event of a Change of
         Control pursuant to which a Competitor Controls deCODE, MERCK shall
         have the right to terminate the Research Program at any time on written
         notice to deCODE. In the event that the term of the Research Program
         expires or the Research Program is terminated during the pendency of an
         IRCT or in the event that the Parties elect to abandon or terminate any
         IRCT during the course of the Research Program, the Parties shall
         arrange for orderly completion or

                                        4


         early termination of such IRCT over a reasonable period of at least 90
         days, including making provision for payment for all non-cancelable
         expenses associated therewith.

2.10     EXCLUSIVE EFFORTS

         (a) During the Research Program Term, deCODE shall work exclusively
         with MERCK in efforts to conduct IRCT [CONFIDENTIAL TREATMENT
         REQUESTED] and shall not otherwise facilitate or assist any Third Party
         to conduct IRCT [CONFIDENTIAL TREATMENT REQUESTED] by providing rights
         to, either through license or any agreement to forgo enforcement of,
         deCODE Patents or deCODE Prior Know-How. This Agreement does not
         prohibit deCODE from (i) conducting IRCT [CONFIDENTIAL TREATMENT
         REQUESTED]; or (ii) conducting clinical trials [CONFIDENTIAL TREATMENT
         REQUESTED]. In the event that MERCK and deCODE begin an IRCT with a
         Selected Compound in a Non-exclusive Disease Area, deCODE shall not
         commence any IRCT with [CONFIDENTIAL TREATMENT REQUESTED].

         (b) Beginning after the first anniversary of the Effective Date, if
         during any [**] period the Parties do not commence or continue an IRCT
         in any one of the Exclusive Disease Areas, and if during such two-year
         period the Operating Committee neither plans nor conducts at least five
         concurrent IRCT's during at least [**] of such [**] period, then such
         specific Disease Area shall thereafter become a Non-Exclusive Disease
         Area for all purposes under this Agreement. Notwithstanding the
         preceding sentence, the Parties may agree to create exceptions to, or
         the tolling of, the foregoing for special circumstances.

2.11     EXCHANGE OF INFORMATION

         During the Research Term, deCODE promptly shall disclose on an ongoing
         basis to MERCK in English and in writing all deCODE Know-How. MERCK
         shall promptly disclose to deCODE during the Research Program Term all
         MERCK Know-How.

2.12     USE OF HUMAN MATERIALS

         With respect to any human cell lines, tissue, human clinical isolates
         or similar human-derived materials that have been or are to be
         collected and/or used in the Research Program ("Human Materials"), each
         Party represents and warrants (i) that it has complied, or shall
         comply, with all applicable laws, guidelines and regulations relating
         to the collection and/or use of the Human Materials and (ii) that it
         has obtained, or shall obtain, all necessary approvals and appropriate
         informed consents, in writing, for the collection and/or use of such
         Human Materials. deCODE shall provide documentation of such approvals
         and consents upon MERCK's request. Each Party further represents and
         warrants that such Human Materials may be used as contemplated in this
         Agreement without any obligations to the individuals or entities
         ("Providers") who contributed the Human Materials, including, without
         limitation, any obligations of compensation to such Providers or any
         other Third Party for the intellectual property associated with, or
         commercial use of, the Human Materials for any purposes.

2.13     PHARMACOGENOMICS TESTS.

         (a) TESTS FOR USE IN CLINICAL TRIALS. MERCK shall have the sole and
         exclusive right to direct and control the development and
         commercialization of Tests for use with Selected Compounds. deCODE
         shall have the first right to perform the work needed to develop such
         Tests for use in the

                                        4


         conduct of IRCT's under this Agreement as set forth below. MERCK shall
         identify and prioritize the Tests it wishes to have developed and Merck
         shall have the right to solicit bids from Third Parties including
         deadlines for the achievement of defined events in the development of
         such Tests ("Test Milestones"). Prior to accepting any specific bid
         from a Third Party, MERCK shall inform deCODE about the bid by
         providing deCODE with a written notice including sufficient information
         about the Test Milestones in the Third Party bid. deCODE shall have
         thirty days from MERCK's notice to agree to the Test Milestones set
         forth in the Third Party bid for a particular Test or MERCK may enter
         into an agreement for the development of that Test with the Third
         Party.

         (b) TESTS FOR USE WITH MARKETED COMPOUNDS. In the event that MERCK
         desires to have developed and marketed a Test for use with a Product,
         MERCK shall have the right to solicit bids including Test Milestones
         from Third Parties. If a Test has not been previously developed under
         Section 2.13(a) for the IRCT Compound in the Product by a Third Party,
         then prior to accepting any specific bid from a Third Party, MERCK
         shall inform deCODE about the bid by providing deCODE with a written
         notice including sufficient information about the Test Milestones in
         the Third Party bid. deCODE shall have thirty days from MERCK's notice
         to agree to the Test Milestones set forth in the Third Party bid for a
         particular Test or MERCK may enter into an agreement for the
         development of that Test with the Third Party.

         (c) REVERSION OF RIGHTS TO TEST DEVELOPMENT. In the event that deCODE
         exercises its rights under either Section 2.13 (a) or 2.13 (b) to
         develop a Test and deCODE at any time fails to achieve a Test
         Milestone, then the Parties shall meet within [**] to discuss the
         reasons for failure to achieve the Test Milestone and any proposals for
         revised Test Milestones provided, however, MERCK shall have the right
         in its sole discretion to continue on in the development of such Test
         either with deCODE, by itself or to enter into an agreement with a
         Third Party for such Test. deCODE shall cooperate with MERCK in
         providing reasonable assistance necessary to insure a rapid and
         efficient transfer of technology related to the Test to allow the
         continued development of the Test by MERCK or its contractor.

         (d) RETAINED RIGHTS. MERCK's rights to develop pharmacogenomic tests
         set forth in this Section 2.13 and Article 3 are limited to Tests and
         no license under Article 3 shall be construed to grant to MERCK or any
         sublicensee any rights under deCODE Patents, deCODE Generalized
         Technology, deCODE Collaboration Patents, deCODE Know-How, deCODE
         Genomics Data with respect to research and development of
         pharmacogenomic tests or diagnostics generally.

3.       LICENSE; EXCHANGE OF INFORMATION; DEVELOPMENT AND COMMERCIALIZATION

3.1      LICENSE GRANT

         (a)     COMMERCIALIZATION GRANTS. deCODE hereby grants to MERCK an
                 exclusive license in the Territory under deCODE Collaboration
                 Patents, Joint Collaboration Patents, and deCODE Know-How, with
                 a right to sublicense (i) to make, have made, use, offer to
                 sell, sell or import IRCT Compound and Product(s) and related
                 Tests and (ii) to practice any other invention claimed in the
                 foregoing patents solely with IRCT Compounds and Products or
                 use any licensed Know-How solely with IRCT Compounds and
                 Products and related Tests.

         (b)     COMPOUND DEVELOPMENT GRANTS.

                                        4


                 (i)   deCODE hereby grants to MERCK an exclusive license in the
                       Territory under deCODE Collaboration Patents, Joint
                       Collaboration Patents and deCODE Know-How with a right to
                       sublicense for the development of compounds Controlled by
                       MERCK and related Tests in the Therapeutic Field for (1)
                       Disease Areas and (2) Associated Information.

                 (ii)  deCODE hereby grants to MERCK an non-exclusive license in
                       the Territory under deCODE Prior Know-How and deCODE
                       Patents with a right to sublicense for the development of
                       compounds Controlled by MERCK and related Tests in the
                       Therapeutic Field for (1) Disease Areas and (2)
                       Associated Information.

                 (iii) Subject to Section 3.1 (d), upon expiration or
                       termination of the Research Program under Section 2.9,
                       the licenses granted in this Section 3.1(b)(ii) under the
                       deCODE Collaboration Patents, Joint Collaboration
                       Patents, and deCODE Know-How, shall become non-exclusive.

         (c)     MUTUAL COVENANTS. Subject to Section 3.1(d), each Party
                 covenants that for the Research Program Term neither it nor its
                 Affiliates shall practice any invention covered by the deCODE
                 Collaboration Patents, the MERCK Collaboration Patents and the
                 Joint Collaboration Patents nor will it or its Affiliates use
                 deCODE Know-How or MERCK Know-How for any purposes other than
                 in furtherance of the Research Program. The covenants made in
                 this Section 3.1(c) are intended to include each Party's
                 promise not to use its Collaboration Patents or its Know-How
                 for purposes other than the Research Program and in the case of
                 MERCK additionally to include a right to develop and market
                 Products.

         (d)     MERCK OPTION - INTELLECTUAL PROPERTY.

                 At any time but no later then the expiration or termination of
                 the Research Program under Section 2.9, MERCK may (1) retain
                 exclusive rights granted in Section 3.1(b)(i) and (2) deCODE
                 will release MERCK from its covenant under Section 3.1 (c) by
                 payment of an exclusive license fee of [CONFIDENTIAL TREATMENT
                 REQUESTED] for which MERCK elects to retain exclusivity. MERCK
                 may exercise this option by providing notice and payment to
                 deCODE at any time prior to or concurrently with the expiration
                 or termination of the Research Program. Upon payment of the
                 Exclusive License Fee, deCODE hereby releases MERCK from the
                 covenant made in Section 3.1 (c) with respect to the Elected
                 Disease.

         (e)     MERCK OPTION - DECODE COMPOUNDS.

                 (i)   RIGHTS GRANTED. In the Non-exclusive Disease Areas deCODE
                       may research and develop deCODE Compounds. During the
                       Research Term, for each deCODE Compound in a
                       Non-exclusive Disease Area that deCODE Controls, deCODE
                       grants to MERCK an exclusive option to negotiate for an
                       exclusive license to that deCODE Compound in the
                       Territory ("MERCK Compound Option"), subject only to any
                       conflicting or superceding rights of Third Parties with
                       respect to that deCODE Compound that were granted prior
                       to the Effective Date or as a condition of deCODE
                       obtaining rights to such deCODE Compound. As to deCODE
                       Compounds in a Non-Exclusive Disease Area that are not
                       subject to conflicting or superceding rights of Third
                       Parties, deCODE agrees it will not engage in any
                       discussions with a Third Party for commercial rights of
                       any kind to

                                        4


                       a deCODE Compound before first offering such rights to
                       MERCK as set forth in the succeeding provisions of this
                       Section 3 1(e).

                 (ii)  deCODE NOTICE. From time to time and prior to discussions
                       with any Third Party concerning the sale, licensing or
                       commercial relationship involving a deCODE Compound, at
                       deCODE's sole discretion it may provide MERCK with notice
                       that it intends to license rights to commercialize a
                       deCODE Compound("deCODE Notice"). The deCODE Notice shall
                       contain a commercially reasonable offer in writing
                       containing the financial terms under which deCODE is
                       willing to license the deCODE Compound to MERCK and will
                       include relevant information about the deCODE Compound
                       including but not limited to any chemical, biological and
                       clinical data. deCODE will provide MERCK an opportunity
                       to review any and all relevant information about the
                       deCODE Compound including but not limited to the
                       foregoing chemical, biological and clinical data.

                 (iii) CONDITIONS TO OPTION EXERCISE; OPTION TERM. The MERCK
                       Compound Option may be exercised at any time but no later
                       then the earlier of [**] after the deCODE Notice or the
                       end of the Term. MERCK may exercise the MERCK Compound
                       Option by sending written notice ("MERCK Exercise
                       Notice") to deCODE that MERCK wishes to engage in
                       negotiations for an exclusive license to the deCODE
                       Compound. MERCK shall have [**] to negotiate in good
                       faith principal business terms to be enumerated in a
                       non-binding term sheet and [**] thereafter ("Negotiation
                       Period") to negotiate in good faith and execute a
                       definitive agreement for an exclusive license to the
                       deCODE Compound in the Territory, which may be extended
                       by the Parties on mutual consent.

                 (iv)  OPTION LAPSE AND REVIVAL. In the event that the Parties
                       fail to reach agreement on the terms and conditions of an
                       exclusive license during the Negotiation Period, deCODE
                       shall have the right to negotiate with Third Parties for
                       rights to that deCODE Compound; PROVIDED, HOWEVER, that
                       if deCODE has not licensed rights to that deCODE Compound
                       within [**] after the end of the Negotiation Period, and
                       if the Term has not yet expired or been terminated,
                       deCODE grants to MERCK another MERCK Compound Option for
                       that deCODE Compound exercisable in accordance with
                       Sections 3.1(e) et seq.

         (f)     deCODE LICENSES.

                 (i)   During the Research Program, MERCK grants to deCODE a
                       non-exclusive license under MERCK Collaboration Patents,
                       MERCK Know-How, MERCK Prior Know-How and MERCK Patents
                       solely to perform its obligations under the Research
                       Program.

                 (ii)  In the event the Research Program expires or terminates
                       and (1) MERCK has not made at least one payment under
                       Section 3.1(d)(i) or (2) a Change of Control pursuant to
                       which a Competitor obtains Control of deCODE has not
                       occurred, MERCK grants to deCODE a non-exclusive,
                       royalty-free license to practice any and all inventions
                       covered by MERCK Collaboration Patents.

                                        4


3.2      NON-EXCLUSIVE LICENSE GRANT

         In the event the making, having made, use, offer for sale, sale or
         import by MERCK, its Affiliates or permitted sublicensees of IRCT
         Compound(s), Test(s) or Product(s) would infringe during the term of
         this Agreement a claim of issued letters patent which deCODE owns or
         has the rights to license and which patents are not covered by the
         grant in Section 3.1, deCODE hereby grants to MERCK, to the extent
         deCODE is legally able to do so, a non-exclusive, sublicensable,
         royalty-free license in the Territory under such issued letters patent
         solely for MERCK to develop, make, have made, use, sell, offer for sale
         or import IRCT Compound(s), Test(s) and Product(s) in the Territory.

3.3      NO IMPLIED LICENSES.

         The Parties do not intend to grant rights under patents or know-how
         except as expressly set forth herein and the grant of rights herein
         does not imply a grant of rights to patents and know-how Controlled by
         a Party that may be necessary to practice the full scope of any right
         granted herein. Except as otherwise expressly qualified herein all
         exclusive licenses granted herein are exclusive even as to the grantor
         and no implied rights are retained.

3.4      DEVELOPMENT AND COMMERCIALIZATION.

         MERCK shall use reasonable efforts, consistent with the usual practice
         followed by MERCK in pursuing the commercialization and marketing of
         its other pharmaceutical products of a similar commercial value, at its
         own expense, to develop and commercialize a Product or Test on a
         commercially reasonable basis in such countries in the Territory where
         in MERCK's opinion it is commercially viable to do so.

3.5      EXCUSED PERFORMANCE.

         In addition to the provisions of Article 7 hereof, the obligation of
         MERCK with respect to any Product or Test under Section 3.4 are
         expressly conditioned upon the continuing absence of any adverse
         condition or event relating to the safety or efficacy of the Product or
         Test, and the obligation of MERCK to develop or market any such Product
         or Test shall be delayed or suspended so long as in MERCK's opinion any
         such condition or event exists.

3.6      RIGHT OF FIRST NEGOTIATION.

         In the event that MERCK determines that neither it nor its Affiliates
         will commercialize an IRCT Compound and in its sole discretion
         determines that it will license the commercial rights to a Third Party,
         it shall notify deCODE of such decision and shall negotiate exclusively
         with deCODE in good faith on the terms and conditions on which it is
         willing to license commercial rights to such IRCT Compound for a period
         of [**]. In the event that deCODE does not agree upon principal
         business terms to be enumerated in a non-binding term sheet within [**]
         or the Parties do not execute a definitive agreement on such terms and
         conditions within [**] thereafter, MERCK shall have the right to
         negotiate with Third Parties for the commercial rights to that IRCT
         Compound; PROVIDED, HOWEVER, that if MERCK has not licensed commercial
         rights to such IRCT Compound to a Third Party within [**] after the end
         of the [**] period and if the Term has

                                        4


         not yet expired or been terminated, MERCK grants to deCODE another
         right of first negotiation exercisable in accordance with this Section
         3.6. In connection with the rights granted under this Section 3.6,
         MERCK will provide deCODE with reasonable opportunity to review any and
         all relevant information about the IRCT Compound including but not
         limited to chemical, biological and clinical data. deCODE's rights
         under this Section 3.6 shall be subject only to any conflicting or
         superceding rights of Third Parties with respect to a particular IRCT
         Compound that were granted prior to the compound's selection under
         Section 2.4.

4.       CONFIDENTIALITY AND PUBLICATION

4.1      NONDISCLOSURE OBLIGATION.

         All Information disclosed by one Party to the other Party hereunder
         shall be maintained in confidence by the receiving Party and shall not
         be disclosed to non-Party or used for any purpose except as set forth
         herein without the prior written consent of the disclosing Party,
         except to the extent that such Information:

         (a)     is known by receiving Party at the time of its receipt, and not
                 through a prior disclosure by the disclosing Party, as
                 documented by the receiving Party's business records;

         (b)     is properly in the public domain;

         (c)     is subsequently disclosed to the receiving Party by a Third
                 Party who may lawfully do so and is not under an obligation of
                 confidentiality to the disclosing Party;

         (d)     is developed by the receiving Party independently of
                 Information received from the disclosing Party, as documented
                 by the receiving Party's business records;

         (e)     is disclosed to governmental or other regulatory agencies in
                 order to obtain patents or to gain or maintain approval to
                 conduct clinical trials or to market Product or Tests, but such
                 disclosure may be only to the extent reasonably necessary to
                 obtain patents or authorizations.

         Any combination of features or disclosures shall not be deemed to fall
         within the foregoing exclusions merely because individual features are
         published or available to the general public or in the rightful
         possession of the receiving Party unless the combination itself and
         principle of operation are published or available to the general public
         or in the rightful possession of the receiving party.

4.1.2    Notwithstanding the obligations of confidentiality and prohibitions on
         use, it shall not be a breach of a Party's obligations under this
         Section 4.1 to disclose Proprietary Information:

         (a)     to Third Parties under confidentiality provisions at least as
         stringent as those in this Agreement, for consulting, manufacturing
         development, manufacturing, external testing, marketing trials and to
         Third Parties who are sublicensees or other development/marketing
         partners of the Parties with respect to any of the subject matter of
         this Agreement; or

         (b)     in compliance with applicable laws or regulations (including
         the disclosure requirements of the U.S. Securities and Exchange
         Commission, NASDAQ or any stock exchange on which securities issued by
         such Party or its Affiliates are traded) or order by a court or other
         regulatory

                                        4


         body having competent jurisdiction; provided that if a Party is so
         required to disclose Information that is subject to the non-disclosure
         provisions of this Section 4.1 or 4.2, such Party shall promptly inform
         the other Party of the disclosure that is being sought in order to
         provide the other Party an opportunity to challenge or limit the
         disclosure obligations except where impracticable for necessary
         disclosures (for example, to physicians conducting studies or to health
         authorities). Information that is disclosed by judicial or
         administrative process shall remain otherwise subject to the
         confidentiality and non-use provisions of this Section 4.1 and Section
         4.2, and the Party disclosing Information pursuant to law or court
         order shall take all steps reasonably necessary, including without
         limitation obtaining an order of confidentiality, to ensure the
         continued confidential treatment of such Information.

4.2      deCODE KNOW-HOW.

         deCODE agrees to use its best efforts to keep all deCODE Know-How and
         deCODE Prior Know-How confidential except as may be agreed by the
         Parties under Section 4.3. deCODE agrees that to the extent deCODE
         Prior Know-how will be disclosed to Third Parties for use outside of
         the Disease Areas that such disclosure to a Third Party will be subject
         to obligations of non-disclosure similar to those in Section 4.1 above.

4.3      PUBLICATION.

         MERCK and deCODE each acknowledge the other Party's interest in
         publishing the results of its research in order to obtain recognition
         within the scientific community and to advance the state of scientific
         knowledge. Each Party also recognizes the mutual interest in obtaining
         valid patent protection and in protecting business interests and trade
         secret information. Consequently, except for disclosures permitted
         pursuant to Section 4.1, either Party, its employees or consultants
         wishing to make a publication shall deliver to the other Party a copy
         of the proposed written publication or an outline of an oral disclosure
         at least sixty (60) days prior to submission for publication or
         presentation. The reviewing Party shall have the right (a) to propose
         modifications to the publication or presentation for patent reasons,
         trade secret reasons or business reasons or (b) to request a reasonable
         delay in publication or presentation in order to protect patentable
         information. If the reviewing Party requests a delay, the publishing
         Party shall delay submission or presentation for a period of ninety
         (90) days to enable patent applications protecting each Party's rights
         in such information to be filed in accordance with Article 7 below.
         Upon expiration of such ninety (90) days, the publishing Party shall be
         free to proceed with the publication or presentation. If the reviewing
         Party requests modifications to the publication or presentation, the
         publishing Party shall edit such publication to prevent disclosure of
         trade secret or proprietary business information prior to submission of
         the publication or presentation.

4.4      PUBLICITY/USE OF NAMES.

         No disclosure of the existence of, or the terms of, this Agreement may
         be made by either Party, and no Party shall use the name, trademark,
         trade name or logo of the other Party or its employees in any
         publicity, news release or disclosure relating to this Agreement or its
         subject matter, without the prior express written permission of the
         other Party. Nothing in this Agreement shall prevent either Party from
         issuing statements that such Party determines to be necessary to comply
         with applicable law (including the disclosure requirements of the U.S.
         Securities and Exchange Commission, NASDAQ or any other stock exchange
         on which securities issued by such Party are traded); provided,
         HOWEVER, that, the disclosing Party shall provide the other Party with
         a copy of

                                        4


         the proposed text of such statements sufficiently in advance of the
         scheduled release thereof to afford such other Party a reasonable
         opportunity to review and comment upon the proposed text and the
         disclosing Party shall take all reasonable steps to limit such
         disclosure solely to fulfill its legal obligations.

4.5      IMPROPER DISCLOSURES.

         In the event that either Party discloses Information other than in
         accordance with Sections 4.3 and 4.4, the non-breaching Party shall
         have the right to seek compensation from the breaching Party in
         addition to and not in place of any other non-monetary remedies
         available for such breach of Sections 4.3 and 4.4. Entitlement to
         compensation and the amount of the compensation shall be submitted to
         dispute resolution in accordance with Section 10.6.

5.       PAYMENTS; ROYALTIES AND REPORTS

5.1      RESEARCH PROGRAM FUNDING

         (a) PARTY CONTRIBUTIONS. As set forth herein each Party has an ongoing
         financial obligation to support the Research Program. Neither Party
         shall be obligated to provide a higher level of support than agreed
         upon in the Budget for any Calendar Year. In accordance with the Budget
         and with funding process set out in Schedule 5.1, MERCK shall be
         responsible for [**] of the operational expenses of the Research
         Program and deCODE shall be responsible for [**] of the operational
         expenses. These shared operational expenses shall be limited solely to
         [CONFIDENTIAL TREATMENT REQUESTED], as reflected in Schedule 5.1, and
         the Parties contemplate that deCODE shall provide approximately
         [CONFIDENTIAL TREATMENT REQUESTED] provided by MERCK. Without its
         consent, deCODE shall not be obligated to share responsibility for
         operational expenses that result from aggregate [CONFIDENTIAL TREATMENT
         REQUESTED]. Subject to the methodology set forth in Schedule 5.1, such
         other methodologies as the Operating Committee may expressly approve
         and in accordance with the Budget, operational expenses incurred by
         either Party shall be determined in accordance with that Party's
         regular accounting methods, consistently applied.

         (b) BUDGET PREPARATION. The estimated expenditures for that portion of
         the first Calendar Year beginning on the Effective Date and ending on
         December 31st shall be set forth in the Budget which will be attached
         hereto as Schedule 2.6 following its preparation by the Operating
         Committee and approval by the Executive Committee. By the initial
         September 15th following the Effective Date of the Agreement and for
         each subsequent September 15th, the Operating Committee shall prepare a
         Budget for the upcoming Calendar Year for approval by the Executive
         Committee.

         (c) RESEARCH PAYMENTS. MERCK shall pay to deCODE, in advance on a
         quarterly basis at the beginning of each Calendar Quarter its estimated
         MERCK Share for that Calendar Quarter. The initial payment shall be
         made within thirty days of approval of the initial Budget by the
         Executive Committee. Within sixty (60) days following the end of a
         Calendar Quarter, the Parties shall meet and determine actual
         expenditures in employee time and expenses properly attributable to the
         Research Program for that Calendar Quarter. The combined total of
         expenditures shall be the Research Program Expenditures for that
         Calendar Quarter. The MERCK Share shall be determined in accordance
         with Schedule 5.1 and the Parties shall reconcile the

                                        4


         differences between contribution obligations and expenditures by
         payment of the appropriate amount of money from one Party to the other
         Party in accordance with Schedule 5.1.

         (d) ANCILLARY PAYMENTS BY MERCK. Certain expenditures directly
         associated with the conduct of the IRCT in accordance with Section 2.3
         shall be borne solely by MERCK and shall not be considered part of the
         Research Program funding subject to the defined contributions of the
         Parties. These expenditures shall include [**] and only those costs of
         a similar nature agreed to in writing by the parties.

         (e) PAYMENT FOR ABANDONED IRCT COMPOUNDS. If MERCK in its sole
         discretion for reasons other than safety or efficacy elects to abandon
         development of an IRCT Compound, and provided that (i) MERCK has
         elected not to offer commercialization rights to deCODE pursuant to
         Section 3.6, and (ii) there is or will be no Product in the same
         Disease Area as the abandoned IRCT Compound for which deCODE has
         received or may receive payments under either Section 5.3 or 5.4, THEN
         MERCK shall be obligated to pay deCODE [**] of its costs and expenses
         incurred to provide the FTEs dedicated to the development of that IRCT
         Compound under the Research Program PROVIDED, HOWEVER, that MERCK shall
         not be obligated to pay deCODE until the later of the end of the
         Research Program Term including any Extended Research Program Term or
         the date on which no other IRCT Compounds in the same Disease Area as
         the abandoned IRCT Compound are being developed by MERCK.

5.2      CONSIDERATION FOR LICENSE

         In partial consideration for the licenses granted herein under the
         Patent Rights and deCODE Know-How, upon the terms and conditions
         contained herein, MERCK shall pay to deCODE a total of [**] dollars as
         a non-refundable exclusivity license and technology access signature
         fee for all of the diseases within the Disease Area within thirty (30)
         days of the Effective Date. This payment is comprised of [**] dollars.

         If deCODE rejects the initial [**] MERCK nominated compounds from
         [CONFIDENTIAL TREATMENT REQUESTED] for an Information Rich Clinical
         Trial pursuant to Section 2.4, THEN at any time prior to deCODE's
         acceptance of a subsequent MERCK nominated compound in the
         [CONFIDENTIAL TREATMENT REQUESTED], MERCK may demand by written notice
         to deCODE the payment of [**] dollars. deCODE shall make such payment
         to MERCK within thirty (30) days of the notice. Effective when MERCK
         gives such notice, this Agreement shall be deemed terminated with
         respect to such Non-Exclusive Disease Areas, after which time neither
         MERCK nor deCODE shall have further rights or obligations with respect
         to the conduct of the Research Program in such Non-Exclusive Disease
         Area under Section 2, and all licenses, options and other rights
         granted to either Party under Section 3 with respect to such
         Non-Exclusive Disease Area shall terminate.

5.3      MILESTONE PAYMENTS

         Subject to the terms and conditions in this Agreement, MERCK shall pay
to deCODE the following milestone payments:

         (a)     MERCK will pay a milestone of [CONFIDENTIAL TREATMENT
                 REQUESTED].

         (b)     MERCK will pay a milestone of [CONFIDENTIAL TREATMENT
                 REQUESTED].

                                        4


                                        4


         MERCK shall notify deCODE in writing within thirty (30) days upon the
         achievement of the milestone for each Product or Test, and shall make
         the appropriate milestone payment within thirty (30) days of the
         achievement of such milestone. The milestone payment shall be payable
         only upon the [**] achievement of such milestone for any Test or
         Product containing a unique IRCT Compound and no amounts shall be due
         hereunder for [**] achievement of such milestone with other Tests or
         Products containing that IRCT Compound. No milestone payment shall be
         due under 5.3 (a) for any Product containing a Related IRCT Compound if
         a milestone under Section 5.3(a) has been paid for a Product containing
         an IRCT Compound that the Related IRCT Compound was derived from or
         that the Related IRCT Compound is [CONFIDENTIAL TREATMENT REQUESTED]
         unless the Product also contains an IRCT Compound that would otherwise
         qualify for the milestone under this Section 5.3. In the event that
         MERCK makes a payment under Section 5.3(a) for a Product containing a
         Related IRCT Compound, it shall have no further obligation to make
         milestone payments under Section 5.3(a) for (i) any other Product
         containing that Related IRCT Compound; (ii) the IRCT Compound that it
         is a [CONFIDENTIAL TREATMENT REQUESTED] of under Section 1.60(a); or
         (iii) any other compound that is a Related IRCT Compound because it is
         a [CONFIDENTIAL TREATMENT REQUESTED] of the IRCT Compound of (ii).

5.4      ROYALTIES

5.4.1    ROYALTIES PAYABLE BY MERCK.

         (a) Subject to the terms and conditions of this Agreement, MERCK shall
         pay to deCODE royalties on a country-by-country basis in an amount
         equal to:

         (i) MERCK will pay a royalty of [**] to deCODE on MERCK's Net Sales of
         Product.

         (ii)    In the event there is no Valid Patent Claim of a MERCK Compound
         Patent in a country, the royalty due for Net Sales in that country
         shall be [**] percent of those royalty rates set forth in Section 5.4.1
         (a)(i).

         (iii)   Royalties on each Product at the rate set forth above shall be
         effective as of the date of First Commercial Sale of Product in a
         country and shall continue until the later of (A) the expiration of the
         last Valid Patent Claim of a MERCK Compound Patent in that country or
         (B) until the tenth (10th) anniversary of the First Commercial Sale in
         such country, subject to the following conditions:

                 (1)   that only one royalty shall be due with respect to the
                 same unit of Product;

                 (2)   that no royalties shall be due upon the sale or other
                 transfer among MERCK or its Affiliates or sublicensees, but in
                 such cases the royalty shall be due and calculated upon MERCK's
                 or its Affiliate's or sublicensee's Net Sales to the first
                 independent Third Party; and

                 (3)   no royalties shall accrue on the disposition of Product
                 in reasonable quantities by MERCK or its Related Parties as
                 samples (promotion or otherwise) or as donations (for example,
                 to non-profit institutions or government agencies for a
                 non-commercial purpose).

         (b)     Subject to the terms and conditions of this Agreement, MERCK
                 shall pay to deCODE royalties on a Test-by-Test and a
                 country-by-country basis of [**] of MERCK's Net Sales of Tests.

                                        4


5.4.2    CHANGE IN SALES PRACTICES.

         The Parties acknowledge that during the term of this Agreement, MERCK's
         sales practices for the marketing and distribution of Product or Tests
         may change to the extent to which the calculation of the payment for
         royalties on Net Sales may become impractical or even impossible. In
         such event the Parties agree to meet and discuss in good faith new ways
         of compensating deCODE to the extent currently contemplated under
         Section 5.4.1.

5.4.3    ROYALTIES FOR BULK COMPOUND.

         In those cases where MERCK sells bulk IRCT Compound or Related IRCT
         Compound rather than Product in packaged form to an independent Third
         Party, the royalty obligations of this Section 5.4 shall be applicable
         to the bulk IRCT Compound or Related IRCT Compound.

5.4.4    COMPETITIVE PRODUCT.

         In the event a Competitive Product is sold in a country, then the
         royalty term set out in Section 5.4.1.(a)(iii) for the corresponding
         Product shall be [**] from First Commercial Sale without regard to the
         existence of a Valid Patent Claim and royalties shall be reduced in
         accordance Section 5.4.1(a)(ii) .

5.5      REPORTS; PAYMENT OF ROYALTY

         During the term of the Agreement following the First Commercial Sale of
         a Product or Test, MERCK shall furnish to deCODE a quarterly written
         report for the Calendar Quarter showing the Net Sales of all Products
         or Tests subject to royalty payments sold by MERCK and its Related
         Parties in the Territory during the reporting period and the royalties
         payable under this Agreement. Reports shall be due on the sixtieth (60)
         day following the close of each Calendar Quarter. Royalties shown to
         have accrued by each royalty report shall be due and payable on the
         date such royally report is due. MERCK shall keep complete and accurate
         records in sufficient detail to enable the royalties payable hereunder
         to be determined.

5.6.     AUDITS

5.6.1    Upon the written request of deCODE and not more than once in each
         Calendar Year, MERCK shall permit an independent certified public
         accounting firm of nationally recognized standing selected by deCODE
         and reasonably acceptable to MERCK, at deCODE's expense, to have access
         during normal business hours to such of the records of MERCK as may be
         reasonably necessary to verify the accuracy of the royalty reports
         hereunder for any year ending not more than twenty-four (24) months
         prior to the date of such request. The accounting firm shall disclose
         to deCODE only whether the royalty reports are correct or incorrect and
         the specific details concerning any discrepancies. No other information
         shall be provided to deCODE.

5.6.2    If such accounting firm correctly identifies a discrepancy made during
         such period, the appropriate Party shall pay the other Party the amount
         of the discrepancy within thirty (30) days of the date deCODE delivers
         to MERCK such accounting firm's written report so correctly concluding,
         or as otherwise agreed upon by the Parties. The fees charged by such
         accounting firm shall be paid by deCODE, PROVIDED, HOWEVER, if the
         payments made or payable were at least

                                        4


         [**] dollars below and less than [**] of the amount that should have
         been paid during the period in question, MERCK shall also reimburse
         deCODE for the reasonable costs of such audit.

5.6.3    MERCK shall include in each sublicense granted by it pursuant to this
         Agreement a provision requiring the sublicensee to make reports to
         MERCK, to keep and maintain records of sales made pursuant to such
         sublicense and to grant access to such records by deCODE's independent
         accountant to the same extent required of MERCK under this Agreement.
         Upon the expiration of twenty-four (24) months following the end of any
         year, the calculation of royalties payable with respect to such year
         shall be binding and conclusive upon deCODE, and MERCK and its
         sublicensees shall be released from any liability or accountability
         with respect to royalties for such year.

5.6.4    Upon the expiration of twenty-four (24) months following the end of any
         year, the calculation of royalties payable with respect to such year
         shall be binding and conclusive upon deCODE, and MERCK and its Related
         Parties shall be released from any liability or accountability with
         respect to royalties for such year.

5.6.5    deCODE shall treat all financial information subject to review under
         this Section 5.6 or under any sublicense agreement in accordance with
         the confidentiality and non-use provisions of this Agreement, and shall
         cause its accounting firm to enter into an acceptable confidentiality
         agreement with MERCK and/or its Related Parties obligating it to retain
         all such information in confidence pursuant to such confidentiality
         agreement.

5.7      PAYMENT EXCHANGE RATE

         All payments to be made by MERCK to deCODE under this Agreement shall
         be made in United States dollars and may be paid by check made to the
         order of deCODE or bank wire transfer in immediately available funds to
         such bank account in the United States designated in writing by deCODE
         from time to time. In the case of sales outside the United States, the
         rate of exchange to be used in computing the amount of currency
         equivalent in United States dollars due deCODE shall be made at the
         rate of exchange and on the periodic schedule used by MERCK for its own
         financial reporting purposes at such time.

5.8      INCOME TAX WITHHOLDING

         If laws, rules or regulations require withholding of income taxes or
         other taxes imposed upon payments set forth in this Article 5, MERCK
         shall make such withholding payments as required and subtract such
         withholding payments from the payments set forth in this Article 5.
         MERCK promptly shall notify deCODE of such withholding and shall submit
         appropriate proof of payment of the withholding taxes to deCODE within
         a reasonable period of time.

6.       REPRESENTATIONS AND WARRANTIES

6.1      REPRESENTATION AND WARRANTY

         (a)     deCODE represents and warrants to MERCK that as of the date of
                 this Agreement:

         (i)     it has the full right, power and authority to enter into this
                 Agreement, to perform the Research Program and to grant the
                 licenses granted under Article 3 hereof;

                                        4


         (ii)    it has not previously assigned, transferred, conveyed or
                 otherwise encumbered its right, title and interest in Patent
                 Rights, deCODE Know-How or deCODE Prior Know-How;

         (iii)   to the best of deCODE's knowledge, it is the sole and exclusive
                 owner of the Patent Rights and deCODE Know-How(excluding those
                 rights included in the foregoing on basis that deCODE has
                 Control solely through license rights from a Third Party), all
                 of which are (and shall be, in the case of deCODE Information
                 and Invention) free and clear of any liens, charges and
                 encumbrances, and no other person, corporate or other private
                 entity, or governmental entity or subdivision thereof, has or
                 shall have any claim of ownership whatsoever with respect to
                 the Patent Rights and deCODE Know-How;

         (iv)    there are no claims, judgments or settlements against or owed
                 by deCODE or pending or threatened claims or litigation
                 relating to the Patent Rights, deCODE Know-How and deCODE Prior
                 Know-How(excluding those rights included in the foregoing on
                 basis that deCODE has Control solely through license rights
                 from a Third Party); and

         (v)     deCODE has disclosed to MERCK all reasonably relevant
                 information regarding the Patent Rights and deCODE Know-How
                 licensed under this Agreement, including without limitation the
                 existence of any patent opinions obtained by deCODE related
                 thereto.

         (b) MERCK represents and warrants to deCODE that as of the date of this
         Agreement:

         (i)     it has the full right, power and authority to enter into this
                 Agreement, to perform the Research Program and to grant the
                 licenses granted under Article 3 hereof;

         (ii)    it has not previously assigned, transferred, conveyed or
                 otherwise encumbered its right, title and interest in MERCK
                 Patents, MERCK Collaboration Patents, Joint Collaboration
                 Patents, MERCK Know-How or MERCK Prior Know-How;

         (iii)   to the best of MERCK's knowledge, it is the sole and exclusive
                 owner of MERCK Patents, MERCK Collaboration Patents, MERCK
                 Know-How or MERCK Prior Know-How(excluding those rights
                 included in the foregoing on basis that MERCK has Control
                 solely through license rights from a Third Party), all of which
                 are (and shall be, in the case of MERCK Information and
                 Invention) free and clear of any liens, charges and
                 encumbrances, and no other person, corporate or other private
                 entity, or governmental entity or subdivision thereof, has or
                 shall have any claim of ownership whatsoever with respect to
                 MERCK Patents, MERCK Collaboration Patents, Joint Collaboration
                 Patents, MERCK Know-How or MERCK Prior Know-How;

         (iv)    there are no claims, judgments or settlements against or owed
                 by MERCK or pending or threatened claims or litigation relating
                 to the MERCK Patents, MERCK Collaboration Patents, Joint
                 Collaboration Patents, MERCK Know-How or MERCK Prior
                 Know-How(excluding those rights included in the foregoing on
                 basis that MERCK has Control solely through license rights from
                 a Third Party).

                                        4


7.       PATENT PROVISIONS

7.1      OWNERSHIP, FILING, PROSECUTION AND MAINTENANCE OF PATENTS

7.1.1    deCODE shall retain all right, title and interest in and to deCODE
         Generalized Technology, deCODE Genomics Data, deCODE Know-How, deCODE
         Prior Know-How, deCODE Collaboration Patents and deCODE Patents,
         subject to the licenses granted to MERCK pursuant to Section 3.1.

7.1.2    MERCK shall retain all right, title and interest in and to the MERCK
         Know-How, MERCK Collaboration Patents and MERCK Patents, subject to the
         licenses granted to deCODE pursuant to Section 3.1.

7.1.3    Subject to the licenses granted hereunder:

         (i)     rights to deCODE Information and Inventions shall belong to
                 deCODE;

         (ii)    rights to MERCK Information and Inventions shall belong to
                 MERCK; and

         (iii)   rights to Joint Information and Inventions shall belong jointly
                 to deCODE and to MERCK.

         Except as expressly set forth in this Agreement, the Parties shall
         follow United States laws of inventorship, ownership, and patenting
         rights including a Party's ability to exploit joint inventions without
         accounting to each other.

7.1.4    deCODE agrees to file, prosecute and maintain in the Territory, upon
         appropriate consultation with MERCK, the Patent Rights licensed to
         MERCK under this Agreement; PROVIDED, HOWEVER, with respect to Joint
         Information and Inventions, MERCK shall have the first right to file
         patent applications for such Joint Information and Inventions. With
         respect to deCODE Information and Inventions, deCODE may elect not to
         file and if so MERCK shall have the right to file patent applications.
         In such event, deCODE shall execute such documents and perform such
         acts at deCODE's expense as may be reasonably necessary to effect an
         assignment of such Patent Rights to MERCK in a timely manner to allow
         MERCK to continue such prosecution or maintenance. In each case, the
         filing Party shall give the non-filing Party an opportunity to review
         the text of the application before filing, shall consult with the
         non-filing Party with respect thereto, and shall supply the non-filing
         Party with a copy of the application as filed, together with notice of
         its filing date and serial number. deCODE shall keep MERCK advised of
         the status of the actual and prospective patent filings and upon the
         request of MERCK, provide advance copies of any papers related to the
         filing, prosecution and maintenance of such patent filings. deCODE
         shall promptly give notice to MERCK of the grant, lapse, revocation,
         surrender, invalidation or abandonment of any Patent Rights licensed to
         MERCK for which deCODE is responsible for the filing, prosecution and
         maintenance. With respect to all filings hereunder, the filing Party
         shall be responsible for payment of all costs and expenses related to
         such filings, except with respect to filings related to Joint
         Collaboration Patents, the costs and expenses of which shall be borne
         equally by the Parties.

                                        4


         In the event that a Party elects not to contribute to the costs and
         expenses incurred in connection with a filing related to a Joint
         Collaboration Patent in any country, such Party shall be deemed to have
         abandoned its rights with respect to such Joint Collaboration Patent in
         such country.

7.2      OPTION OF MERCK TO PROSECUTE AND MAINTAIN PATENTS

         deCODE shall give notice to MERCK of any desire to cease prosecution
         and/or maintenance of Patent Rights on a country by country basis in
         the Territory and, in such case, shall permit MERCK, at its sole
         discretion, to continue prosecution or maintenance of such Patent
         Rights at its own expense. If MERCK elects to continue prosecution or
         maintenance or to file based on deCODE's election not to file pursuant
         to Section 7.1 above, deCODE shall execute such documents and perform
         such acts at deCODE's expense as may be reasonably necessary to effect
         an assignment of such Patent Rights to MERCK in a timely manner to
         allow MERCK to continue such prosecution or maintenance.

7.3      INTERFERENCE, OPPOSITION, REEXAMINATION AND REISSUE

         (a)     deCODE shall, within ten (10) days of learning of such event,
         inform MERCK of any request for, or filing or declaration of, any
         interference, opposition, or reexamination relating to Patent Rights.
         MERCK and deCODE shall thereafter consult and cooperate fully to
         determine a course of action with respect to any such proceeding. MERCK
         shall have the right to review and approve any submission to be made in
         connection with such proceeding.

         (b)     deCODE shall not initiate any reexamination, interference or
         reissue proceeding relating to Patent Rights without the prior written
         consent to MERCK, which consent shall not be unreasonably withheld.

         (c)     In connection with any interference, opposition, reissue, or
         reexamination proceeding relating to Patent Rights, MERCK and deCODE
         will cooperate fully and will provide each other with any information
         or assistance that either may reasonably request. deCODE shall keep
         MERCK informed of developments in any such action or proceeding,
         including, to the extent permissible by law, consultation and approval
         of any settlement, the status of any settlement negotiations and the
         terms of any offer related thereto.

         (d)     deCODE shall bear the expense of any interference, opposition,
         reexamination, or reissue proceeding relating to Patent Rights, except
         with respect to proceedings related to Joint Collaboration Patents, the
         costs and expenses of which shall be borne equally by the Parties. In
         the event that a Party elects not to contribute to the costs and
         expenses incurred in connection with a proceeding in a country related
         to a Joint Collaboration Patent, such Party shall be deemed to have
         abandoned its rights with respect to such Joint Collaboration Patent in
         that country.

7.4      ENFORCEMENT AND DEFENSE

         (a)     deCODE shall give MERCK notice of either (i) any infringement
         of Patent Rights, or (ii) any misappropriation or misuse of deCODE
         Know-How, that may come to deCODE's attention. MERCK and deCODE shall
         thereafter consult and cooperate fully to determine a course of action,
         including but not limited to the commencement of legal action by either
         or both MERCK and deCODE, to terminate any infringement of Patent
         Rights or any misappropriation or misuse

                                        4


         of deCODE Know-How. However, deCODE, upon notice to MERCK, shall have
         the first right to initiate and prosecute such legal action in the name
         of deCODE and MERCK, or to control the defense of any declaratory
         judgment action relating to Patent Rights or deCODE Know-How. deCODE
         shall promptly inform MERCK if it elects not to exercise such first
         right and MERCK shall thereafter have the right to either initiate and
         prosecute such action or to control the defense of such declaratory
         judgment action in the name of MERCK and, if necessary, deCODE. Each
         Party shall have the right to be represented by counsel of its own
         choice. The Party initiating a prosecution relating to Patent Rights
         shall bear the expense of such prosecution, except with respect to
         prosecutions related to Joint Collaboration Patents, the costs and
         expenses of which shall be borne equally by the Parties. In the event
         that a Party elects not to contribute to the costs and expenses
         incurred in connection with a prosecution related to a Joint
         Collaboration Patent in a country, such Party shall be deemed to have
         abandoned its rights with respect to such Joint Collaboration Patent in
         that country.

         (b)     In the event that deCODE elects not to initiate and prosecute
         an action as provided in paragraph (a), and MERCK elects to do so, the
         costs of any agreed-upon course of action to terminate infringement of
         Patent Rights or misappropriation or misuse of deCODE Know-How,
         including without limitation the costs of any legal action commenced or
         the defense of any declaratory judgment, shall be shared equally by
         deCODE and MERCK.

         (c)     For any action to terminate any infringement of Patent Rights
         or any misappropriation or misuse of deCODE Know-How, in the event that
         MERCK is unable to initiate or prosecute such action solely in its own
         name, deCODE will join such action voluntarily and will execute and
         cause its Affiliates to execute all documents necessary for MERCK to
         initiate litigation to prosecute and maintain such action. In
         connection with any action, MERCK and deCODE will cooperate fully and
         will provide each other with any information or assistance that either
         may reasonably request. Each Party shall keep the other informed of
         developments in any action or proceeding, including, to the extent
         permissible by law, the consultation and approval of any settlement
         negotiations and the terms of any offer related thereto.

         (d)     Any recovery obtained by either or both MERCK and deCODE in
         connection with or as a result of any action contemplated by this
         section, whether by settlement or otherwise, shall be shared in order
         as follows:

                 (i)   the Party which initiated and prosecuted the action shall
                       recoup all of its costs and expenses incurred in
                       connection with the action;

                 (ii)  the other Party shall then, to the extent possible,
                       recover its costs and expenses incurred in connection
                       with the action; and

                 (iii) the amount of any recovery remaining shall then be
                       allocated between the Parties on a PRO RATA basis taking
                       into consideration the relative economic losses suffered
                       by each Party. By way of example and not limitation,
                       MERCK may suffer lost profit from the loss of sales of
                       Product or Tests and deCODE may suffer lost royalty
                       income on the loss of sales.

         (e)     deCODE shall inform MERCK of any certification regarding any
         Patent Rights it has received pursuant to either 21 U.S.C. Sections
         355(b)(2)(A)(iv) or (j)(2)(A)(vii)(IV) or it successor provisions or
         any similar provisions in a country in the Territory other than the
         United States and shall provide MERCK with a copy of such certification
         within five (5) days of receipt. deCODE's and MERCK's rights with
         respect to the initiation and prosecution of any legal action as a
         result
                                        4


         of such certification or any recovery obtained as a result of such
         legal action shall be as defined in paragraphs 7.4(a)-(d) hereof;
         PROVIDED, HOWEVER, deCODE shall exercise its first right to initiate
         and prosecute any action and shall inform MERCK of such decision within
         ten (10) days of receipt of the certification, after which time MERCK
         shall have the right to initiate and prosecute such action.

7.5      PATENT TERM RESTORATION

         The Parties hereto shall cooperate with each other in obtaining patent
         term restoration or supplemental protection certificates or their
         equivalents in any country in the Territory where applicable to Patent
         Rights. In the event that elections with respect to obtaining such
         patent term restoration are to be made, MERCK shall have the right to
         make the election and deCODE agrees to abide by such election.

8.       TERM AND TERMINATION

8.1      TERM AND EXPIRATION.

         This Agreement shall be effective as of the Effective Date and unless
         terminated earlier pursuant to Sections 8.2 or 8.3 below, this
         Agreement shall continue in effect until expiration of all payment
         obligations hereunder. Upon expiration of this Agreement due to the
         expiration of all payment obligations, MERCK's licenses pursuant to
         Section 3.1 and 3.2 shall become fully paid-up, perpetual licenses.

8.2      TERMINATION BY A PARTY.

         Notwithstanding anything contained herein to the contrary, after the
         Research Program has ended or been terminated and if no IRCT Compounds
         are being sold as Products and no IRCT Compounds are in development,
         MERCK shall have the right to terminate this Agreement at any time in
         its sole discretion by giving ninety (90) days' advance written notice
         to deCODE. Not later than thirty (30) days after the date of such
         termination, each Party shall return or cause to be returned to the
         other Party all Information in tangible form received from the other
         party and all copies thereof, except that each party may retain one
         copy in its confidential files for records purposes. In the event of
         termination under this Section 8.2: (i) each Party shall pay all
         amounts then due and owing as of the termination date; and (ii) except
         for the surviving provisions set forth in Section 8.4 hereof, the
         rights and obligations of the parties hereunder shall terminate as of
         the date of such termination; PROVIDED, HOWEVER, that MERCK retain all
         licenses granted under Section 3.1 in the scope that existed
         immediately prior to termination.

8.3      TERMINATION FOR CAUSE

8.3.1    CAUSE FOR TERMINATION.

         This Agreement may be terminated at any time during the term of this
         Agreement upon written notice by either Party if the other Party is in
         breach of its material obligations hereunder by causes and reasons
         within its control and has not cured such breach within ninety (90)
         days after notice requesting cure of the breach; PROVIDED, HOWEVER, in
         the event of a good faith dispute with

                                        4


         respect to the existence of a material breach, the ninety (90) day cure
         period shall be tolled until such time as the dispute is resolved
         pursuant to Section 10.6 hereof.

8.3.2    EFFECT OF TERMINATION FOR CAUSE ON LICENSE.

         (a)     If MERCK terminates this Agreement under Section 8.3.1, MERCK's
         licenses pursuant to Sections 3.1 and 3.2 shall be subject only to
         MERCK's continuing obligations of compensation, reporting and
         confidentiality to deCODE under Sections 2.7.2(a), 4, 5.3 and 5.4 and
         otherwise may not be terminated nor circumscribed for any other reason.
         In addition, deCODE shall at MERCK's request promptly return or cause
         to be returned to MERCK all Products and Tests, IRCT Compounds, Related
         IRCT Compounds, Information in tangible form, and all substances or
         compositions delivered or provided by MERCK, as well as any other
         material provided by MERCK in any medium. If deCODE terminates this
         Agreement under Section 8.3.1, (1) if MERCK has not paid any Exclusive
         License Fees prior to termination then MERCK's licenses under Section
         3.1(b) and (d) become non-exclusive; (2) if MERCK pays an Exclusive
         License Fee at any time prior to the date of termination, then its
         license rights under Section 3.1 (b) and (d) to the corresponding
         Elected Disease become exclusive licenses; (3) MERCK's licenses under
         Section 3.1(a) survive any termination of the Agreement by deCODE and
         to the extent that any IRCT Compounds, Related IRCT Compounds, Tests or
         Products exist, subject to MERCK's continuing obligations of
         compensation, reporting and confidentiality to deCODE under Sections
         2.7.2, 4, 5.3 and 5.4.

         (b)     If this Agreement is rejected by or on behalf of deCODE under
         Section 365 of the United States Bankruptcy Code (the "Code"), all
         licenses and rights to licenses granted under or pursuant to this
         Agreement by deCODE to MERCK are, and shall otherwise be deemed to be,
         for purposes of Section 365(n) of the Code, licenses of rights to
         "intellectual property" as defined under Section 101(35A) of the Code.
         The Parties agree that MERCK, as a licensee of such rights under this
         Agreement, shall retain and may fully exercise all of its rights and
         elections under the Code, and that upon commencement of a bankruptcy
         proceeding by or against deCODE under the Code, MERCK shall be entitled
         to a complete duplicate of or complete access to (as MERCK deems
         appropriate), any such intellectual property and all embodiments of
         such intellectual property. Such intellectual property and all
         embodiments thereof shall be promptly delivered to MERCK (i) upon any
         such commencement of a bankruptcy proceeding upon written request
         therefore by MERCK, unless deCODE elects to continue to perform all of
         its obligations under this Agreement or (ii) if not delivered under (i)
         above, upon the rejection of this Agreement by or on behalf of deCODE
         upon written request therefore by MERCK. If the Agreement is rejected
         by or on behalf of deCODE under any provisions of bankruptcy or
         insolvency law of any other country, it is the Parties intent that the
         licenses of rights of intellectual property shall not be subject to
         termination and that MERCK shall be entitled to a complete duplicate of
         or complete access to (as MERCK deems appropriate), any such
         intellectual property and all embodiments of such intellectual property
         or to the maximum protections afforded to licensees under the
         applicable law.

         The foregoing provisions of Subsection 8.3.2(a) are without prejudice
         to any rights MERCK may have arising under the Code or other applicable
         law.

8.4      EFFECT OF EXPIRATION OR TERMINATION; SURVIVAL

         Expiration or termination of the Agreement shall not relieve the
         Parties of any obligation accruing prior to such expiration or
         termination. Any expiration or termination of this Agreement shall be

                                        4


         without prejudice to the rights of either Party against the other
         accrued or accruing under this Agreement prior to expiration or
         termination, including without limitation the obligation to pay
         royalties for Product(s), Tests, Related IRCT Compounds or IRCT
         Compound sold prior to such expiration termination. In the event this
         Agreement expires or is terminated during the pendency of an IRCT, the
         Parties shall arrange for orderly completion or early termination of
         such IRCT, including making provision for payment for all
         non-cancelable expenses associated therewith. The provisions of Article
         4 shall survive the expiration or termination of the Agreement and
         shall continue in effect for ten (10) years. In addition, the
         provisions of Articles 1, 4, 5, 6 and 7, and Sections 2.7, 8.4 and 10.6
         shall survive any expiration or termination of this Agreement.

9.       INDEMNIFICATION; INSURANCE; LIABILITY

9.1      INDEMNIFICATION

9.1.1    INDEMNIFICATION BY MERCK.

         MERCK shall indemnify and hold harmless deCODE, its Affiliates, any
         present or future parent or subsidiary of them, and their respective
         officers, directors, employees, agents and Affiliates (collectively in
         this Section 9.1 referred to as "deCODE") from and against any and all
         losses, liabilities, damages including, but not limited to, reasonable
         counsel fees, actually incurred by deCODE in defending against any
         litigation or any claim whatsoever by a Third Party and any and all
         amounts reasonably paid in settlement of any claim or litigation, any
         settlement payments (which shall first be subject to MERCK's prior
         written consent, not to be unreasonably withheld) (collectively in this
         section referred to as "deCODE Losses"), PROVIDED such deCODE Losses
         arise solely out of (i) the promotion, marketing, distribution and
         sale, whether directly or through distributors, of the Products or
         Tests, or (ii) the negligence, recklessness or wrongful intentional
         acts or omissions of MERCK, its Affiliates or its sublicensees, if any,
         or their respective directors, officers, employees or agents, in
         connection with the performance by MERCK under this Agreement; and
         PROVIDED further, that this obligation by MERCK shall not apply in the
         event that such deCODE Losses are attributable in any manner to any
         intentional act or negligence, willful or otherwise, of deCODE.

9.1.2    INDEMNIFICATION BY deCODE.

         deCODE shall indemnify and hold harmless MERCK, its Affiliates, any
         present or future parent or subsidiary of them, and their respective
         officers, directors, employees, agents and Affiliates (collectively in
         this Section 9.1.2 referred to as "MERCK") from and against any and all
         losses, liabilities, damages including, but not limited to, reasonable
         counsel fees, actually incurred by MERCK in defending against any
         litigation or any claim whatsoever by a Third Party and any and all
         amounts reasonably paid in settlement of any claim or litigation, any
         settlement payments (which shall first be subject to deCODE' prior
         written consent, not to be unreasonably withheld) (collectively in this
         section referred to as "MERCK Losses"), PROVIDED such MERCK Losses
         arise solely out of (i) the promotion, marketing, distribution and
         sale, whether directly or through distributors, of the Products or
         Tests by deCODE or (ii) the negligence, recklessness or wrongful
         intentional acts or omissions of deCODE, its Affiliates or its
         sublicensees, if any, or their respective directors, officers,
         employees or agents, in connection with the performance by deCODE under
         this Agreement; and PROVIDED further, that this obligation by deCODE
         shall not apply in the event that such MERCK Losses are attributable in
         any manner to any intentional act or negligence, willful or otherwise,
         of MERCK.

                                        4


9.1.3    NOTICE OF CLAIM OF INDEMNIFICATION - THIRD PARTY CLAIMS

         (a)     A Party (the "Indemnified Party") seeking indemnification under
         this Agreement for a claim made against it by a Third Party ("Third
         Party Claim") shall notify the other Party (the "Indemnifying Party")
         in writing of the Third Party Claim within thirty (30) days after
         receipt by the Indemnified Party of written notice of the Third Party
         Claim; however, failure to give such notification shall not affect the
         indemnification provided under this Agreement, except to the extent the
         Indemnifying Party shall actually in a material manner have been
         prejudiced by the failure. Thereafter, the Indemnified Party shall
         deliver to the Indemnifying Party, promptly after the Indemnified
         Party's receipt thereof, copies of all notices and documents (including
         court papers) received by the Indemnified Party relating to the Third
         Party Claim.

         (b)     The Indemnifying Party shall have the right, within thirty (30)
         days after being so notified, to assume the defense of such Third Party
         Claim with counsel reasonably satisfactory to the Indemnified Party. In
         any such proceeding the defense of which the Indemnifying Party shall
         have so assumed, the Indemnified Party shall have the right to
         participate therein and retain its own counsel (without otherwise
         affecting the rights of the Parties under Section 9.1) at its own
         expense unless (i) the Indemnified Party and the Indemnifying Party
         shall have mutually agreed to the retention of such counsel, (ii) the
         Indemnified Party shall have reasonably concluded that there may be one
         or more legal defenses available to it which are different from or
         additional to those available to the Indemnifying Party, or (iii) the
         named parties to any such proceeding (including the impleaded parties)
         include both the Indemnifying Party and the Indemnified Party, and
         representation of both Parties by the same counsel would be
         inappropriate in the opinion of the Indemnified Party's counsel due to
         actual or potential differing interests between them; in any such case,
         one firm of attorneys separate from the Indemnifying Party's counsel
         may be retained to represent the Indemnified Parties at the
         Indemnifying Party's expense. Any settlement of such a Third Party
         Claim, the defense of which has been assumed by the Indemnifying Party,
         shall not be entered into by the Indemnifying Party without prior
         written consent of the Indemnified Party, which consent shall not be
         unreasonably withheld.

         (c)     With respect to all Third Party Claims, the Indemnified Party
         shall cooperate in all reasonable respects with the Indemnifying Party
         in connection with any Third Party Claims and the defense or compromise
         thereof. Such cooperation shall include the retention and (upon the
         Indemnifying Party's request) the provision to the Indemnifying Party
         of records and information reasonably relevant to the Third Party
         Claim, making employees available on a mutually convenient basis to
         provide additional information, and explanation of any material
         provided under this Agreement. If the Indemnifying Party shall have
         assumed the defense of a Third Party Claim, the Indemnified Party shall
         not, without first waiving the indemnity as to such claim, admit any
         liability with respect to, or settle, compromise, or discharge, the
         Third Party Claim, without the Indemnifying Party's prior written
         consent; PROVIDED that admissions of facts which a Party may reasonably
         be required to make shall not be deemed to be admissions of liability.

9.1.4    COOPERATION.

         The Parties shall cooperate with each other with respect to resolving
         any claim or liability with respect to which one Party is obligated to
         indemnify the other Party under this Agreement, including, without
         limitation, by taking reasonable efforts to mitigate or resolve any
         such claim or liability.

9.2      INSURANCE.

                                        4


         Each Party shall maintain adequate insurance against liability and
         other risks associated with its activities contemplated by this
         Agreement, including but not limited to its indemnification obligations
         herein, in such amounts and on such terms as are customary in the
         industry for the activities to be conducted by it under this Agreement.
         Each Party shall furnish to the other Party evidence of such insurance,
         upon request.

10.      MISCELLANEOUS

10.1     FORCE MAJEURE

         Neither Party shall be held liable to the other Party nor be deemed to
         have defaulted under or breached the Agreement for failure or delay in
         performing any obligation under the Agreement when such failure or
         delay is caused by or results from causes beyond the reasonable control
         of the affected Party including, but not limited to, embargoes, war,
         acts of war (whether war be declared or not), insurrections, riots,
         civil commotions, strikes, lockouts or other labor disturbances, fire,
         floods, or other acts of God, or acts, omissions or delays in acting by
         any governmental authority or the other Party. The affected Party shall
         notify the other Party of such force majeure circumstances as soon as
         reasonably practical, and shall promptly undertake all reasonable
         efforts necessary to cure such force majeure circumstances. The Party
         giving such notice shall thereupon be excused from such of its
         obligations under this Agreement as it is thereby disabled from
         performing for so long as it is so disabled and the thirty (30) days
         thereafter. To the extent possible, each Party shall use reasonable
         efforts to minimize the duration of any force majeure.

10.2     ASSIGNMENT/ CHANGE OF CONTROL

         (a) Neither Party shall be entitled to assign its rights or delegate
         its obligations hereunder without the express written consent of the
         other Party hereto, except that (i) MERCK may assign its rights and
         transfer its duties hereunder to an Affiliate or to any assignee of all
         or substantially all of its business (or that portion thereof to which
         this Agreement relates) or in the event of MERCK's merger,
         consolidation or involvement in a similar transaction and (ii) deCODE
         may assign its rights and transfer its duties hereunder to an Affiliate
         or to any assignee of all or substantially all of its business (or that
         portion thereof to which this Agreement relates) or in the event of
         deCODE's merger, consolidation or involvement in a similar transaction,
         PROVIDED HOWEVER, during the Research Program Term deCODE may not
         assign its rights and obligations under the Agreement without MERCK's
         written consent which shall not be unreasonably withheld. It shall be
         reasonable for MERCK to withhold consent of an assignment to a
         Competitor. No assignment and transfer shall be valid or effective
         unless done in accordance with this Section 9.2 and unless and until
         the assignee/transferee shall agree in writing to be bound by the
         provisions of this Agreement.

         (b) In the event that deCODE enters into an agreement resulting in a
         Change of Control pursuant to which a Competitor obtains Control of
         deCODE, then (1) MERCK shall have the right to terminate the Agreement
         under Section 8.3.1 and; (2) deCODE shall adopt procedures to be agreed
         upon in writing by MERCK to prevent the disclosure of deCODE Know-How,
         deCODE Information and Inventions, MERCK Information and Inventions,
         Joint Information and Inventions and MERCK Know-How (collectively,
         "Sensitive Information") beyond the deCODE personnel having access to
         and knowledge of Sensitive Information prior to the Change of

                                        4


         Control and deCODE shall adopt procedures approved in writing by MERCK
         to control the dissemination of Sensitive Information disclosed after
         the Change of Control. The purposes of all such procedures shall be to
         strictly limit such disclosures to only those personnel having a need
         to know Sensitive Information in order for deCODE to perform its
         obligations.

10.3     SEVERABILITY

         If any one or more of the provisions contained in this Agreement is
         held invalid, illegal or unenforceable in any respect, the validity,
         legality and enforceability of the remaining provisions contained
         herein shall not in any way be affected or impaired thereby, unless the
         absence of the invalidated provision(s) adversely affects the
         substantive rights of the Parties. The Parties shall in such an
         instance use their best efforts to replace the invalid, illegal or
         unenforceable provision(s) with valid, legal and enforceable
         provision(s) which, insofar as practical, implement the purposes of
         this Agreement.

                                        4


10.4     NOTICES

         All notices which are required or permitted hereunder shall be in
         writing and sufficient if delivered personally, sent by facsimile (and
         promptly confirmed by personal delivery, registered or certified mail
         or overnight courier), sent by nationally-recognized overnight courier
         or sent by registered or certified mail, postage prepaid, return
         receipt requested, addressed as follows:

         if to deCODE, to:     deCODE genetics, Ehf.
                               Sturlugata 8, IS-101
                               Reykjavik, Iceland
                               Attention: President
                               Facsimile No.: +354 570 1901

                  and:         Attention: Legal Department
                               Facsimile No.: +354 570 1981


         if to MERCK, to:      Merck & Co., Inc.
                               One Merck Drive
                               P.O. Box 100, WS3A-65
                               Whitehouse Station, NJ 08889-0100
                               Attention: Office of Secretary
                               Facsimile No.: (908) 735-1246

                    And        Merck & Co., Inc.
                               One Merck Drive
                               Attention: Chief Licensing Officer
                               P.O. Box 100, WS2A-30
                               Whitehouse Station, NJ 08889-0100
                               Facsimile: (908) 735-1214

         or to such other address as the Party to whom notice is to be given may
         have furnished to the other Party in writing in accordance herewith.
         Any such notice shall be deemed to have been given: (a) when delivered
         if personally delivered or sent by facsimile on a business day; (b) on
         the business day after dispatch if sent by nationally-recognized
         overnight courier; and/or (c) on the fifth business day following the
         date of mailing if sent by mail.

10.5     APPLICABLE LAW

         The Agreement shall be governed by and construed in accordance with the
         laws of the State of New Jersey and the patent laws of the United
         States without reference to any rules of conflict of laws or renvoi.
         The United Nations Convention on the Sale of Goods shall not apply.

10.6     DISPUTE RESOLUTION

         (a) The Parties shall negotiate in good faith and use reasonable
         efforts to settle any dispute, controversy or claim arising from or
         related to this Agreement or the breach thereof. If the Parties do not
         fully settle, and a Party wishes to pursue the matter, each such
         dispute, controversy

                                        4


         or claim that is not an "Excluded Claim" shall be finally resolved by
         binding arbitration in accordance with the Commercial Arbitration Rules
         and Supplementary Procedures for Large Complex Disputes of the American
         Arbitration Association ("AAA"), and judgment on the arbitration award
         may be entered in any court having jurisdiction thereof.

         (b) The arbitration shall be conducted by a panel of three persons
         experienced in the pharmaceutical business: within 30 days after
         initiation of arbitration, each Party shall select one person to act as
         arbitrator and the two Party-selected arbitrators shall select a third
         arbitrator within 30 days of their appointment. If the arbitrators
         selected by the Parties are unable or fail to agree upon the third
         arbitrator, the third arbitrator shall be appointed by the AAA. The
         place of arbitration shall be New York, New York, and all proceedings
         and communications shall be in English.

         (c) Either Party may apply to the arbitrators for interim
         injunctive relief until the arbitration award is rendered or the
         controversy is otherwise resolved. Either Party also may, without
         waiving any remedy under this Agreement, seek from any court having
         jurisdiction any injunctive or provisional relief necessary to protect
         the rights or property of that Party pending the arbitration award. The
         arbitrators shall have no authority to award punitive or any other type
         of damages not measured by a Party's compensatory damages. Each Party
         shall bear its own costs and expenses and attorneys' fees and an equal
         share of the arbitrators' and any administrative fees of arbitration.

         (d) Except to the extent necessary to confirm an award or as may be
         required by law, neither a Party nor an arbitrator may disclose the
         existence, content, or results of an arbitration without the prior
         written consent of both Parties. In no event shall an arbitration be
         initiated after the date when commencement of a legal or equitable
         proceeding based on the dispute, controversy or claim would be barred
         by the applicable New York statute of limitations.

         (e) The parties agree that, in the event of a dispute over the nature
         or quality of performance under this Agreement, neither party may
         terminate the Agreement until final resolution of the dispute through
         arbitration or other judicial determination. The parties further agree
         that any payments made pursuant to this Agreement pending resolution of
         the dispute shall be refunded if an arbitrator or court determines that
         such payments are not due.

         (f) As used in this Section, the term "Excluded Claim" shall mean a
         dispute, controversy or claim that concerns (i) the validity or
         infringement of a patent, trademark or copyright; or (ii) any
         antitrust, anti-monopoly or competition law or regulation, whether or
         not statutory.

10.7     ENTIRE AGREEMENT; AMENDMENTS

         The Agreement contains the entire understanding of the Parties with
         respect to the Research Program and licenses granted hereunder. All
         express or implied agreements and understandings, either oral or
         written, with regard to the Research Program and the licenses granted
         hereunder are superseded by the terms of this Agreement. The Agreement
         may be amended, or any term hereof modified, only by a written
         instrument duly executed by authorized representatives of both Parties
         hereto.

                                        4


10.8     HEADINGS

         The captions to the several Articles and Sections hereof are not a part
         of the Agreement, but are merely for convenience to assist in locating
         and reading the several Articles and Sections hereof.

10.9     INDEPENDENT CONTRACTORS

         It is expressly agreed that deCODE and MERCK shall be independent
         contractors and that the relationship between the two Parties shall not
         constitute a partnership, joint venture or agency. Neither deCODE nor
         MERCK shall have the authority to make any statements, representations
         or commitments of any kind, or to take any action, which shall be
         binding on the other Party, without the prior written consent of the
         other Party.

10.10    WAIVER

         A waiver (whether express or implied) by one of the Parties of any of
         the provisions of this Agreement or of any breach of or default by the
         other Party in performing any of those provisions shall not constitute
         a continuing waiver and that waiver shall not prevent the waiving Party
         from subsequently enforcing any of the provisions of this Agreement not
         waived or from acting on any subsequent breach of or default by the
         other Party under any of the provisions of this Agreement.

10.11    CUMULATIVE REMEDIES

         No remedy referred to in this Agreement is intended to be exclusive,
         but each shall be cumulative and in addition to any other remedy
         referred to in this Agreement or otherwise available under law.

10.12    WAIVER OF RULE OF CONSTRUCTION

         Each Party has had the opportunity to consult with counsel in
         connection with the review, drafting and negotiation of this Agreement.
         Accordingly, the rule of construction that any ambiguity in this
         Agreement shall be construed against the drafting Party shall not
         apply.

                                        *

                                        *

                                        *

                                        *

                                        *

                                        4


10.13    COUNTERPARTS

         The Agreement may be executed in two or more counterparts, each of
         which shall be deemed an original, but all of which together shall
         constitute one and the same instrument.

         IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
date first set forth above.


MERCK & CO., INC.                             DECODE GENETICS, EHF.


BY: /s/ Raymond V. Gilmartin                  BY: /s/ Kari Stefansson
    ------------------------                      -------------------
    Raymond V. Gilmartin                          Kari Stefansson

TITLE: Chairman, President and Chief          TITLE:
Executive Officer

DATE:                                         DATE:
     --------------------                          -----------------

                                        4


                                    SCHEDULES

                          SCHEDULE 1.21 DECODE PATENTS

[CONFIDENTIAL TREATMENT REQUESTED]

                                        4


                        SCHEDULE 2.1-0 INITIAL WORK PLAN

[CONFIDENTIAL TREATMENT REQUESTED]

                                        4


                                  Schedule 2.3
                       [CONFIDENTIAL TREATMENT REQUESTED]

                                        4


APPENDIX 1.3.1.b: [CONFIDENTIAL TREATMENT REQUESTED]

                                        4


APPENDIX 3.5 [CONFIDENTIAL TREATMENT REQUESTED]

                                        4


SCHEDULE 2.6 BUDGET

                                        4


SCHEDULE 5.1 Research Program Funding
[CONFIDENTIAL TREATMENT REQUESTED]

                                        4

EX-10.36

                                                                   Exhibit 10.36

                      STOCK AND WARRANT PURCHASE AGREEMENT

       THIS STOCK AND WARRANT PURCHASE AGREEMENT (this "AGREEMENT") is dated as
FEBRUARY 25, 2004 and is made by and between deCODE genetics, Inc., a Delaware
corporation (the "SELLER") and Merck & Co., Inc., a New Jersey corporation (the
"PURCHASER").

                             PRELIMINARY STATEMENTS

       A.     The Purchaser and the Seller's wholly owned subsidiary, deCODE
genetics, ehf, are parties to that certain License and Research Collaboration
Agreement dated as of the date hereof (the "LICENSE AGREEMENT").

       B.     In connection with the execution of the License Agreement, the
Purchaser has agreed to acquire from the Seller, and the Seller has agreed to
sell to the Purchaser, the Securities (as hereinafter defined).

                                    AGREEMENT

       In consideration of the premises and the mutual promises hereinafter set
forth, the parties hereby agree as follows:

       1.     DEFINITIONS. All capitalized terms used in this Agreement shall
have the meanings assigned to them elsewhere in this Agreement or as specified
below:

              "AGREEMENT" shall have the meaning set forth in the opening
paragraph hereof.

              "CLOSINg" shall mean the closing of the sale to, and purchase by,
the Purchaser of the Securities.

              "COMMISSION" shall mean the United States Securities and Exchange
Commission.

              "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended.

              "MATERIAL ADVERSE EFFECT" shall mean any change or effect that,
individually or in the aggregate with all other such changes or effects, would
have a material adverse effect on the business, assets, results or operations,
or financial condition of such party and its subsidiaries taken as a whole or
materially impair the ability of such party to perform its obligations under
this Agreement.

              "PERSON" shall mean and include an individual, a corporation, a
partnership, a trust, an incorporated organization, a limited liability company,
a joint stock corporation, a joint venture, a government or any department,
agency or political subdivision thereof and any other entity.

              "PURCHASE PRICE" shall have the meaning set forth in Section 2.2.



              "PURCHASER" shall have the meaning set forth in the opening
paragraph hereof.

              "REGISTER", "REGISTERED" and "REGISTRATION" shall refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.

              "REGISTRABLE SECURITIES" shall mean (1) the Shares; (2) the
Warrant Shares, and (3) any securities issued or issuable with respect to the
Shares or Warrant Shares by way of a stock dividend or stock split or in
connection with a combination of shares, reclassification, recapitalization,
merger or consolidation or reorganization; PROVIDED, HOWEVER, that such shares
of common stock or other securities shall cease to be Registrable Securities if
and when they (i) have been sold to or through a broker or dealer or underwriter
in a public distribution or a public securities transaction; (ii) have been sold
in a transaction exempt from the registration and prospectus delivery
requirements of the Securities Act under Section 4(1) thereof so that all
transfer restrictions and restrictive legends with respect to such common stock
are removed upon the consummation of such sale; or (iii) can be sold in any
three month period (or any other relevant period under any amendment to Rule 144
made subsequent to the date hereof) pursuant to Rule 144 without regard to any
manner of sale or volume limitations.

              "RULE 144" shall mean Rule 144 promulgated by the Commission
pursuant to the Securities Act or any similar successor rule.

              "SECURITIES" shall mean the Shares and the Warrant.

              "SECURITIES ACT" shall mean the Securities Act of 1933, as
amended, and the rules and regulations of the Commission promulgated thereunder,
all as the same shall be in effect from time to time.

              "SELLER" shall have the meaning set forth in the opening paragraph
hereof.

              "SHARES" shall mean 689,703 shares of the Seller's common stock,
par value $.001.

              "UNDERWRITTEN OFFERING" shall mean a distribution, registered
pursuant to the Securities Act, in which securities of the Seller are sold to
the public through one or more underwriters.

              "WARRANT" shall mean a warrant to purchase 1,724,257 shares of the
Seller's common stock for an exercise price of $29.00 per share, in
substantially the form as attached hereto as Exhibit A.

              "WARRANT SHARES" shall mean the shares of the Seller's common
stock underlying the Warrant.

                                        2


       2.     SALE AND PURCHASE OF SECURITIES.

              2.1    AGREEMENT TO PURCHASE AND SELL. Upon the terms and subject
to the conditions set forth in this Agreement and upon the representations and
warranties made herein, the Seller is hereby selling to the Purchaser, and the
Purchaser is hereby purchasing from the Seller, the Securities.

              2.2    PURCHASE PRICE. The aggregate purchase price for the
Securities is $10,000,000 (the "PURCHASE PRICE").

              2.3    CLOSING. The Closing is occurring simultaneously herewith
at the offices of Stevens & Lee, P.C., 600 College Road East, Princeton, New
Jersey 08540 on the date hereof.

              2.4    CLOSING ACTIONS. At the Closing, (i) the Purchaser is
delivering to the Seller the Purchase Price by wire transfer to such account
previously specified by the Seller, and (ii) the Seller is delivering to the
Purchaser a certificate representing the Shares and a certificate evidencing the
Warrant.

       3.     REPRESENTATIONS AND WARRANTIES OF THE SELLER. The Seller
represents and warrants to the Purchaser as follows:

              3.1    ORGANIZATION. The Seller is (i) a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation, (ii) has all requisite corporate power and
authority to own, lease and operate its properties and to carry on its
businesses as presently conducted, and (iii) is duly qualified and in good
standing to do business in all of the jurisdictions in which the conduct of the
Seller's business or its ownership, leasing or operation of property requires
such qualification and where the absence of such qualification would have a
Material Adverse Effect on the Seller.

              3.2    AUTHORIZATION. The Seller has full legal power and
authority to enter into and perform this Agreement. This Agreement has been duly
and validly executed and delivered by the Seller and constitutes the valid and
binding obligation of the Seller, enforceable in accordance with its terms,
subject to applicable bankruptcy, reorganization, insolvency, moratorium and
similar laws affecting creditors' rights generally and to general principles of
equity. The Shares have been duly authorized, are duly and validly issued, fully
paid and non-assessable, and are free of any liens or encumbrances. The Warrant
is duly and validly issued and free of any liens or encumbrances. The Warrant
Shares have been duly and validly reserved for issuance.

                     3.3    CAPITALIZATION. The authorized capital stock of the
Seller is (i) 100,000,000 shares of common stock, par value $.001, of which
53,736,460 were outstanding as of December 31, 2003 and (ii) 6,716,666 shares of
preferred stock, par value $.001, of which no shares are outstanding. The Seller
has reserved 1,400,467 of common stock for issuance upon outstanding warrants
(exclusive of the Warrant) and 4,108,331 shares of common stock for

                                        3


issuance to employees, consultants, officers or directors pursuant to its 1996
Equity Incentive Plan, as amended, and its 2002 Equity Incentive Plan.

              3.4    DISCLOSURE. The registration statements, reports and proxy
statements filed by the Seller with the Commission, including the financial
statements contained therein (collectively, the "SEC Reports"), complied, as of
their respective dates, in all material respects with the requirements of the
Securities Act and the Exchange Act, and did not, as of their respective dates,
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements made therein
not misleading.

              3.5    NO MATERIAL ADVERSE CHANGE. Since December 31, 2003, there
has been no Material Adverse Effect on the financial condition, results of
operations, assets, liabilities or business of the Seller and its subsidiaries,
taken as a whole, other than those generally affecting Persons in the Seller's
business, those generally affecting the economy, and those resulting from
changes in general economic, political or financial conditions.

              3.6    NO CONSENTS OR APPROVALS REQUIRED. No consents, approvals
or authorization of designation, declaration or filing with any governmental or
regulatory authority, agency, commission, body or other governmental entity or
by any court or other third party is required for the valid authorization,
execution, delivery and performance by the Seller of this Agreement or for the
valid sale and delivery of the Securities.

              3.7    LISTING. The Seller has been approved for listing on, and
no notification of the issuance of the Securities is required to be given to,
the Nasdaq National Market.

       4.     REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The Purchaser
represents and warrants to the Seller as follows:

              4.1    AUTHORIZATION OF AGREEMENT. The Purchaser has full legal
power and authority to enter into and perform this Agreement. This Agreement has
been duly and validly executed and delivered by the Purchaser and constitutes
the valid and binding obligation of the Purchaser, enforceable in accordance
with its terms, subject to applicable bankruptcy, reorganization, insolvency,
moratorium and similar laws affecting creditors' rights generally and to general
principles of equity.

              4.2    ACCREDITED PURCHASER. The Purchaser is an accredited
investor within the meaning of Rule 501(a) promulgated under the Securities Act.
The Securities are being purchased or otherwise acquired for its own account and
not with the view to, or for resale in connection with, any distribution or
public offering thereof within the meaning of the Securities Act. It understands
that the Securities have not been registered under the Securities Act or any
applicable state laws by reason of their issuance or contemplated issuance in a
transaction exempt from the registration and prospectus delivery requirements of
the Securities Act and such laws, and that the reliance of the Seller and others
upon this exemption is predicated in part upon this representation and warranty.
It further understands that the Securities may not be transferred or resold
without (a) registration under the Securities Act and any applicable state
securities

                                        4


laws, or (b) an exemption from the requirements of the Securities Act and
applicable state securities laws.

              4.3    INVESTMENT EVALUATION. The Purchaser has such knowledge and
experience in financial and business matters that it is capable of evaluating
the merits and risks of the investment to be made hereunder.

              4.4    LEGEND. The Purchaser understands that the certificates for
the Shares and the Warrant bear a legend in substantially the following form in
addition to any other legends that may be required under any other documents to
which the Purchaser is a party.

       THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
       UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") OR THE
       SECURITIES ACT OF ANY STATE AND MAY NOT BE OFFERED, SOLD OR
       OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL
       REGISTERED UNDER THE ACT AND APPLICABLE STATE SECURITIES ACTS
       OR, IN THE OPINION OF COUNSEL IN FORM AND SUBSTANCE
       SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH OFFER,
       SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS PURSUANT TO AN
       AVAILABLE EXEMPTION FROM SUCH REGISTRATION OR IS IN ACCORDANCE
       WITH THE PROVISIONS OF REGULATION S UNDER THE ACT. HEDGING
       TRANSACTIONS INVOLVING THESE SECURITIES MAY NOT BE CONDUCTED
       UNLESS IN COMPLIANCE WITH THE ACT.

              4.5    BUSINESS AFFAIRS. The Purchaser is aware of the Seller's
business affairs and financial condition and has acquired sufficient information
about the Seller and has had such access to Seller's books and records and
Seller's executive offices as it deems necessary to reach an informed and
knowledgeable decision to acquire the Securities. The Purchaser recognizes that
investment in the Securities involves a number of significant risks.

       5.     DEMAND REGISTRATION RIGHTS; PROCEDURES.

              5.1    GRANT OF DEMAND REGISTRATION RIGHTS. Subject to the terms
of this Agreement, at any time and from time to time, the Purchaser shall be
entitled to request registration under the Securities Act of at least fifty
percent (50%) of the Registrable Securities then held by the Purchaser. Each
such request for registration must specify the number of Registrable Securities
requested to be registered and whether such registration is to be in the form of
an Underwritten Offering.

              5.2    SELECTION OF UNDERWRITER(s). If the Purchaser elects to
have the offering of Registrable Securities pursuant to a Demand Registration be
in the form of an Underwritten Offering, the Purchaser shall select and obtain
the investment banker or investment bankers and manager or managers for the
offering, subject to the approval of the Seller.

                                        5


              5.3    PRIORITY ON UNDERWRITTEN DEMAND REGISTRATION. If a Demand
Registration is an Underwritten Offering and the managing underwriters advise
the Purchaser and the Seller in writing that in their opinion the number of
Registrable Securities requested to be included in such offering exceeds the
number of Registrable Securities that can be sold therein without adversely
affecting the marketability of the offering, the Seller will include in such
registration the number of Registrable Securities requested to be included that,
in the opinion of such underwriters, can be sold without adversely affecting the
marketability of the offering. If there is any reduction in the number of
Registrable Securities included in such Underwritten Offering by the Purchaser,
no securities of any other Person shall be included in such registration. The
Purchaser may abandon a Demand Registration at any time. An abandoned Demand
Registration shall not count as a Demand Registration and such Purchaser shall
retain its rights hereunder with respect to the number of Demand Registrations
without a reduction as a result thereof if such Purchaser, at its option, pays
all fees and expenses in connection with such abandoned registration other than
fees and expenses relating to any Registrable Securities that any Person other
than the Purchaser may have requested to be included in such abandoned
registration.

              5.4    LIMITATIONS ON DEMAND REGISTRATION. Notwithstanding any
other provision in this Agreement, (i) the Purchaser shall not be permitted to
make more than three (3) requests for a Demand Registration pursuant to Section
5.1 provided however in the event that the Purchaser exercises the Warrant, the
Purchaser shall be permitted three additional requests for Demand Registration
with respect to the Registrable Securities issued upon exercise of the Warrant,
and (ii) the Seller shall not be required to effect more than one (1) Demand
Registration during any 12-month period.

              5.5    POSTPONEMENT OF DEMAND REGISTRATION BY THE SELLER. The
Seller may postpone for up to 90 days the filing of a registration statement for
a Demand Registration if the Seller has delivered a certificate to the Purchaser
stating that the Board, acting in good faith, has determined that pursuance of
such Demand Registration would be seriously detrimental to the Seller and its
stockholders PROVIDED, HOWEVER, that in the event of any such postponement, the
Purchaser shall be entitled to withdraw the request for such Demand Registration
and, if such request is withdrawn, such request shall not count as a Demand
Registration hereunder. The Seller may postpone such filing for the reasons
stated above not more than once during any calendar year. In addition, the
Seller shall not be required to effect any registration pursuant to this
Agreement at any time when another registration statement (other than on Form
S-8) of the Seller (A) is reasonably foreseen by the Board to be filed with the
Commission within thirty (30) days after the request for such Demand
Registration has been filed and not yet become effective, or (B) has become
effective less than six (6) months prior to the date of the request for such
Demand Registration.

              5.6    SPECIAL AUDITS. Notwithstanding any other provision of this
Agreement, the Seller shall not be required to undergo or pay for any special
audit to effect any registration statement pursuant to this Section 5, and if
such a special audit would be required in order to file or effect a registration
statement hereunder, the Seller shall be entitled to delay the filing or
effectiveness of such registration statement until a reasonable period of time
following

                                        6


completion of such audit in the ordinary course of the Seller's business;
PROVIDED, HOWEVER, that the Seller shall not be entitled to delay the filing or
effectiveness of such registration statement if the Purchaser shall agree to pay
for the cost of such audit.

              5.7    PROCEDURES. If and as often as the Seller is required by
the provisions of this Section 5 to include shares of Registrable Securities
held by the Purchaser in a registration statement filed under the Securities
Act, the Seller, at its expense and as expeditiously as possible, agrees to:

                     (i)    in accordance with the Securities Act and all
applicable rules and regulations, prepare and file with the Commission a
registration statement with respect to such securities and use its best efforts
to cause such registration statement to become and remain effective for a period
of 90 days (or, if such registration statement has been filed on Form S-3 and
the Purchaser has indicated in its request for a Demand Registration that it is
requesting a shelf registration pursuant to Rule 415 under the Securities Act,
for a period of two years) and prepare and file with the Commission such
amendments and supplements to such registration statement and the prospectus
contained therein as may be necessary to keep such registration statement
effective and such registration statement and prospectus accurate and complete
during such period of time;

                     (ii)   furnish to the Purchaser and to any underwriters of
the securities being registered such number of copies of the registration
statement and each amendment and supplement thereto, preliminary prospectus,
final prospectus and such other documents as such underwriters and Purchaser may
reasonably request in order to facilitate the public offering of such
securities;

                     (iii)  use reasonable efforts to register or qualify the
securities covered by such registration statement under such state securities or
blue sky laws of such jurisdictions as the Purchaser and underwriters may
reasonably request within 20 days prior to the original filing of such
registration statement, except that the Seller shall not for any purpose be
required to execute a general consent to service of process or to qualify to do
business as a foreign corporation in any jurisdiction where it is not so
qualified, or to subject itself to taxation in any such jurisdiction;

                     (iv)   notify the Purchaser promptly after it shall receive
notice thereof, of the date and time when such registration statement and each
post-effective amendment thereto has become effective or a supplement to any
prospectus forming a part of such registration statement has been filed;

                     (v)    prepare and file promptly with the Commission, and
promptly notify the Purchaser of the filing of, such amendments or supplements
to such registration statement or prospectus as may be necessary to correct any
statements or omissions if, at the time when a prospectus relating to such
securities is required to be delivered under the Securities Act, any event has
occurred as the result of which any such prospectus or any other prospectus as
then

                                       7


in effect would include an untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading; and

                     (vi)   advise the Purchaser, promptly after it shall
receive notice or obtain knowledge thereof, of the issuance of any stop order by
the Commission suspending the effectiveness of such registration statement or
the initiation or threatening of any proceeding for that purpose.

              5.8    PURCHASER'S AGREEMENTS. The Purchaser shall (i) provide the
Seller with such information with respect to the Purchaser and the distribution
of the Registrable Securities of the Purchaser that is sought to be effected
pursuant to this Agreement as the Seller may from time to time reasonably
request in writing and as shall be required by law or by the Commission in
connection therewith, (ii) comply with all applicable provisions of the
Securities Act, the Exchange Act and any other applicable law or regulation,
including without limitation, the prospectus delivery requirements of the
Securities Act, and (iii) not make any disposition of the Registrable Securities
pursuant to a registration statement filed pursuant to this Agreement following
notice from the Seller of the happening of any event as a result of which the
prospectus included in such registration statement, as then in effect, includes
an untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements contained
therein not misleading in light of the circumstances then existing until it
receives written notice from the Seller that the use of such prospectus may be
resumed or until it receives copies of any supplement or amendment to such
prospectus.

              5.9    FORMS. All references in this Agreement to particular forms
of registration statements are intended to include, and shall be deemed to
include, references to all successor forms which are intended to replace, or to
apply to similar transactions as, the forms herein referenced.

              5.10   STANDSTILL. The Purchaser agrees that, in the event of an
Underwritten Offering by the Seller of which the Purchaser has been given at
least 30 days advance notice by the Seller , if requested by the managing
underwriter of such Underwritten Offering, the Purchaser will not offer, pledge,
sell, contract to sell, grant any option for the sale of or otherwise dispose
of, directly or indirectly, any of the Registrable Securities held by the
Purchaser for a period commencing 7 days prior to and ending 90 days following
the effective date of any registration statement pertaining to such Underwritten
Offering, except with respect to any Registrable Securities included in such
registration (it being understood that the Seller shall have not any obligation
to include any Registrable Securities in such offering).

              5.11   TERMINATION. Unless sooner terminated pursuant to the terms
of this Agreement, the obligations of the Seller pursuant to this Section 5 as
to any Registrable Securities shall terminate upon the Purchaser's notification
to the Seller in writing that it does not wish to have the Registrable
Securities registered under this Agreement.

       6.     FEES AND EXPENSES. Each party shall be responsible for payment of
its own fees and expenses incurred in connection with this Agreement and the
transactions contemplated

                                        8


hereby. The foregoing notwithstanding, except as set forth in Section 5.3, with
respect to each inclusion of shares of Registrable Securities in a registration
statement pursuant to Section 5 hereof, the Seller agrees to bear all fees,
costs and expenses of and incidental to such registration and the public
offering in connection therewith; PROVIDED, HOWEVER, that the Purchaser shall
pay its own legal and accounting fees and its pro rata share of any applicable
underwriting discount and commissions. The fees, costs and expenses of
registration to be borne as provided in the preceding sentence shall include,
without limitation, all registration, filing, listing, and NASD fees, printing
expenses, fees and disbursements of counsel and accountants for the Seller, and
all legal fees and disbursements and other expenses of complying with state
securities or blue sky laws of any jurisdiction in which such securities are to
be registered or qualified.


       7.     INDEMNIFICATION; SURVIVAL.

              7.1    INDEMNITY.

                     (a)    Each of the Seller and the Purchaser agrees to
indemnify, defend and hold harmless the other, its affiliates and their
respective stockholders, directors, officers, partners, employees, agents,
successors and assigns from and against all losses, damages, liabilities,
deficiencies or obligations, including, without limitation, all claims, actions,
suits, proceedings, demands, judgments, assessments, fines, interest, penalties,
costs and expenses (including settlement costs and reasonable legal fees) to
which any of them may become subject as a result of any and all
misrepresentations or breaches of a representation or warranty made by it
herein.

                     (b)    The Seller hereby agrees to indemnify and hold
harmless the Purchaser, its officers, directors and each Person who controls the
Purchaser within the meaning of the Securities Act, from and against, and agrees
to reimburse the Seller, its officers, directors and controlling Persons and any
underwriter or broker dealer acting for the Purchaser with respect to, all
losses, damages, liabilities, deficiencies or obligations, including, without
limitation, all claims, actions, suits, proceedings, demands, judgments,
assessments, fines, interest, penalties, costs and expenses (including
settlement costs and reasonable legal fees) to which the Purchaser may become
subject under the Securities Act or otherwise, insofar as such claims, actions,
demands, losses, damages, liabilities, costs or expenses arise out of or are
based upon any untrue statement or alleged untrue statement of any material fact
contained in a registration statement that includes the Registrable Securities
of the Purchaser, any prospectus contained therein, or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances in which
they were made, not misleading; PROVIDED, HOWEVER, that the Seller will not be
liable in any such case to the extent that any such claim, action, demand, loss,
damage, liability, cost or expense is caused by an untrue statement or alleged
untrue statement or omission or alleged omission so made in conformity with
written information furnished by the Purchaser specifically for use in the
preparation thereof.

                                        9


                     (c)    The Purchaser hereby agrees to indemnify and hold
harmless the Seller, its officers, directors and each Person who controls the
Seller within the meaning of the Securities Act, from and against, and agrees to
reimburse the Seller, its officers, directors and controlling Persons with
respect to, all losses, damages, liabilities, deficiencies or obligations,
including, without limitation, all claims, actions, suits, proceedings, demands,
judgments, assessments, fines, interest, penalties, costs and expenses
(including settlement costs and reasonable legal fees) to which the Seller, its
officers, directors or such controlling Persons may become subject under the
Securities Act or otherwise, insofar as such claims, actions, demands, losses,
damages, liabilities, costs or expenses are caused by any untrue statement or
alleged untrue statement of any material fact contained in a registration
statement that includes the Registrable Securities of the Purchaser, any
prospectus contained therein or any amendment or supplement thereto, or are
caused by the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading, in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was so made in reliance upon
and in conformity with written information furnished by the Purchaser
specifically for use in the preparation thereof. Notwithstanding the foregoing,
the Purchaser shall be obligated hereunder to pay no more than the net proceeds
realized by it upon its sale of Registrable Securities included in such
registration statement.

              7.2    PROCEDURE. Promptly after receipt by an indemnified party
under this Section 7 of notice of the commencement of any action, such
indemnified party will, if a claim in respect thereof is to be made against the
indemnifying party, notify the indemnifying party of the commencement thereof.
In case any such action is brought against any indemnified party, and it
notifies the indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate in, and, to the extent that it may wish
jointly with any other indemnifying party similarly notified, to assume the
defense thereof, with counsel reasonably satisfactory to such indemnified party,
and after notice from the indemnifying party of its election so to assume the
defense thereof, the indemnifying party will not be liable to such indemnified
party under this Section 7 for any legal or other expenses subsequently incurred
by such indemnified party in connection with the defense thereof. The indemnity
provided under this Agreement shall not apply to amounts paid in settlement of
any claim, action, suit or proceeding if such settlement is effected without the
consent of the indemnifying party, which consent shall not be unreasonably
withheld. No indemnifying party will consent to entry of any judgment or enter
into any settlement which does not include as an unconditional term thereof the
giving by the claimant or plaintiff to the indemnified party of a release from
all liability in respect of such claim, action, suit or proceeding.

              7.3    SURVIVAL. All representations made herein by the Seller and
the Purchaser shall survive the closing of the transactions contemplated hereby
for a period of three (3) years. Any matter as to which a claim has been
asserted by notice to the other party that is pending or unresolved at the end
of such survival period shall continue to be covered by this Section 6 until
such matter is finally terminated or otherwise resolved by the parties under
this Agreement or by a court of competent jurisdiction and any amounts payable
hereunder are finally determined and paid.

                                       10


       8.     SUCCESSORS AND ASSIGNS; PARTIES IN INTEREST. This Agreement shall
bind and inure to the benefit of (i) the Purchaser, (ii) the Seller and (iii)
their respective successors and assigns, including without limitation any Person
who succeeds to the rights and properties of a Party as a result of a merger,
consolidation, acquisition of substantially all of a Party's assets or similar
transaction. Except as provided above, no party may assign its rights under this
Agreement without the consent of the other, which consent shall not be
unreasonably withheld.

       9.     ENTIRE AGREEMENT. This Agreement (as amended from time to time)
and the other writings referred to herein or delivered pursuant hereto which
form a part hereof contain the entire agreement among the parties with respect
to the subject matter hereof and supersede all prior and contemporaneous
arrangements or understandings with respect thereto.

       10.    NOTICES. All notices, requests, consents and other communications
hereunder to any party shall be in writing and shall be delivered in person or
duly sent by overnight courier, facsimile transmission or first class registered
or certified mail, return receipt requested, postage prepaid, addressed to such
party at the address set forth below or such other address as may hereafter be
designated in writing by the addressee to the addressor listing all parties:

              (a)    If to the Purchaser:

                     MERCK & Co., Inc.
                     One MERCK Drive
                     P.O. Box 100, WS3A-65
                     Whitehouse Station, NJ 08889-0100
                     Attention: Office of Secretary
                     Facsimile No.: (908)735-1246

                     With a copy (which shall not constitute notice) to:

                     MERCK & Co., Inc.
                     One MERCK Drive
                     P.O. Box 100, WS2A-30
                     Whitehouse Station, NJ 08889-0100
                     Attention: Chief Licensing Officer
                     Facsimile: (908) 735-1214

              (b)    If to the Seller:

                     deCODE genetics, Inc.
                     Sturlugata 8
                     IS-101, Reykjavik, Iceland
                     Attn: President
                     Facsimile No. : +354 570 1901

                                       11


                     and

                     Attn: Legal Department
                     Facsimile No. : +354 570 1806

                     With a copy (which shall not constitute notice) to:

                     Stevens & Lee, P.C.
                     600 College Road East
                     Princeton, NJ  08540
                     Attn: Marsha E., Novick, Esq.
                     Facsimile: 1-610-371-7929


All such notices and communications shall be deemed to have been give in the
case of (a) facsimile transmission on the date sent, (b) personal delivery on
the date of such delivery, (c) overnight courier on the day following delivery
to such courier and (d) mailing on the third day after the posting thereof.

       11.    CHANGES. The terms and provisions of this Agreement may not be
modified or amended, or any of the provisions hereof waived, temporarily or
permanently, except pursuant to the consent of the affected party.

       12.    COUNTERPARTS. This Agreement may be executed in any number of
counterparts, and each such counterpart hereof shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement.

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

       14.    GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of New Jersey, without regard to
conflict of laws.

       15.    SEVERABILITY. Any provision of this Agreement that is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.

       16.    FURTHER ASSURANCES. The parties hereto shall, subsequent to the
date hereof, execute and deliver such further documentation, and take such
further action, in each case without cost to the other party, as shall be
reasonably requested by such other party hereto to further evidence and perfect
the completion of the transactions contemplated hereby.

                                       ***

                                       12


       IN WITNESS WHEREOF, the parties hereto have caused this Stock and Warrant
Purchase Agreement to be duly executed on their behalf.


                                   deCODE genetics, Inc.


                                   By: /s/ Kari Stefansson
                                       ---------------------------------

                                   Name:  Kari Stefansson
                                          ------------------------------

                                   Title: CEO
                                          ------------------------------


                                   Merck & Co., Inc.


                                   By: /s/ Raymond V. Gilmartin
                                       ---------------------------------

                                   Name:  Raymond V. Gilmartin
                                          ------------------------------

                                   Title: Chairman, President and
                                          ------------------------------
                                          Chief Executive Officer



                                    EXHIBIT A

                                 FORM OF WARRANT

EX-21.1

                                  EXHIBIT 21.1


SUBSIDIARIES OF deCODE genetics, Inc.
     1. Islensk erfdagreining ehf., an Icelandic private limited company
        (English name: deCODE genetics ehf,)
     2. MediChem Life Sciences, Inc., a Delaware corporation

SUBSIDIARIES OF ISLENSK ERFDAGREINING EHF.
     1. Islenskar lyfjarannsoknir ehf., an Icelandic private limited company
        (English name: Encode ehf.)
     2. Islenskar krabbameinsrannsoknir ehf., an Icelandic private limited
        company (English name: deCODE Cancer ehf.)
     3. Vetrargardurinn ehf., an Icelandic private limited company (formerly
        known as Sturlugata 8 ehf.)

 SUBSIDIARIES OF MEDICHEM LIFE SCIENCES, INC.
     1. Emerald BioStructures, Inc., a Washington corporation
     2. ThermoGen, Inc., an Illinois corporation
     3. Advanced X-Ray Analytical Services, Inc., an Illinois corporation
     4. MediChem Research, Inc., an Illinois corporation

EX-23.1

                                  EXHIBIT 23.1

                       CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (No. 333-66374) and Forms S-8 (Nos. 333-56996,
333-96825 and 333-110905) of deCODE genetics, Inc. of our report dated
February 27, 2004, except for the fifth paragraph of the footnote titled
"Debt" for which the date is March 15, 2004, relating to the consolidated
financial statements, which appears in this Annual Report on Form 10-K. We
also consent to the reference to us under the heading "Selected Financial
Data" in this Form 10-K.


/s/ PRICEWATERHOUSECOOPERS LLP


Boston, Massachusetts
March 15, 2004

EX-23.2

                                  EXHIBIT 23.2

                       CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (No. 333-66374) and Forms S-8 (Nos. 333-56996, 333-96825
and 333-110905) of deCODE genetics, Inc. of our report dated March 18, 2002,
except for the footnote to the 2001 financial statements titled "Restatement of
Consolidated Financial Statements" (not shown therein) for which the date is
April 2, 2003 relating to the consolidated financial statements, which appears
in this Annual Report on Form 10-K. We also consent to the references to us
under the heading "Selected Financial Data" in this Form 10-K.


/s/ PRICEWATERHOUSECOOPERS hf


Reykjavik, Iceland
March 15, 2004

EX-31.1

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EXHIBIT 31.1

CERTIFICATION

I, Dr. Kari Stefansson, Chief Executive Officer, certify that:

1.

I have reviewed this annual report on Form 10-K of deCODE genetics, Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements and other financial information included in this report fairly present, in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)

evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by the report based on such evaluation; and

c)

disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting

	/s/  KARI STEFANSSON Dr. Kari Stefansson Chief Executive Officer
Dated: March 15, 2004

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EXHIBIT 31.1

CERTIFICATION

EX-31.2

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EXHIBIT 31.2

CERTIFICATION

I, Lance Thibault, Chief Financial Officer, certify that:

1.

I have reviewed this report on Form 10-K of deCODE genetics, Inc.;

2.

Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements and other financial information included in this report fairly present, in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)

evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by the report based on such evaluation; and

c)

disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting

	/s/  LANCE THIBAULT Lance Thibault Chief Financial Officer
Dated: March 15, 2004

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EXHIBIT 31.2

CERTIFICATION

EX-32

                                   EXHIBIT 32

     CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(SUBSECTIONS (A) AND (B) OF SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES
                                      CODE)

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the
undersigned officers of the registrant certifies, to the best of his knowledge,
that the registrant's Annual Report on Form 10-K for the year ended December 31,
2003 (the "Form 10-K") fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934 and that the information contained
in the Form 10-K, fairly presents, in all material respects, the financial
condition and results of operations of the registrant.





                               /s/ KARI STEFANSSON
                     --------------------------------------
                               Dr. Kari Stefansson
                     President and Chief Executive Officer



Dated: March 15, 2004





                               /s/ LANCE THIBAULT
                     --------------------------------------
                                 Lance Thibault
                     Chief Financial Officer and Treasurer



Dated: March 15, 2004

A signed original of this written statement required by Section 906 has been
furnished to deCODE genetics, Inc. and will be retained be deCODE genetics, Inc.
and furnished to the Securities and Exchange Commission or staff upon request.