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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------

                                   FORM 10-K
                       FOR ANNUAL AND TRANSITION REPORTS
                        PURSUANT TO SECTIONS 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
MARK ONE
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
                                       OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

            FOR THE TRANSITION PERIOD FROM           TO           .

                         COMMISSION FILE NO. 000-30469

                             DECODE GENETICS, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<Table>
<S>                                                  <C>
                    DELAWARE                                            04-3326704
            (STATE OR JURISDICTION OF                                (I.R.S. EMPLOYER
         INCORPORATION OR ORGANIZATION)                             IDENTIFICATION NO.)

                                   STURLUGATA 8, REYKJAVIK, ICELAND
                               (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

                                            + 354-570-1900
                         (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
</Table>

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

<Table>
<Caption>
               TITLE OF EACH CLASS                       NAME OF EACH EXCHANGE ON WHICH REGISTERED
               -------------------                       -----------------------------------------
<S>                                                  <C>
                      None                                                 None
</Table>

          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  [X]  No  [ ]

     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.  [ ]

     State the aggregate market value of the equity stock held by non-affiliates
of the Registrant: $190,410,861 at March 22, 2002 based on the last sales price
on that date.

     Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of March 22, 2002.

<Table>
<Caption>
                      CLASS                                          NUMBER OF SHARES
                      -----                                          ----------------
<S>                                                  <C>
          Common Stock, $.001 par value                                 45,298,115
</Table>

                      DOCUMENTS INCORPORATED BY REFERENCE

     The Proxy Statement to be filed with respect to the 2002 Annual Meeting of
Stockholders is incorporated by reference into Part III.

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<PAGE>

                                     PART I

ITEM 1.  BUSINESS

OVERVIEW

     deCODE is a genomics and health informatics company which is developing
products and services for the healthcare industry. We use our comprehensive
population data and proprietary datamining tools to identify and analyze the
genetic factors involved in common diseases. We use this information in the
development of new drugs, DNA-based diagnostics and bioinformatics systems and
tools. We also develop and apply modern informatics technology to discover new
knowledge about health and disease through data-mining.

     Our approach to the discovery of knowledge about the nature of health and
disease brings together three key types of anonymized data on the Icelandic
population: public-domain genealogical data, and genotypic and clinical data
gathered from volunteer participants in our gene research programs.

     Our research approach is based on four sets of information:

     - genealogy records of almost all living Icelanders and most of their
       ancestors for whom records exist, dating back in some cases to the
       settlement of Iceland in the ninth century;

     - genotype data from consenting Icelanders;

     - clinical data from Icelandic patients and family members participating in
       our disease-gene research; and

     - other public and proprietary data to which we have access.

     Our three avenues of commercialization are as follows:

     Discovery Services.  We believe that the development and application of
proprietary datasets and informatics in the context of an appropriate population
will accelerate our ability to discover disease-related genes and associated
drug targets. We have adopted this strategy to derive value both from
development of diagnostic and therapeutic products and from pharmacogenomic
services. We are currently working on discovery and product development in these
areas on our own and in collaboration with a number of pharmaceutical and
biotechnology companies. Our partners include: F.Hoffmann-La Roche, or Roche;
Roche Diagnostics; Affymetrix; Genmab and Medarex; and Pharmacia. We expect to
seek additional partners for this part of our business.

     Database Services.  We have also developed and are marketing the Clinical
Genome Miner(TM), a computer based discovery system that allows users to perform
real-time analysis to study the association between variation in human genes and
human disease. The system is being offered under a multi-year license to
research organizations to enable the discovery and validation of novel
therapeutic and diagnostic targets, based on the pathology and genetics of human
disease. The Clinical Genome Miner(TM) combines bioinformatics software and
anonymized data on the medical condition, genotypes and genealogy of tens of
thousands of Icelandic individuals who have participated in deCODE disease
studies and contributed samples and information under informed consent.

     We are developing the deCODE Combined Data Processing system, a tool which,
subject to ongoing compliance with regulatory requirements, will cross-reference
genealogical records, data from the Icelandic Health Sector Database and
genotypes of consenting participants.

     Informatics.  The third area of focus, informatics, is derived from our
discovery and database services. Our informatics business has two principal
components: bioinformatics and healthcare informatics.

     - Bioinformatics.  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.
       In order to carry out this work efficiently we have developed proprietary
       software and systems specifically suited to these tasks. In order to
       analyze this large amount of genotypic data, we have also developed what
       we believe are some of the fastest and most powerful mathematical
       algorithms and software systems for carrying out linkage analysis. These
       products enable us to efficiently study the inheritance of genetic
       markers across large families, an approach which indicates specific
       regions of the

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       genome containing genes involved in the pathogenesis of specific
       diseases. We are now marketing these products in partnership with Applied
       Biosystems Group, by integrating them for use with Applied Biosystems'
       bioanalytical instruments and data-capture software.

     - Healthcare Informatics.  In the future, the integration of genetics and
       medicine will add a new level of complexity to the decision-making
       process in the delivery of healthcare. The need for medical decision
       support systems for healthcare providers is expected to increase over the
       next several years. We are developing medical decision-support systems,
       which will include insights from the Clinical Genome Miner(TM) and, when
       it is operational, the Icelandic Health Sector Database.

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

     deCode was incorporated in Delaware in 1996.

SCIENTIFIC BACKGROUND

     In February 2001, Celera Genomics and the Human Genome Project presented
the initial sequencing and analysis of the human genome. The next great
challenge is to transform these raw sequence data into specific knowledge about
disease and healthcare.

GENOMICS

     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 has been estimated to contain 30,000 - 35,000 protein-coding
genes. Each cell uses or "expresses" only those genes (approximately 30% of the
30,000 - 35,000 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.

     The human genome sequence is now nearly completed and has been estimated to
contain 30,000 - 35,000 protein-coding genes and more than two million markers
to help map disease-causing genes. 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 which 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

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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 about which tissues or proteins or genes are important in
the disease, it represents a systematic strategy for creating specific knowledge
about disease. We believe that 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.

GENOMICS AND HEALTHCARE PRODUCTS

     Genomics and Diagnostics.  Gene-based diagnostic tests for both disease
diagnoses and management represent an important tool that physicians can use to
identify and monitor patients with increased risk of a disease. These tests can
complement clinical tests and may lead to more cost-effective use of expensive
tests and to a greater level of accuracy. Knowledge of predisposition towards a
disease may allow patients to alter their lifestyles or to take medication that
prevents the disease.

     Genomics and Therapeutics.  The lack of precise knowledge about the causes
of diseases makes it difficult for the pharmaceutical industry to select targets
for new drugs. Identifying specific disease genes may result in very specific
and, therefore, potentially more valuable drug targets than are otherwise
available. The disease gene products themselves may be attractive drug targets.
In addition, they mark a key molecular pathway that is composed of several other
potential drug targets.

     Genomics and Drug Response.  The efficacy and safety of existing and new
drugs may be enhanced by pharmacogenomics. Pharmacogenomics is the application
of genomics technology to the analysis and identification of genes involved in
drug response. It is believed that genomics will permit the identification of
the genetic differences that cause people to respond differently to the same
drugs. This may lead to tailor-made treatments for individuals, maximizing
efficacy and minimizing side effects.

DECODE'S UNIQUE APPROACH

POPULATION GENOMICS AND THE VALUE OF THE ICELANDIC POPULATION

     We believe that our unique approach, coupled with the application of
extensive bioinformatics to population genomics, has a number of distinct
advantages because of the following characteristics of the Icelandic nation:

     Extensive Genealogy.  Genealogy is a national pastime in Iceland. According
to Icelandic history books and old manuscripts from as early as the thirteenth
century, Iceland was settled in the ninth and tenth centuries. Since very early
stages of their history, Icelanders wrote detailed accounts of Icelandic facts
and events, including genealogy. The library of the University of Iceland and
other institutions contain manuscripts on genealogy dating from the middle ages,
which form a bridge between the time of settlement and official records kept in
the Icelandic National Archives from the time when church and government
officials began systematic registration of the population in the seventeenth
century. Numerous sources of genealogical information, including parish records,
census data and written manuscripts, such as the Icelandic sagas, are readily
available. Genealogical data can facilitate the identification of genes that
cause a specific disease by enabling researchers to compare the genes of family
members with and without the disease over the generations. The genealogical data
can go back as far as 35 generations and we believe it provides sufficient
genealogical information for our purposes. In addition, the fact that there has
been little immigration means that most Icelanders living today are descendants
of the original "founding" settlers and can, therefore, trace their ancestry to
the early middle ages.

                                        3
<PAGE>

     Relative Genetic Homogeneity.  Diseases which are prevalent in developed
countries, such as cancer and heart disease, have a large number of genetic
causes. In an isolated population that is genetically simpler, the number of
genetic causes is likely to be fewer than in more genetically diverse
populations. Thus, studying a more homogeneous population, like the Icelanders,
simplifies the problem of finding and subsequently understanding disease genes
and mutations causing common diseases. The Icelandic population was founded by
Norwegian and British settlers who arrived in Iceland in the ninth and tenth
centuries. Because Iceland has experienced little immigration over the last
eleven centuries, most of the 280,000 living Icelanders are descended from these
original "founding" settlers. Our ability to trace the Icelandic population back
approximately 1,100 years also facilitates gene discovery. Specific genes are
associated with the appearance and existence of specific diseases. For example,
the BRCA2 gene is known to carry mutations in some individuals that can cause
breast cancer. Because many present-day Icelanders may share a gene carrying a
mutation that causes a particular disease with one of the founding settlers,
they may also have such "disease gene" in common with other Icelanders. We can
make use of this "founder" effect to facilitate the identification of disease
genes. 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 may enhance the
identification of drug targets for any population.

     Centralized Healthcare System.  Iceland has had a centralized national
healthcare system since 1915. It presently consists of a base of 55 primary care
centers, a large University hospital in Reykjavik which has recently been formed
on the basis of a merger of the country's two largest hospitals, one central
hospital in Akureyri, and several smaller ones. 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 centralization
of the healthcare system means that the data is centralized and easily
accessible for scientific research.

     Well-educated Population.  The level of public education is high in Iceland
and illiteracy is negligible. Historically, the Icelandic population has been
cooperative when approached by physicians and scientists working on biomedical
research in the Icelandic community.

     We believe that the Icelandic population meets the criteria of being small
enough to allow necessary cooperation but large enough to deliver meaningful
results. While the Icelandic population is characterized by relative genetic
homogeneity, it is large enough to prevent an increased incidence of recessive
genetic conditions which can arise as a result of intermarriage. At the same
time, the population is small enough, and the amount of immigration is limited
enough, that the total genome of Icelanders is less variable than the genomes of
larger, less historically isolated nations.

COMPARISON TO OTHER APPROACHES

     Some companies are using an approach to locate disease genes that relies on
correlating DNA variations such as single nucleotide polymorphisms, known as
SNPs, throughout the genome or in candidate genes to patients. We believe that
this approach 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 SNPs and other variations to narrow down or
fine-map genes.

     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

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<PAGE>

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.

DISCOVERY SERVICES

     The extensive genealogy database and associated bioinformatics that we have
built in Iceland are the core of our novel genealogical approach to identifying
human disease genes and associated drug targets.

     We believe that working with the Icelandic population puts us in a position
to accelerate the discovery and development of new proprietary diagnostic and
therapeutic products capable of addressing diseases at their root causes, rather
than simply identifying and treating their symptoms. These programs may permit
doctors to make earlier diagnoses, use healthcare resources more
cost-effectively and select safer and more effective drugs for patients on the
basis of their genetic make-up.

     The genealogical approach that we have developed depends on a genealogical
database and bioinformatics tools that we have built. In the study of any
particular disease, we first define the disease classification broadly but
rigorously. (For example, we first labeled stroke patients as "stroke" rather
than as a series of less common subtypes of stroke). After our clinical
collaborators compile a list of all patients who have been diagnosed with the
disease, the list is encrypted and run through our genealogy database which
yields very large extended families of patients, sometimes containing hundreds
of individuals. The genealogy naturally links together those patients who are
likely to share a gene or genes for the disease. The patients are genotyped to
determine which genes or pieces of chromosomes they have in common. The
genealogical approach compensates for the inadequacies of "consensus criteria"
for disease classification, which utilizes specific symptoms accepted by a
consensus committee of physicians to determine who is "affected" by the disease,
and increases the chance that the form of the disease studied is the one
actually inherited. We believe that no other organization uses genealogy in this
manner. Our unique approach to human genetics has allowed us to map genes in
diseases in which many others have previously failed. By using this approach, we
expect to be able to assign function to the raw data contained in the human
genome sequence.

     The following describes our approach to gene discovery.

Genetic Mapping

     We have developed an extensive computerized genealogy database that
currently includes approximately 620,000 individuals or almost all the
approximately 280,000 living Icelanders along with most of their ancestors for
whom records exist. This represents most of the Icelanders who are known through
records ever to have lived to adulthood in Iceland. Research that our scientists
conducted on 26 extended families containing hundreds of individuals, which the
American Journal of Human Genetics published in its May 2000 issue, showed that
the accuracy of maternal connections in the database is 99.3%.

     Before we start a study looking for genes that cause or contribute to a
particular disease, we obtain approvals from both the Icelandic Bioethics
Committee and the Data Protection Authority. All patients who participate in our
research program by giving a blood sample sign an informed consent form approved
by the Bioethics Committee. We have developed a sophisticated encryption system
to protect the personal privacy of all participating volunteers.

     In our present disease-based research projects the first step of our
genealogical approach is for our clinical collaborators to compile a list of
patients who have been diagnosed with a particular disease in Iceland. After the
patient list has been encrypted, it is sent to us and run through an encrypted
version of our genealogy database. The genealogy database and associated
data-mining tools that we have developed enable us to determine the
relationships among all members of a large patient list and demonstrate
information flow through the generations.

     Using DNA from participating patients and their relatives, who grant us
informed consent, we are able to generate high-resolution genotypes with our
genotyping facility using 1,000 microsatellite markers. A microsatellite marker
is a segment of DNA containing variable short repeats that can be used to derive
a genotype. Our high-throughput genotyping facility and bioinformatics systems
substantially decrease the amount of labor involved in reading the genotypes.

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     We have developed a statistical informatics program that is used to
determine which portion of the genome is shared among most or all of the
patients within a family. This technique can systematically screen every segment
of the human genome for shared genotypes and can narrow the location of a
disease gene or genes to a small fraction (1/1000) of the human genome. That
segment marks the location of the disease gene that is mutated in the patients
with the disease. We use stringent criteria to determine that we have
successfully found a disease gene location before moving onto the next step of
gene discovery.

Physical Mapping, Fine-Mapping, and Sequencing

     Once we have narrowed the chromosomal region containing the disease gene to
two to three million base pairs, we develop a higher resolution map. To
accomplish this, we construct a physical map using large overlapping pieces of
human DNA. We have developed an automated high-throughput physical mapping
method which is based on sophisticated proprietary software we have developed
and uses robotics. By integrating a robust hybridization system (i.e., matching
of a small piece of DNA to large segments of DNA), automated analysis of the
hybridization data and data-mining techniques, we construct a high-resolution
map of the human genome.

     We use low-resolution and high-resolution physical maps to find new
microsatellite markers and genetic variations known as single nucleotide
polymorphisms, or SNPs which allows us to create more precise sets of genotypes
of the patients. SNP markers differ from microsatellite markers in several ways.
SNPs represent a single base change in the genomic sequence and microsatellite
markers represent short repeats of sequence. Microsatellite markers contain more
information than SNPs (one microsatellite marker typically contains three to
five times more information than a SNP) and, therefore, are well-suited for our
genetic studies using large families. Currently, the cost of genotyping
microsatellite markers is much less than genotyping SNPs (especially given the
relative information content). However, the SNPs are more numerous than
microsatellite markers and therefore more useful for fine-mapping and
association studies.

     Many patients may share several closely spaced genotypes which serve to
narrow the region containing a disease gene. We believe that the relative
genetic homogeneity and the age of the Icelandic population will enable us to
reduce the size of the chromosomal region containing the disease gene to as few
as 250,000 base pairs. We believe that this segment would generally contain
fewer than ten candidate genes, thus reducing the amount of time required to
screen the genes for mutations.

     Once we have narrowed a region, we sequence this narrow region using
automated DNA sequencers and then use our bioinformatics tools to identify new
genes. The genes are screened in turn for mutations that occur in patients with
the disease and rarely in those without. Typically, only one gene in this
segment will be the disease gene, but we may find disease genes on other
chromosomes that can be discovered in the same manner. We believe that our
ability to go from gene mapping to disease gene identification will be further
enhanced as the sequencing of the human genome is completed.

Functional Genomics

     After we have succeeded in identifying a disease gene using our population
genomics approach, we 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 specific drug targets
that interact with the disease genes.

     We have established three complementary systems designed to isolate
specific drug targets from "upstream," "downstream" and "proximal" pathways that
may be involved in the disease process. We believe these three functional
approaches will expand the number of potential drug targets that are associated
with the specific disease genes identified using our population genomics
approach.

     Our proximal 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 which involve increasing
stringency in order to eliminate false positive protein-protein interactions. We
are also able to crossmatch the genes identified as partners of the first
disease gene with additional population genomics data since they might be
mutated in the same disease.

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     Potential drug targets from upstream 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 plan to link the control region of newly
identified disease genes to a "reporter" gene and establish precisely which
region governs expression. DNA from this region will be used to retrieve
specific binding proteins that are responsible for turning the disease on.
Finally, we plan to perform gene expression analysis using Affymetrix GeneChip
technology to validate our conclusions and to identify other genes which are
regulated in tandem with the disease gene.

     Our downstream analysis 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 a gene on or off in cells, as well as
to express mutated versions revealed in the course of gene discovery. We employ
DNA chip technology in our efforts to find genes whose expression patterns are
altered by different scenarios of disease gene expression. Some of these genes
may play a role together with the disease gene product in disrupting the normal
biology and leading to disease.

DATABASE SERVICES

     At present, our focus in database services is on the commercialization and
continued development of the deCODE Clinical Genome Miner(TM) and on the
development and launch of the Icelandic Health Sector Database and the deCODE
Combined Data Processing system.

Description of the deCODE Clinical Genome Miner(TM)

     The deCODE Clinical Genome Miner(TM) (CGM) is the first bioinformatics
system in the world that enables the cross-referencing of genetic, phenotypic
and genealogical data on a large scale and in real time.

     The CGM contains uniquely comprehensive and integrated proprietary data for
the analysis of the interplay between genetics and environmental factors
involved in the development of common diseases. These include our anonymized
genealogical data, as well as genoyptic and clinical medical data on over 50,000
volunteer participants in more than 30 of our disease research programs. The
datamining tools and two principal components of the CGM -- the Disease
Miner(TM) and Genome Miner(TM) -- enable users to find correlations between
genetic variation and disease, based on queries starting from either endpoint.
Users can define a phenotype, conduct a genome-wide, population linkage scan and
drill down to find the known genes in any chromosomal region of interest. They
can also identify a gene, place it within the most detailed genetic and physical
maps of the genome available -- developed by deCODE -- and view the population
linkage correlations between the chromosomal location of the gene and more than
30 diseases.

     The CGM thereby enables subscribers to answer in a matter of minutes
questions that would likely take years to answer through experimentation, and to
ask the questions in a relatively hypothesis-free manner. We believe that the
CGM will be valuable to subscribers as a discovery platform, as a means of
verifying results, and, perhaps most importantly, as an efficient means for
pharmaceutical and biotechnology companies to characterize and prioritize large
numbers of drug and diagnostic targets whose links to disease may not be well
understood. We believe that this represents one of the most daunting challenges
in employing genomics to create new diagnostic tools and therapeutics to improve
healthcare.

     CGM users' interactions with the system are confined to the query layer;
users will not have direct access to the data itself, which remains proprietary
to deCODE. We are marketing the CGM on the basis of non-exclusive, multi-year
subscriptions.

Description of the deCODE Combined Data Processing system

     We are developing the deCODE Combined Data Processing system, a tool which,
subject to ongoing compliance with regulatory requirements, will cross-reference
genealogical records, data from the Icelandic Health Sector Database and
genotypes of consenting participants. The healthcare data contained in the
Icelandic Health Sector Database will include, in addition to disease diagnosis
details of laboratory results, treatments and outcomes.

     Under the terms of the Icelandic Health Sector Database license we will be
able to process medical information, environmental exposure information and
resource use information from the Icelandic healthcare

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system. A computerized network of medical records will be organized in each
participating healthcare institution. Information processed in the Icelandic
Health Sector Database will take place in a manner designed to ensure that
personal data remains non-personally identifiable. The type of healthcare data
may include admission data, diagnostic work-up and results, diagnoses, treatment
and operations for each patient visit, medical and social history, allergies,
risk factor exposure, pharmaceutical treatment and outcomes.

INFORMATICS

BIOINFORMATICS

     We believe that our population approach to genetics -- through which we use
population- and genome-wide genotypic analysis to identify key genetic
components in common, complex diseases -- has proven to be an efficient and
effective means of identifying drug targets and diagnostic markers rooted in the
biology of disease. With over 50 diseases now under research and one of the
largest high-throughput genotyping laboratories in the world, we believe that
deCODE is a world leader in the generation and analysis of genotypic data. We
have in the course of our research developed mathematical algorithms and
software systems for managing tens of thousands of samples and identifying
locations and levels of genetic sharing in large groups of patients because we
conduct linkage analysis on such a large scale.

HEALTHCARE INFORMATICS

     We believe that the rapidly increasing volume of clinical information and
medical research data available to physicians and healthcare providers, combined
with the data processing capabilities of modern computer and software systems,
have created a need for effective healthcare informatics tools and the means to
meet this need. Key areas of healthcare informatics include personalized
medicine, privacy protection and disease management. We believe that our
experience in using advanced privacy protection systems and our broad range of
data, including anonymized population-based data on genetics and disease, will
enable us to develop innovative products in these fields.

OUR STRATEGY

     Our strategy is to use its population-based approach to transform genomic
and healthcare data into products and services for the healthcare sector. The
key elements of our strategy are as follows:

     Gene and Drug Target Discovery.  We are pursuing gene and drug target
discovery and the characterization of genes that contribute to the causes of
common diseases. In addition, we are using studies of gene expression and
protein-protein interaction systems to define molecular pathways, which may
contain drug targets. We are focusing on diseases that have the potential to
result in the discovery of new proteins and drug candidates. We intend to pursue
the development of these targets to create new therapeutics, both in-house and
in alliance with corporate partners. In addition knowledge about genes and
polymorphisms that contribute to the cause of disease can be used to develop
novel diagnostic markers and tests. Our acquisition in early 2002 of MediChem
Life Sciences, Inc., a U.S.-based drug discovery and development company,
provides us with medicinal chemistry and structural biology expertise to pursue
the downstream development of drug targets on a proprietary basis.

     Pharmacogenomics Partnerships.  In collaboration with pharmaceutical and
biotechnology companies, we are working to apply pharmacogenomics to understand
differences in drug response among individuals. Our approach enables the
identification of the genetic differences that cause people to respond
differently to the same drugs. As a result, we believe that it will be possible
to individualize the selection of drugs for patients. We believe that our
population approach and resources give us an advantage in identifying key genes
involved in responsiveness to drugs, and we are combining this approach with
large-scale gene expression studies to design accurate DNA-based tests to
indicate whether individual patients are likely to respond to a given drug.
Furthermore, we believe that the integration of medical treatment and outcome
information with genetic information will give us and our partners an advantage
in the generation and analysis of pharmacogenomics information, as well as in
the commercialization of pharmacogenomic tests.

     Database Subscriptions.  We have built the deCODE Clinical Genome Miner
database and discovery system, and will continue to extend and enhance this
system through the development of the Icelandic Health

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Sector Database and the deCODE Combined Data Processing system. Services we plan
to offer to future subscribers of our database and discovery systems will
include principally gene discovery and drug target prioritization,
pharmacogenomics, disease management and health management. We expect
subscribers to include pharmaceutical companies, healthcare organizations,
national health services and government agencies that will pay subscription fees
and, in some cases, development milestones and a share of product revenues they
generate as a result of using the database.

     Informatics Products and Services.  We are pursuing market opportunities
for software tools that we have developed in the course of our gene discovery
efforts, in the development of the Clinical Genome Miner(TM). We also intend to
pursue market opportunities for products we develop in healthcare informatics.

PRODUCTS AND SERVICES

     Our current services and those under development can be classified into
three categories, all of which are based on analyzing data from the Icelandic
population using our proprietary bioinformatics tools: discovery services;
database services; and informatics.

DISCOVERY SERVICES

Current Discovery Programs

     We are conducting gene discovery programs associated with over 50 common
diseases. The inheritance patterns of many common diseases are complex,
indicating that the diseases are probably caused by mutations in multiple genes
and/or through interactions between genes and environment. 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.

     We expect the identification of disease genes to provide insights into the
causes of common diseases and to help the development of highly specific
diagnostic and therapeutic products, including small molecule products,
recombinant proteins, gene therapy and antisense therapy. A brief description of
several of our discovery programs and achievements follows.

     Autoimmune Diseases.  We are currently studying several autoimmune diseases
such as atopy, inflammatory bowel disease (Crohn's and ulcerative colitis),
insulin-dependent diabetes, psoriasis, rheumatoid arthritis and ankylosing
spondilytis. These, like all our disease-gene research programs, are being
researched using genome-wide linkage scans of patients and their relatives from
across the population. We have located genes in atopy, psoriasis and rheumatoid
arthritis.

     - Psoriasis.  Psoriasis is a chronic inflammatory disease that leads to
       disfiguring skin lesions and arthritis. We have completed a genome-wide
       linkage scan of Icelandic familial material and have confirmed linkage
       and association to a region of the genome that regulates immune response
       known as the MHC. Our genome-wide scan also identified a novel region of
       the genome that interacts with the MHC to cause psoriasis. Our second
       location represents the second gene mapped outside the MHC that fulfills
       the criteria for genome-wide significance. We are in the process of
       fine-mapping both gene locations.

     - Rheumatoid arthritis.  We have mapped the first gene with genome-wide
       significant linkage to rheumatoid arthritis outside the MHC region, and
       are currently fine-mapping this locus.

     Cardiopulmonary Diseases.  We are studying a variety of common diseases
such as asthma, chronic obstructive pulmonary disease (COPD), hypertension,
myocardial infarction, peripheral arterial occlusive disease (PAOD),
cerebrovascular disease (stroke) and obstructive sleep apnea syndrome. We have
identified novel genes in PAOD and the common form of stroke, and located genes
in asthma, COPD, Hypertension and myocardial infarction.

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     - Peripheral arterial occlusive disease (PAOD).  PAOD is a vascular
       disorder characterized by narrowing of the arteries of the arms and legs,
       and obstruction of the blood flow. PAOD strikes between 2% and 5% of
       people over the age of 65 worldwide and results in pain, diminished
       mobility, the need for invasive surgery, and, in extreme cases, gangrene
       and loss of the affected limbs. By conducting a genome-wide analysis of
       1300 Icelandic PAOD patients and family members, deCODE researchers were
       able to identify a small section of a single chromosome that shows
       significant genetic linkage to the disease. The patients who participated
       in the study were carefully selected by collaborating surgeons from the
       Icelandic Society of Vascular Surgery working at Iceland's National
       University Hospital. All had undergone previous angiography that
       documented the nature and extent of vascular lesions, and most had
       undergone surgery to bypass blocked arteries. The study marks an
       important advance in identifying the genetic mechanisms contributing to
       PAOD. This study may expand slightly to emphasize that we have validated
       a drug target which was linked to the disease. We have validated a drug
       target identified through analysis of the gene which we have linked to
       PAOD, and are now conducting ongoing drug discovery work on this target.

     - Cerebrovascular disease (stroke).  Stroke represents diseases that
       directly or indirectly affect the blood vessels in the brain and cause
       central nervous system damage from either blockage of cerebral blood flow
       or rupture of an intracranial artery. It is the third leading cause of
       death. We have a research alliance with local physicians who care for a
       majority of the stroke patients diagnosed in Iceland. We have collected
       almost 2,000 DNA samples from informative families and genotyped most of
       them. Using our genealogical approach, we have identified the first gene
       ever linked to the common form of stroke and used this information to
       identify a drug target. We are conducting drug discovery work using this
       target.

     Central nervous system diseases.  We are studying the genetic basis for
several psychiatric and central nervous system diseases, including Alzheimer's
disease, anxiety, bipolar disease/depression, familial essential tremor,
multiple sclerosis, narcolepsy, Parkinson's disease, schizophrenia, autism,
attention deficit and hyperactivity disorder, and migraine.

     - Alzheimer's disease.  Alzheimer's disease is the most common cause of
       dementia. We have carried out a genome-wide scan involving 1,200
       Icelanders and mapped a gene that contributes to the occurrence of
       late-onset Alzheimer's disease. We are fine-mapping this locus to
       identify the gene in question.

     - Schizophrenia.  Schizophrenia is a debilitating psychiatric disorder. We
       have carried out a genome-wide scan with the participation of 400
       Icelandic schizophrenia patients and we have identified a gene linked to
       schizophrenia. Through functional and proteomics studies we identified a
       protein coded for by this gene and another protein with which it
       interacts in the central nervous system. We are using the latter protein
       as a drug target. We have developed knock-out mice to gain additional
       information on this target, and have conducted high-throughput screening
       to identify potentially effective compounds for use against this target.

     - Parkinson's disease.  We have mapped a gene contributing to late-onset
       Parkinson's disease, the first genetic factor ever mapped for the most
       common form of the disease. The gene was mapped to a small region of
       chromosome 1, through analysis of genotypic data from volunteer
       late-onset Parkinson's patients and their unaffected relatives from 51
       families from across Iceland.

     - Familial essential tremor (FET).  A genome-wide scan for FET genes was
       performed at deCODE, in a study of 16 Icelandic families with 75 affected
       individuals in whom FET was apparently inherited as a dominant trait. The
       scan revealed one locus of genome-wide significance. This locus is
       currently being fine-mapped.

     - Anxiety disorder and depression.  The most common form of mental illness
       in industrialized countries, anxiety disorder and depression encompasses
       a constellation of conditions, including panic disorder, phobic
       disorders, obsessive-compulsive disorder, general anxiety disorder and
       depression. We approached anxiety as a broadly defined disorder that
       encompasses all of these complexities. Following a survey of more than
       10,000 randomly-selected individuals conducted by collaborating
       physicians, some 500 respondents who had reported symptoms of anxiety
       agreed to be clinically examined and

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       genotyped. By focusing on extended families with at least one individual
       suffering from panic disorder, we mapped a gene strongly linked to all
       forms of clinical anxiety. We are now expanding this program by surveying
       20,000 randomly-selected individuals for depression and have already
       identified 230 who have been further evaluated and are being genotyped
       along with their closest family members.

     Eye Disease.  We are studying a range of eye diseases, including macular
degeneration, cataracts, glaucoma, myopia and retinitis pigmentosa. We have
mapped 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 chromosome 2p13. In February 2002, we
and a team from the National University Hospital in Reykjavik published a study
utilizing our genealogical database to demonstrate the contribution of genetic
factors in the development of endometriosis (Human Reproduction, 17:3,
pp555-559). We are using this data as the basis for a study to identify key
genes involved in the disease.

     Cancer.  We conducting research in many forms of cancer, including lung
cancer, melanoma, renal cancer, colon cancer, testicular cancer, thyroid cancer,
prostate cancer and also for benign prostatic hypertrophy.

     Metabolic and Other Diseases and Conditions.  We are studying the genetic
basis for osteoarthritis, osteoporosis, non-insulin-dependent diabetes (NIDDM),
obesity, familial combined hyperlipidemia, nocturnal enuresis, and longevity. We
have mapped genes for the first four conditions and for longevity.

     - Osteoarthritis.  We have mapped three genes linked to osteoarthritis. We
       are currently fine-mapping and sequencing these regions to search for the
       disease genes themselves.

     - Osteoporosis.  Osteoporosis is a disorder of the bones characterized by
       the progressive thinning and weakening of bone tissue. It generally
       strikes people over the age of 50, and is four times more common in women
       than in men, making it one of the most challenging medical problems in
       women's health worldwide. We have mapped an osteoporosis gene to a small
       chromosomal region as a result of a genome-wide scan conducted with the
       participation of 139 Icelandic families, including more than 430 patients
       and 600 unaffected relatives. The discovery marks a major advance toward
       identifying one of the genes that, if present in a variant form,
       contribute to this important disease.

     - Non-insulin dependent diabetes.  We located a gene linked to NIDDM to a
       small chromosomal region by utilizing the genotypes of 2700 volunteer
       patients and relatives grouped into 200 families from across Iceland.

     - Obesity.  We located a gene whose variant forms contribute to obesity by
       analyzing genotypic data from more than 11,000 adult volunteers in
       Iceland -- representing a significant proportion of the population
       suffering from severe obesity. Using the Clinical Genome Miner(TM), we
       were able to correlate a wide range of clinical, behavioral, and
       genotypic data, and gained important new insights into the heritability
       of different aspects of obesity, as well as into the complex interplay
       between obesity and diabetes, stroke, heart disease, and hyperlipidemia.
       In this way we have also located a gene variant that appears to protect
       obese individuals from type-2 diabetes, an otherwise common complication.

     - Longevity.  Using our genealogical database and datamining algorithms, we
       have found that individuals above the 95th percentile in longevity in
       Iceland are significantly more related than members of the population at
       large. Through the analysis of genotype data from volunteer members of
       families with significant numbers of individuals living beyond the 95th
       percentile, we have located a gene that appears to correlate with extreme
       longevity. We are fine-mapping this locus.

Collaborations

     Our strategy for pursuing business opportunities is to attempt to turn our
discoveries and resources into to a broad range of products for the market. In
some instances we intend to pursue this research and product development on our
own, and in others through alliances with pharmaceutical companies,
biotechnology firms and other healthcare institutions. Depending on the nature
of each prospective business opportunity, we may conduct the research in return
for one or more of the following: up-front equity investments; direct payments
for research funding; payments upon the achievement of scientific milestones;
shared or exclusive rights to

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diagnostics and therapeutics; and royalties on products that our collaborators
market. In some instances, we may negotiate for access to our collaborators
technologies, for example libraries of chemical compounds, to enhance our
operations.

     F.Hoffmann-La Roche.  In February 1998, we entered into a research
collaboration and cross-license agreement with Roche to collaborate on the
discovery of genetic variations which affect the cause of diseases for the
purpose of developing new methods to diagnose diseases and obtain drug targets
useful in drug discovery. The term of this agreement expired on February 1,
2002.

     In connection with the agreement, Roche Finance Ltd., or Roche Finance, an
affiliate of Roche, purchased shares of our preferred stock and received an
option to purchase additional shares at any time prior to the end of February
2001. Roche Finance also purchased warrants to buy shares of our preferred stock
and received the right to purchase additional warrants if it exercised its
option to acquire additional shares of preferred stock. These became warrants to
purchase an equivalent amount of common stock upon the completion of our initial
public offering. In April 2000, Roche Finance transferred these shares, warrants
and options to an affiliate, SAPAC Corporation Ltd., or SAPAC. In June 2000,
SAPAC exercised its option and purchased 555,556 shares of our preferred stock,
which subsequently converted into an equivalent number of shares of common stock
and a warrant to purchase 55,556 shares of our preferred stock, which currently
allows for the purchase of the same number of shares of common stock.

     F.Hoffmann-La Roche.  In January 2002, we formed with a new, three-year
alliance with Roche focused on turning the achievements of our 1998 gene
discovery collaboration into novel treatments for common diseases. Under our
1998 agreement, we used our population data to identify key genetic factors
contributing to ten major diseases: osteoarthritis, Alzheimer's disease,
schizophrenia, peripheral arterial occlusive disease (PAOD), stroke,
osteoporosis, obesity, anxiety, type 2 diabetes and rheumatoid arthritis. The
new alliance extends our partnership with Roche to leverage our expanding
capabilities in drug discovery and development. Under this new alliance, Roche
will provide us with research funding to increasingly focus over the next two
years on downstream research in a selection of four of the diseases covered by
the earlier agreement. The goal of the new alliance is to use the targets
identified under the 1998 alliance to discover and develop new therapeutic
compounds and to take these compounds into clinical trials. We will receive
milestone payments for the development of compounds as well as royalties on the
sales of drugs developed under the alliance. We retain therapeutic development
rights to those targets identified under the 1998 alliance and not carried over
into the new alliance. Pursuant to an agreement, we license our GeneMiner
bioinformatic software product to Roche.

     Genmab and Medarex.  In June 2001, we entered into two agreements with
Genmab A/S. Under the first, we are conducting research aimed at developing a
DNA-based test to predict individual clinical response to Genmab's antibody
treatment for rheumatoid arthritis (RA). We and our subsidiary Encode are
conducting studies using Icelandic patients and patients from broader
populations to identify key genetic factors predictive of clinical response to
treatments for moderate to severe RA. These studies will also specifically focus
on genetic factors predictive of responsiveness to HuMax-CD4, a fully human
monoclonal antibody developed by Genmab and now in Phase III clinical trials.
With the results of this research, we plan to develop an RNA- or DNA-based test
that can be employed by doctors to determine the best treatment regimes for
individual RA patients. Exclusive of potential sales royalties, Genmab is
providing deCODE with research funding and potential milestone payments for a
successfully marketed product.

     We have also entered a broad-based collaboration with Genmab to develop new
antibody therapeutic products. The partnership aims to utilize novel targets
discovered in our research on the genetics of common diseases along with
Genmab's fully human antibody technology to create and develop new products.
This is a multi-target alliance covering a range of disease areas including
cardiovascular and inflammatory diseases as well as cancer. We and Genmab will
collaborate on the research, development, and commercialization of the new
antibody products, and will share equally development costs and revenues
generated from outlicensing or sales of these products. Given the scope of this
multi-target alliance, Medarex, Inc., a leading antibody company based in the
United States, will also contribute resources to the collaboration and will
share certain costs and commercial rights. Medarex originally developed the
UltiMAb(TM) platform, which Genmab has

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licensed, and also has an agreement in which it may participate with Genmab in
multi-target European genomics relationships, such as this one.

     Roche Diagnostics.  In June 2001, we signed with Roche a five-year alliance
to develop and market DNA-based diagnostics for major diseases. The alliance
represents an important element in our strategy of turning our research platform
and achievements into products on the market. The alliance aims to bring
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. In
addition to the development of novel DNA-based diagnostic and predisposition
screening products, we will be working under this alliance to use our Clinical
Genome Miner(TM) system to develop point-of-care informatics products that can
assist doctors in evaluating the results of DNA-based diagnostic tests. We
believe that our population data and informatics tools contained in the CGM give
us an advantage in the development of such products, and that such products will
be important in establishing the use of DNA-based diagnostic and pharmacogenomic
tests as a useful part of everyday healthcare.

     Affymetrix.  In July 2001, we formed a pharmacogenomics alliance with
Affymetrix, Inc., under which we are developing DNA-based tests to predict the
responsiveness of individual patients to treatments for common diseases. We are
bringing together our population-based approach to pharmacogenomics and
Affymetrix' GeneChip(R) technology, focusing initially on conducting gene
expression analysis to understand the response to drugs used in the treatment of
several common diseases. These include high-cholesterol, depression, asthma,
hypertension, breast cancer, schizophrenia and migraine. Clinical work under
this collaboration is being performed by Encode, our wholly-owned subsidiary.
Through Encode, we will share the revenues from the sale of tests developed
under the collaboration.

     Pharmacia.  In December 2001, we formed a pharmacogenomics alliance with
Pharmacia Corporation to identify the role of genetics in the development of
advanced forms of heart disease. Under the agreement, we will employ our
population resources and Clinical Genome Miner(TM) to find genetic markers that
can be used to identify patients who are highly predisposed to progressing from
an early to an advanced form of heart disease. The companies then hope to use
this information as the basis for clinical trials. These trials would aim to
establish the utility of these genetic markers in identifying patients likely to
benefit from cardiovascular drugs under development at Pharmacia. We believe
that this alliance underscores the potential of our pharmacogenomics approach
for extending the applicability of a developmental treatment in a targeted
manner, maximizing its potential benefits to patients. Through our
pharmacogenomics subsidiary and CRO Encode, we will receive contract fees as
part of the first phase of this agreement. If certain license options are
exercised by Pharmacia, deCODE, through Encode, will receive royalties on sales
of diagnostic tests as well as royalties on potential sales of cardiovascular
drugs. Pharmacia may terminate this arrangement for a full refund through April
18, 2002 for certain defined circumstances.

     In addition, we have entered into the following collaborations:

     Partners HealthCare System, Inc.  In May 2000, we entered into a three-year
strategic alliance agreement and crosswalk development agreement with Partners
HealthCare System, Inc., The General Hospital Corporation, d.b.a. Massachusetts
General Hospital and The Brigham and Women's Hospital, Inc. (collectively,
"Partners") pursuant to which (a) we will fund research by investigators of
Partners pursuant to sponsored research agreements and/or clinical trial
agreements to be entered into from time to time, (b) we will collaborate with
Partners on, and provide funding for, development of an information technology
bridge, called the crosswalk, to facilitate studies with the deCODE Combined
Data Processing system and Partners' Research Patient Data Registry and (c) we
will develop and market, in consultation with Partners, new information
technology products and services relating to the use of the crosswalk for future
pharmaceutical and biotechnology applications. We do not believe that the amount
of funding we have agreed to provide over the term of the agreements is material
to us.

     We will have an exclusive option to acquire an exclusive license to any
patents or copyrights developed under such sponsored research or clinical trial
agreements on financial terms to be negotiated by the parties based on
pre-determined criteria contained in the strategic alliance agreement. Each
party has the right to use the crosswalk to facilitate studies with the
databases for non-commercial internal research purposes. Each party also has the
right to use the crosswalk to facilitate studies with such party's own database
to conduct

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commercially sponsored research. Partners is required to pay us a royalty on
revenue it receives from such use. In addition, we have the exclusive right to
use the crosswalk to develop and market products and services, and we are
obligated to pay Partners a royalty on revenue we receive from the sale of such
products and services. Because we have not yet developed such products or
services and Partners has not yet entered into any commercially sponsored
research agreements, we cannot estimate the amount of royalties we may receive
or be required to pay under the agreements.

     Other Hospital and Physician Collaborations.  We have entered into
collaboration agreements and arrangements with the Icelandic Heart Association
and several physician groups. The goal of these collaborations is the discovery
of genetic factors which contribute to the genesis of certain disorders on which
the various physician groups maintain patient information. These collaborators
contribute data and/or other clinical information to the project, while we
provide our expertise in molecular genetics and experimental design, as well as
necessary equipment and research supplies. We are responsible for the
reimbursement of all expenses related to the projects. We share the ability to
make management decisions regarding the projects with these collaborators, and
we jointly form executive or steering committees to monitor the projects. Our
collaboration agreements with these collaborators normally continue for a term
of no more than five years.

     To further facilitate our research projects and enable us to construct
lists of patients with specific diseases, we have also entered into
collaboration agreements and arrangements with two of the largest hospitals in
Iceland, one of which was recently founded by merging the two formerly largest
hospitals in Iceland. Under the terms of these agreements, the hospitals
contribute research data, and surveillance committees that we jointly appoint
with the hospitals monitor our projects. We are obligated to pay all the
hospitals' out-of-pocket expenses incurred as a result of the collaboration. Our
agreements with the hospitals will continue until terminated by the parties.

     We have also entered into agreements with 19 Icelandic health institutions
as required by the Icelandic Health Sector Database Act and License in order to
get data from those institutions into the Health Sector Database.

Pharmacogenomics

     In November 2000, we acquired Encode, a wholly owned subsidiary, to launch
pharmacogenomics studies in Iceland, based on deCODE's approach. Encode also
continues to conduct clinical trials for new and existing therapeutics for major
pharmaceutical companies as a Contract Research Organization. We are now working
with several pharmaceutical and biotechnology companies, including GenMab,
Pharmacia and Affymetrix to develop and market pharmacogenomic tests. In this
way, we believe that we will be able to assist pharmaceutical companies in
tailoring drugs to specific parts of the patient population. Tailor-made drugs
will better ensure both effectiveness and safety. In addition, genetic
information may lead to faster and more successful clinical trials, which may
result in cost savings. Pharmacogenomics may also enable pharmaceutical
companies to explore the use of older chemical compounds which have been
abandoned. As the development cost of these compounds has already been incurred,
pharmacogenomics research may provide a cost-effective method to bring these
abandoned products to market.

Cancer

     In November 2000, we founded deCODE Cancer ehf., a wholly-owned subsidiary
that has incorporated deCODE's cancer research. By creating a subsidiary with an
exclusive focus on cancer, we believe that we will reinforce the ability of our
researchers to continue to develop the particular skills and methods necessary
for studying the complex biology involved in the study of cancer. deCODE Cancer
also enjoy the flexibility to develop special alliances, while at the same time
continuing to leverage deCODE's resources for population genomics research.

Proprietary Discovery and Development Programs

     We also plan to work on some diseases without partnering with
pharmaceutical companies, and we are currently pursuing approximately 45 disease
projects independent of research sponsorships. In the event we complete any
independent projects, we intend to pursue the commercial development of our gene
and drug target discovery through the development and marketing of therapeutics
and diagnostic products. We may do

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this by using our own resources to turn discoveries from our internal projects
into therapeutic or diagnostic products and developing our own marketing
capabilities, by licensing our discoveries to others who would be required to
pay us royalties on sales of any products they develop using the results of our
gene discovery programs, or by entering into collaborative arrangements for the
development and marketing of products from these programs.

     In March 2002, we acquired Medichem Life Sciences Inc. through a
stock-for-stock exchange and merger agreement. We did so in order to gain the
advanced drug discovery and development capabilities necessary to take our
targets into proprietary development. Founded in 1987, MediChem is a
full-service drug discovery technology and services company focused on using its
high-throughput integrated chemistry platform to streamline genomics-based drug
discovery and development. At the time of the acquisition, MediChem had 163
employees, including 107 chemists, 12 molecular biologists and 9 protein
crystallographers. The company has substantial expertise in structural
proteomics; lead discovery and optimization; combinatorial, computational and
medicinal chemistry; biocatalysis; analytical and separations chemistry;
chemical synthesis and scale-up; and clinical trials management and regulatory
approvals.

DATABASE SERVICES

     The deCODE Clinical Genome Miner(TM) and the deCODE Combined Data
Processing system allow users to ask questions about relationships between
genetic, genealogical data and disease. We believe the deCODE database services
systems substantially enhances the value of human genome sequence data,
expression data or studies of animal models by providing a human, medical and
genetic context, which may facilitate the development of new human therapeutics.

Products

     We expect pharmaceutical and biotechnology companies to use the deCODE
Clinical Genome Miner(TM) and the deCode Combined Data processing system in gene
discovery programs, gene validation and drug target prioritization as a way of
confirming their own findings or providing an impetus for further research.

Customers

     We believe that the potential customer base for our database services
consists of members of the healthcare industry, including pharmaceutical and
biotechnology companies. Pharmaceutical and biotechnology companies may use our
database services in their gene discovery, gene validation and pharmacogenomics
programs.

     We anticipate that our customers will pay for access to database products
by means of a fixed subscription fee, in addition to potential share of product
revenues they generate as a result of using the database.

INFORMATICS

     We have identified two broad categories of product opportunities in
informatics to leverage capabilities derived from our gene discovery and
database operations: bioinformatics and healthcare informatics.

Products

     Bioinformatics.  To aid in our gene and drug target discovery work, we have
developed numerous proprietary bioinformatics tools for genealogy analysis,
project management, gene mapping, physical mapping, and gene identification that
we hope to commercialize as independent products.

     Healthcare Informatics.  In the course of our research, and in order to
fulfill the Icelandic Data Protection Authority's requirements, we have
developed substantial expertise in the protection and encryption of potentially
sensitive personal data. All of the data used in our research, whether
genealogical, genetic or medical, is used only in non-personally identifiable
form, with the encryption of personal identifiers supervised by the Icelandic
Data Protection Authority. We have designed efficient systems for meeting
Iceland's data and privacy protection standards, which are at present among the
strictest in the world. We believe that the opportunity to commercialize this
expertise will grow as the healthcare industry seeks to take advantage of the

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benefits that information technology offers to manage complex healthcare data
while maintaining patient confidentiality.

     In addition to the increasing demand for privacy protection, we believe
that the "information load" on physicians will continue to grow as the genetic
dimension of healthcare leads to risk prediction and a shift from generalized
treatment guidelines to personalized care and the development of informed
strategies of preventive medicine. This trend toward personalized healthcare
presents a number of opportunities in healthcare informatics. We believe our
comprehensive data and software for mining this data for knowledge give us an
advantage as we pursue these opportunities in areas including:

     - Personalized Medicine. We intend to use the knowledge that we gain from
       our discovery programs and the Clinical Genome Miner(TM) system to
       provide medical decision-support systems necessary to deliver and
       interpret this increased volume of data to a variety of end-users. We are
       working on integrating the CGM for use with DNA-based diagnostics under
       our alliance with Roche Diagnostics. We believe this will be useful not
       only in interpreting the results of such tests for assisting with
       clinical diagnosis of disease, but also for correlating results
       indicative of disease predisposition with other medical data in order to
       design novel and informed strategies of preventive medicine.

     - Disease Management. By carefully analyzing clinical data and correlating
       such data with genetic factors, healthcare providers may develop programs
       that cover the lifespan of the disease, from preventive actions to
       determining the most appropriate treatments for each individual. For a
       healthcare provider, which is constantly making the cost/quality
       tradeoff, this is a unique way to design programs which optimize both
       cost and quality. We believe the Clinical Genome Miner lends itself to
       this type of analysis, and its capabilities in this area will improve
       with the ability of users to cross-reference CGM data with the healthcare
       data to be included in the Icelandic Health Sector Database.

Collaborations

     Applied Biosystems Group.  In July 2001, we announced the formation of a
three-year alliance with Applied Biosystems Group. Under this alliance we are
adapting our genotyping software suite for integration with Applied Biosystems'
laboratory management software to provide a full range of highly customizable
solutions for the generation, management and analysis of genotyping data. We are
also collaborating with ABG to develop new bioinformatics software to meet the
evolving demands of life science customers. Applied Biosystems expects to
integrate the new software and customers' existing software tools with its
instruments to create fully integrated genotyping solutions. We will receive
royalties on sales of the alliance software.

Customers

     Bioinformatics.  We believe that the customers for our bioinformatics tools
will mainly consist of pharmaceutical and biotechnology companies.

     Healthcare informatics.  We believe that privacy products can potentially
be sold to any company handling sensitive data about individual persons, whether
or not the data are healthcare-related. However, pharmaceutical companies,
healthcare providers and payors with substantial quantities of individual data
protected by privacy restrictions will serve as our primary target. We believe
that products and services in the fields of personalized medicine and disease
management have a broad potential customer base in the healthcare industry. Our
initial focus will be on healthcare providers, national health systems,
physicians and HMOs, all of whom use support tools that capture and analyze
patient data to assist them in healthcare decision-making.

RESEARCH AND DEVELOPMENT EXPENSES

     Our research and development expenses were $71,796,515 in the year ended
December 31, 2001, $45,742,081 in 2000 and $33,213,557 in 1999. Of these
amounts, we estimate that $26 million, $23 million and $22 million were spent on
customer sponsored research and development activities in 2001, 2000 and 1999,
respectively.

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<PAGE>

PATENTS AND PROPRIETARY RIGHTS

     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, 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 intend to 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, including genes we discover, mutations of genes and related
processes and inventions, technologies which may be used to discover and
characterize genes, and therapeutic and diagnostic processes and other
inventions based on these genes. As of year-end 2001, we had four issued U.S.
patents, one European patent and had filed over 30 patent applications for our
inventions in the United States. We have also filed numerous international
patent applications under the Patent Cooperation Treaty, claiming priority from
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 obtained an exclusive license from The Beth Israel Deaconess
Medical Center, or Beth Israel, in Boston, Massachusetts to develop and
commercialize therapeutic and diagnostic products anywhere in the world based on
Beth Israel's interest in patents and know-how relating to the linkage between a
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, we
are obligated to pay license fees and other payments upon the achievement of
specified milestones. We are also obligated to pay royalties to Beth Israel on
the sales of products that may result from the licensed technology. We do not
believe that payments under our agreement with Beth Israel will be material to
us.

COMPETITION

     We face, and will continue to face, intense competition in our gene
discovery programs from organizations such as major pharmaceutical companies,
specialized biotechnology firms, 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 staffs 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;

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<PAGE>

     - 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 and in our proposed business
relating to the deCODE Combined Data Processing system. In addition, the
development, production and marketing of any pharmaceutical products which we or
a partner may develop is subject to regulation by governmental authorities.

THE ICELANDIC HEALTH SECTOR DATABASE LICENSE

     On December 17, 1998, the Icelandic parliament passed the Icelandic Health
Sector Database Act, or the Act, allowing the Ministry of Health and Social
Security, or the Ministry, to grant an operating license to create and operate
the Icelandic Health Sector Database. On January 22, 2000, the Ministry granted
the Icelandic Health Sector Database license (the "License") to Islensk
erfoagreining ehf., our wholly-owned Icelandic subsidiary. The License, which
has a term of twelve years, allows us to collect data from medical records of
Icelandic healthcare institutions and self-employed health professionals, and to
transfer such data in encrypted form into a centralized database containing
non-personally identifiable information. It also permits us to cross-reference
the Icelandic Health Sector Database data with genealogical data and genotypic
data obtained through consent.

     The Act provides that patients may request at any time, by giving notice to
the Icelandic Director General of Public Health, that information about them not
be entered into the Icelandic Health Sector Database.

     Pursuant to the terms of the License and the Act, before we can begin
collecting information and transferring it into the Icelandic Health Sector
Database, we must fulfill numerous conditions, such as paying fees and costs
associated with the License and obtaining government approval of our privacy
protection measures, and must enter into agreements with healthcare institutions
and self-employed health professionals allowing us access to their medical
records. Some medical professionals, including the board of directors of the
Icelandic Medical Association, and the World Medical Association have opposed
some aspects of the Icelandic Health Sector Database on ethical and privacy
grounds. We do not believe that these views are representative of the Icelandic
medical profession as a whole or that they will materially affect our ability to
enter into such agreements. In August 2001 deCODE and the Icelandic Medical
Association reached a certain mutual understanding about the dispute. To date we
have entered into 19 such agreements with health institutions. Once we have
entered into the required agreements, an independent security expert must verify
that our information systems and operating procedures comply with the data
security requirements of the Icelandic Data Protection Authority, or the
Authority, before we can process the data we obtain from these healthcare
providers.

     The deCODE Combined Data Processing system and the Icelandic Health Sector
Database are subject to applicable Icelandic law. The Icelandic Health Sector
Database will be developed and operated pursuant to a License from the Ministry
and will be subject to the Act, the regulations promulgated under the Act, the
License and an agreement between the licensee and the Ministry, all of which
impose numerous requirements on our activities.

     As required by the License, concurrently with the issuance of the License,
we, through our Icelandic subsidiary, entered into an agreement with the
Ministry. This agreement provides that we must pay the Icelandic government a
fixed annual fee for the license of 70 million Icelandic kronas (approximately
$700,000 as of March 2002) and an additional annual fee of 6% of its net profit,
as defined, of the licensee, up to a maximum of 70 million Icelandic kronas per
year. The agreement also provides that our rights to the Icelandic Health Sector
Database will be transferred to the Ministry on the expiration or termination of
the license.

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<PAGE>

     The license and the agreement under which we received the license also
require us to:

     - pay the costs that the health institutions incur (including the costs of
       medical record software) in connection with the entering of data from
       medical records before transfer to the Icelandic Health Sector Database;

     - financially segregate the operation of the Icelandic Health Sector
       Database from our other activities by maintaining a separate operating
       unit and separate accounts for Icelandic Health Sector Database
       operations;

     - pay the costs of the governmental agencies which monitor our Icelandic
       Health Sector Database activities;

     - indemnify and agree not to sue the Icelandic government for any liability
       resulting from the passage of the legislation on the Icelandic Health
       Sector Database and its operation and/or the issuance of the Icelandic
       Health Sector Database license; and

     - observe international bioethics rules.

     The License prohibits us from, among other things:

     - abusing our position by charging unreasonable fees, refusing business to
       our competitors or discriminating among customers by imposing
       discriminatory or other onerous business terms on our customers; or

     - assigning or pledging our rights in the license.

     The Act places a number of duties on us, as the Icelandic Health Sector
Database licensee, and imposes a number of conditions on the License. The Act
prohibits us from allowing direct access to the Icelandic Health Sector Database
and requires us keep the Icelandic Health Sector Database and processing of the
database in Iceland. Our database employees and contractors must sign an
irrevocable confidentiality oath prior to commencing employment or performing
services on our behalf. At the expiration of the License, we are required to
ensure that the Ministry or a party entrusted by the Ministry will receive,
without payment of consideration, intellectual property rights necessary for the
creation and operation of the database for public health purposes and for
scientific research.

     The License may be revoked if we or our employees violate the terms of the
Act, if we fail to fulfill the conditions of the License or if we become unable
to operate the Icelandic Health Sector Database. If we or our employees or any
person assigned to process data violate the provisions of the Act or applicable
regulations with regard to confidentiality, the license requires us to
compensate any persons to whom the data relate for financial loss which the
violation causes. If results obtained from cross-referencing data in the deCODE
Combined Data Processing system prove to be personally identifiable, the Data
Protection Authority may, among other actions, order the destruction of such
results in their entirety or in part or revoke its approval of the procedures
and work processes applied by us to ensure privacy of the Icelandic Health
Sector Database data.

     The License will be reviewed by the Ministry no later than October 1, 2008.
During the course of the review, we and the Ministry will enter into discussions
for the renewal of the License after its expiration in 2012 provided that we
continue to meet the requirements of all applicable laws and regulations. The
Ministry may also review the License from time to time following our request, on
its own initiative or if the License contravenes any applicable laws or
regulations.

     Our creation and operation of the Icelandic Health Sector Database and the
deCODE Combined Data Processing system will involve oversight by the Ministry,
with the assistance of an Icelandic Health Sector Database Monitoring Committee,
an Interdisciplinary Ethics Committee, the Bioethics Committee of Iceland and
the Data Protection Authority of Iceland. These bodies will help to ensure our
compliance with applicable laws and regulations.

     The Monitoring Committee consists of three members which the Minister of
Health and Social Security appoints. The Monitoring Committee will ensure that
the licensee complies with the Act and applicable regulations by monitoring
negotiations and agreements for the transfer of data and reporting any events of
noncompliance with the Act to the Ministry. The Monitoring Committee is charged
with protecting the

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<PAGE>

interests of the public health authorities, health institutions, self-employed
health service workers and scientists in the process of making agreements
between us and those parties.

     The Interdisciplinary Ethics Committee will review query types and monitor
research projects for compliance with internationally accepted ethical standards
for scientific research involving human beings. The Ministry has appointed
members of the Interdisciplinary Ethics Committee which may halt any query or
research project deemed by the committee to violate such standards.

     The Bioethics Committee of Iceland is a standing committee that oversees
scientific research relating to human beings in Iceland. It has no direct
supervisory function over our Icelandic Health Sector Database license but will
provide ethical advice to the Monitoring Committee based upon quarterly reports
containing lists of queries and patient data submitted to the Icelandic Health
Sector Database. The Ministry appoints the members of the committee.

     Members of the Data Protection Authority (the "Authority") which is
responsible for overseeing rights of privacy and data protection in Iceland. The
Minister of Justice appoints the board members of the Authority. The Authority
establishes the technology, security and organizational terms with which we must
comply in the development of the Icelandic Health Sector Database pursuant to
the License. The Authority may periodically review such terms in light of new
technologies, experience or change of circumstances, and we will be required to
comply with the revised data protection terms within the deadline established by
the Authority. The Authority will monitor the security of the collection, use
and access to patients' information and may intervene to prevent breaches of
such security. The Authority will ensure that we comply with the privacy laws
applicable in Iceland and will administer the access limitations to data and
encryption methodology used for the Icelandic Health Sector Database.

PHARMACEUTICAL 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 ability 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.

     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 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

                                        20
<PAGE>

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 for environmental control facilities for the
remainder of this fiscal year or any succeeding fiscal year.

     MediChem's activities 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 MediChem'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.

EMPLOYEES

     As of December 31, 2001, we had approximately 592 employees, of whom
approximately 566 were employed full-time, 87 held Ph.D. or M.D. degrees and
approximately 295 held college degrees. 499 employees were engaged in, or
directly supported, research and development activities, of whom 308 worked
within the laboratory facilities and 149 held positions associated with the
development of informatics. 56 employees were engaged in finance, administrative
support and facilities management, and about 37 were engaged in other support
functions such as Business Development, Legal, Communications, Human Resources
and Clinical Collaboration. In addition, we utilized part-time employees and
outside contractors and consultants as needed and plan to continue to do so. We
anticipate continuing growth in recruitment in 2002.

FORWARD LOOKING STATEMENTS AND CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS

     This report 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. 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.

DECODE MAY NOT ACHIEVE THE BENEFITS IT EXPECTED FROM THE ACQUISITION OF
MEDICHEM, WHICH MAY HAVE A MATERIAL ADVERSE EFFECT ON DECODE'S BUSINESS,
FINANCIAL AND OPERATING RESULTS

     deCODE acquired MediChem with the expectation that the acquisition would
result in benefits to it arising out of the combination of deCODE's unique
population genomics approach to identifying novel targets in major therapeutic
areas with MediChem's high-throughput integrated chemistry platform to
facilitate drug discovery and development. These benefits may include
operational efficiencies resulting from synergies between the companies and
greater sales levels due to increases in product offerings and consolidation of
sales and marketing expertise, among others. To realize any benefits from the
acquisition, deCODE will face the following post-acquisition challenges:

     - integrating the complementary competencies of MediChem's chemistry
       research platform and deCODE's gene discovery capabilities;

     - retaining and assimilating the management and employees of each company;

     - developing new products that utilize the assets and resources of both
       companies;

     - retaining existing customers, strategic partners and suppliers of each
       company;

     - realizing expected cost savings and synergies from the acquisition; and

     - developing and maintaining uniform standards, controls, procedures,
       policies and information systems.

                                        21
<PAGE>

     If deCODE is not successful in addressing these and other challenges, then
the benefits of the acquisition will not be realized and, as a result, deCODE's
operating results and the market price of deCODE's common stock may be adversely
affected. These challenges, if not successfully met by deCODE, could result in
possible unanticipated liabilities, unanticipated costs, diversion of management
attention and loss of personnel. deCODE cannot assure you that it will
successfully integrate MediChem's business or profitably manage the combined
company. Further, deCODE cannot assure you its the growth rate after the
acquisition will equal the historical growth rates experienced by deCODE before
the acquisition.

IF THE COSTS ASSOCIATED WITH THE MEDICHEM ACQUISITION EXCEED THE BENEFITS,
DECODE MAY EXPERIENCE ADVERSE FINANCIAL RESULTS, INCLUDING INCREASED LOSSES

     deCODE will incur consolidation and integration expenses which it cannot
accurately estimate at this time. Actual transaction costs may substantially
exceed deCODE's current estimates and may affect its financial condition and
operating results negatively. If the benefits of the acquisition do not exceed
the costs associated with the acquisition, including any dilution to deCODE's
stockholders resulting from the issuance of shares in connection with the
acquisition, deCODE's financial results could be adversely affected, including
increased losses.

THE MARKET PRICE OF DECODE'S COMMON STOCK MAY DECLINE AS A RESULT OF THE
MEDICHEM ACQUISITION

     The market price of deCODE's common stock may decline as a result of the
acquisition for a number of reasons, including if:

     - the integration of deCODE and MediChem is not completed in a timely and
       efficient manner;

     - deCODE does not achieve the perceived benefits of the acquisition as
       rapidly or to the extent anticipated by financial or industry analysts;
       or

     - the effect of the acquisition on deCODE's financial results is not
       consistent with the expectations of financial or industry analysts.

UNCERTAINLY REGARDING THE EFFECTS OF THE MEDICHEM ACQUISITION COULD CAUSE
DECODE'S CUSTOMERS OR STRATEGIC PARTNERS TO DELAY OR DEFER DECISIONS

     deCODE's and/or MediChem's customers and strategic partners, in response to
the acquisition, may delay or defer decisions, which could have a material
adverse effect on deCODE's business.

DECODE MAY NOT SUCCESSFULLY DEVELOP OR DERIVE REVENUES FROM ANY PRODUCTS OR
SERVICES

Discovery Services

     deCODE is still in the early stages of its gene discovery programs. deCODE
uses its 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 deCODE has identified some genes that it believes are likely
to cause certain diseases, deCODE may not be correct and may not be successful
in identifying any other similar genes. Many experts believe that some of the
diseases deCODE is targeting are caused by both genetic and environmental
factors. Even if deCODE identifies specific genes that are partly responsible
for causing diseases, any gene-based therapeutic or diagnostic products may not
detect, prevent 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 products.

     Any pharmaceutical products that deCODE or its collaborators are able to
develop will fail to produce revenues unless deCODE:

     - establishes that they are safe and effective;

     - successfully competes with other technologies and products;

     - does not infringe on the proprietary rights of others;

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

     - can market them successfully; and

                                        22
<PAGE>

     - can maintain the goodwill and receive the cooperation of the Icelandic
       population.

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

Database Services

     deCODE received a license to create and operate the Icelandic Health Sector
Database, or the Database License, in January 2000, and deCODE is still in the
early stages of developing this database and the deCODE Combined Data Processing
system, a tool which, subject to ongoing compliance with regulatory
requirements, will cross-reference genealogical records, data from the Icelandic
Health Sector Database and genotypes of consenting participants. deCODE expects
it will be several years before it fully develops the deCODE Combined Data
Processing system. deCODE will devote substantial resources to the development
of these systems and their components for the foreseeable future. Database
Services include the Clinical Genome Miner which contains tools to discover or
validate disease linked genes based on non-personally identifiable genotypic,
genealogical and phenotypic data. deCODE cannot be sure that marketing the
Clinical Genome Miner will lead to collaborations with potential clients nor
that the deCODE Combined Data Processing system will result in marketable
products or services. Although deCODE's intended method for cross-referencing
genealogical, genotypic and healthcare data is central to the development of the
deCODE Combined Data Processing system, it is unproven.

     The success of deCODE's database services depends on its ability to:

     - create database and cross reference software that is free from design
       defects or errors;

     - obtain the cooperation of the Icelandic healthcare system;

     - obtain blood samples from Icelanders and their consent to use their
       genotypic data;

     - effectively use the information derived from the deCODE Combined Data
       Processing system in disease management, analysis of drug response, gene
       discovery and drug target validation; and

     - develop marketing and pricing methods that the intended users of the
       deCODE Combined Data Processing system will accept.

     deCODE's development of the Icelandic Health Sector Database will be
impaired if individual Icelanders refuse to allow information from their medical
records to be included in the Icelandic Health Sector Database. As of December
31, 2001, approximately 7% of the population has exercised their rights to
exclude their medical records from the database. Because only a small portion of
the Icelandic population may carry certain mutations, the unwillingness of even
a small portion of the population to participate in deCODE's programs could
diminish its ability to develop and market information based on the use of
genotypic data. If deCODE fails to successfully commercialize its database
services, it will not realize revenues from this part of its business.

Healthcare Informatics

     Only deCODE has tested its bioinformatics and privacy protection products.
These products may not meet the needs of potential customers. deCODE is at a
very early stage of development of its medical decision-support systems for
healthcare providers. deCODE has generated little revenues from sales or
licenses of bioinformatics, decision-support or privacy protection products. To
date, deCODE has not produced any decision-support tools. deCODE cannot assure
you that it can successfully develop or commercialize medical decision-support
systems or that there will be a market for its bioinformatics, decision-support
or privacy protection products.

MediChem Services

     Development and commercialization of potential drug candidates depend not
only on the achievement of research objectives by MediChem and its
collaborators, but also on each of MediChem's client's own financial,
competitive, marketing and strategic considerations and regulatory requirements
imposed by governmental and other regulatory entities in the U.S. and other
countries, all of which are beyond deCODE's control. Given the uncertainties
inherent in the drug discovery and development process, deCODE's ability to
realize revenues from the drug discovery and developmental business is highly
speculative.

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IF DECODE CONTINUES TO INCUR OPERATING LOSSES LONGER THAN ANTICIPATED, OR IN
AMOUNTS GREATER THAN ANTICIPATED, IT MAY BE UNABLE TO CONTINUE ITS OPERATIONS

     deCODE incurred a net loss of $47,838,471 for the year ended December 31,
2001 and has an accumulated deficit of $158,592,171 at December 31, 2001. deCODE
has never generated a profit and it has not generated revenues except for
payments received in connection with its research and development collaborations
with Roche, other recent collaborations and interest revenues. deCODE must
increase its expenditures substantially over the next several years to develop
its technologies and its internal research programs and to prepare the Clinical
Genome Miner Service, the Icelandic Health Sector Database, the deCODE Combined
Data Processing system and informatics. As a result, deCODE expects to incur
operating losses for several years. If the time required to generate product
revenues and achieve profitability is longer than deCODE currently anticipates
or the level of operating losses is greater than deCODE currently anticipates,
deCODE may not be able to continue its operations.

IF DECODE'S ASSUMPTION ABOUT THE ROLE OF GENES IN DISEASE IS WRONG, IT MAY NOT
BE ABLE TO DEVELOP USEFUL PRODUCTS

     The products deCODE hopes 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, deCODE knows of no therapeutic products based
on disease gene discoveries. If deCODE's assumption about the role of genes in
the disease process is wrong, its gene discovery programs may not result in
products, the genetic data included in its database and informatics products may
not be useful to its customers and those products may lose any competitive
advantage.

IF DECODE IS NOT ABLE TO OBTAIN SUFFICIENT ADDITIONAL FUNDING TO MEET ITS
EXPANDING CAPITAL REQUIREMENTS, DECODE MAY BE FORCED TO REDUCE OR TERMINATE ITS
RESEARCH PROGRAMS AND PRODUCT DEVELOPMENT

     deCODE has spent substantial amounts of cash to fund its research and
development activities and expects to spend substantially more over the next
several years for research and development activities. deCODE expects to use
cash to expand its research and development activities, develop the Clinical
Genome Miner, construct the Icelandic Health Sector Database and the deCODE
Combined Data Processing system, collect the genotype data, develop healthcare
informatics products and conduct drug discovery and developmental activities.
Many factors will influence its future capital needs, including:

     - the number, breadth and progress of its discovery and research programs;

     - its ability to attract customers;

     - its ability to commercialize its discoveries and the resources it devotes
       to commercialization;

     - the amount it spends to enforce patent claims and other intellectual
       property rights; and

     - the costs and timing of regulatory approvals.

deCODE intends to rely on Roche and other existing and future collaborators for
significant funding of its research efforts. In addition, deCODE may seek
additional funding through public or private equity offerings and debt
financings. deCODE may not be able to obtain additional financing when it needs
it or the financing may not be on terms favorable to deCODE or its stockholders.
Stockholders' ownership will be diluted if deCODE raises additional capital by
issuing equity securities.

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

DECODE MAY NOT BE ABLE TO FORM AND MAINTAIN THE COLLABORATIVE RELATIONSHIPS THAT
ITS BUSINESS STRATEGY REQUIRES AND THE RELATIONSHIPS MAY LEAD TO DISPUTES OVER
TECHNOLOGY RIGHTS

     deCODE must form research collaborations and licensing arrangements with
several partners at the same time to operate its business strategy. deCODE
currently has only six substantial collaborative relationships,

                                        24
<PAGE>

including two with Roche. To succeed, deCODE will have to maintain these
relationships and establish additional collaborations. deCODE cannot be sure
that it will be able to establish the additional research collaborations or
licensing arrangements necessary to develop and commercialize products using its
technology or that it can do so on terms favorable to deCODE. If deCODE's
collaborations are not successful or deCODE is not able to manage multiple
collaborations successfully, its programs will suffer. If deCODE increases the
number of collaborations, it will become more difficult to manage the various
collaborations successfully and the potential for conflicts among the
collaborators will increase.

DEPENDENCE ON COLLABORATIVE RELATIONSHIPS MAY LEAD TO DELAYS IN PRODUCT
DEVELOPMENT AND DISPUTES OVER RIGHTS TO TECHNOLOGY

     deCODE is dependent 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 its
technology. deCODE's agreements with collaborators typically allow them
significant discretion in electing whether to pursue such activities. deCODE
cannot control the amount and timing of resources collaborators will devote to
its programs or potential products.

AGREEMENTS WITH COLLABORATORS MAY HAVE THE EFFECT OF LIMITING THE AREAS OF
RESEARCH THAT IT MAY PURSUE EITHER ALONE OR WITH OTHERS

     deCODE's arrangements may place responsibility for key aspects of
information technology product development and marketing on its collaborative
partners. If deCODE's collaborators fail to perform their obligations, deCODE's
information technology products could contain erroneous data, design defects,
viruses or software defects that are difficult to detect and correct and may
adversely affect its revenues and the market acceptance of its products.
deCODE's collaborators may stop supporting its products or providing services to
it 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 deCODE's
collaborators and deCODE 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.

DECODE'S CURRENT FACILITIES AND STAFF ARE INADEQUATE FOR COMMERCIAL PRODUCTION
AND DISTRIBUTION OF PRODUCTS

     If deCODE chooses in the future to engage directly in the development,
manufacturing and marketing of certain products, it will require substantial
additional funds, personnel and production facilities.

BECAUSE REVENUES ARE CONCENTRATED, THE LOSS OF A SIGNIFICANT CUSTOMER WOULD HARM
ITS BUSINESS

     Historically, a substantial portion of deCODE's and MediChem's revenue has
been derived from contracts with a limited number of significant customers.
deCODE's largest customer, Roche, accounted for approximately 80% of its
consolidated revenue in 2001. MediChem's ten largest customers accounted for
approximately 71% of its total contract revenues in 2001. The loss of any
significant customer would significantly lower deCODE's revenues and affect
deCODE's progression to profitability.

DECODE'S RELIANCE ON THE ICELANDIC POPULATION MAY LIMIT THE APPLICABILITY OF ITS
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 western countries. However, the
populations of other western nations may be genetically predisposed to certain
diseases because of mutations not present in the Icelandic population. As a
result, deCODE and its partners may be unable to develop diagnostic and
therapeutic products that are effective on all or a portion of the people with
such diseases. Any difference between the Icelandic population and other
populations may have an effect on the usefulness of the Icelandic Health Sector
Database and the Clinical Genome Miner in studying populations outside of
Iceland. For deCODE's business to succeed, it must be able to apply discoveries
that it makes on the basis of the Icelandic population to other markets.

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<PAGE>

DECODE'S CREATION AND OPERATION OF THE ICELANDIC HEALTH SECTOR DATABASE DEPENDS
ON ITS DATABASE LICENSE FROM THE ICELANDIC GOVERNMENT AND IS SUBJECT TO
SUPERVISION AND REGULATION, WHICH MAY MAKE ITS DEVELOPMENT OF DATABASE PRODUCTS
MORE EXPENSIVE AND TIME-CONSUMING THAN DECODE ANTICIPATES

     deCODE's construction and use of the Icelandic Health Sector Database is
subject to the stipulations of the Database License. The Database License was
granted to deCODE by the Ministry of Health and Social Security of Iceland, or
the Health Ministry, pursuant to the Act on the Health Sector Database, no.
139/1998, or the Database Act. The Database License permits the processing of
healthcare data from healthcare records and other relevant data into the
Icelandic Health Sector Database. deCODE's data collection and use activities
will be supervised by the Icelandic Health Sector Database Monitoring Committee,
the Data Protection Authority of Iceland and an Interdisciplinary Ethics
Committee. In addition, the Icelandic Bioethics Committee will review deCODE's
operation of the database. Due to this oversight, deCODE is subject to the
following additional risks:

     - the Health Ministry may withdraw the Database License in the event that
       deCODE violates the terms and conditions of the Database License, the
       Database Act or its rules;

     - the Icelandic parliament may amend the Database Act in ways which would
       adversely affect deCODE's ability to develop or market the database;

     - there is no precedent interpreting the Database Act or the rules on which
       deCODE can rely;

     - deCODE may fail to comply with existing data confidentiality requirements
       of the Database Act or the Database License, resulting in a loss of the
       Database License;

     - the Data Protection Authority may modify or impose additional technical
       requirements covering areas such as data encryption and privacy
       protection and may require greater technical capabilities than deCODE
       currently has or able to procure at reasonable cost to deCODE; and

     - the Interdisciplinary Ethics Committee may withdraw permission for any
       type of research program in the Icelandic Health Sector Database not
       conducted in accordance with international rules of bioethics.

     Compliance with these requirements can be expensive and time-consuming and
may delay or increase the cost of development of the Icelandic Health Sector
Database and the deCODE Combined Data Processing system and may limit their
usefulness, which may negatively influence the commercial potential of the
Processing System. Iceland is subject to both European Free Trade Association
and European Union competition and public procurement rules. If it is determined
that the Database Act or the Database License breaches such rules, the Database
License could be revoked or diluted.

     Even if deCODE is able to successfully create and market the Icelandic
Health Sector Database and the deCODE Combined Data Processing system, the
Database License will expire in January 2012. There is no assurance that deCODE
will obtain further access rights on favorable terms, if at all.

IF DECODE FAILS TO PROTECT CONFIDENTIAL DATA ADEQUATELY, IT COULD INCUR
LIABILITY OR LOSE ITS DATABASE LICENSE

     deCODE is required, under the Database Act and the Database License, to
encrypt all patient data and to take other actions to ensure the confidentiality
of data included in the Icelandic Health Sector Database and to restrict access
to it. deCODE must develop the Icelandic Health Sector Database in accordance
with the terms regarding technology, security and organizational established by
the Data Protection Authority of Iceland. The Database Protection Authority may
periodically review and amend such terms in light of new technology or change of
circumstances. The customers for deCODE's products also may impose additional
confidentiality requirements. deCODE may accidentally disclose confidential data
as a result of technical failures or human error by its employees or those of
its customers or collaborators. Any failure to comply fully with all
confidentiality requirements could lead to liability for damages incurred by
individuals whose privacy is violated, the loss of the Database License, the
loss of its customers and reputation and the loss of the goodwill and
cooperation of the Icelandic population, including healthcare professionals.

                                        26
<PAGE>

IF DECODE IS NOT ABLE TO ENTER INTO AGREEMENTS WITH MORE ICELANDIC HEALTH
INSTITUTIONS IN ORDER TO COLLECT DATA, DECODE WILL NOT BE ABLE TO CONSTRUCT AND
OPERATE THE ICELANDIC HEALTH SECTOR DATABASE

     deCODE is required by the Database License to enter into agreements with
Icelandic health institutions and self-employed health service professionals
regarding access to and the processing of information from medical records. To
date, deCODE has only entered into agreements with nineteen Icelandic health
institutions. deCODE cannot be certain that it will enter into agreements with
enough additional health institutions or on terms favorable to it. deCODE's
inability to enter into additional agreements on favorable terms or in a timely
manner could have material adverse effect on its ability to construct and
operate the Icelandic Health Sector Database.

ETHICAL CONCERNS MAY LIMIT DECODE'S ABILITY TO DEVELOP AND USE THE ICELANDIC
HEALTH SECTOR DATABASE AND THE DECODE COMBINED DATA PROCESSING SYSTEM AND MAY
LEAD TO LITIGATION AGAINST DECODE OR THE ICELANDIC GOVERNMENT

     The Icelandic parliament's passage of the Database Act and the Health
Ministry's granting of the Database License have raised ethical concerns in
Iceland and internationally. These concerns may lead to litigation in U.S.,
Icelandic or other national or international courts (for example, on the basis
of an alleged breach of the patient-doctor confidentiality, constitutional
privacy issues, international conventions dealing with protection of privacy
issues or human rights conventions).

     In February 2000, an Icelandic organization known as Mannvernd, or The
Association of Icelanders for Ethics in Science and Medicine, and a group of
physicians and other citizens issued a press release announcing their intention
to file lawsuits against the State of Iceland and any other relevant parties,
including deCODE, to test the constitutionality of the Database Act. According
to the press release, the lawsuit will allege human rights violations and
challenge the validity of provisions of the Database Act. To date no such suit
has been brought against deCODE. One lawsuit has been brought in Icelandic
courts against the Directorate of Public Health in Iceland challenging the
constitutionality of the Database Act. In the event that the Icelandic State by
a final judgment is found to be liable or subject to payment to any third party
as a result of the passage of legislation on the Icelandic Health Sector
Database and/or the issuance of the Database License, deCODE's agreement with
the Health Ministry requires deCODE to indemnify the Icelandic State against all
damages and costs incurred in connection with such litigation. In addition, the
pendency of such litigation could lead to delay in the development of the
Icelandic Health Sector Database and the deCODE Combined Data Processing system,
and an unfavorable outcome could prevent deCODE from developing and operating
the Icelandic Health Sector Database and the deCODE Combined Data Processing
system.

DECODE HAS AGREED TO INDEMNIFY AND HOLD HARMLESS THE ICELANDIC GOVERNMENT, WHICH
MAY CAUSE DECODE TO INCUR DAMAGES AND MAY LIMIT ITS RIGHT TO TAKE CERTAIN LEGAL
ACTIONS AGAINST THE GOVERNMENT

     deCODE is subject to a very extensive indemnity clause in its agreement
with the Health Ministry, pursuant to which deCODE has agreed:

     - not to make any claim against the government if the Database Act or the
       Database License is amended as a result of the Database Act or rules
       relating to the Icelandic Health Sector Database are found to be
       inconsistent with the rules of the European Economic Area, or other
       international rules and agreements to which Iceland is or becomes a
       party;

     - that if the Icelandic State, by a final judgment, is found to be liable
       or subject to payment to any third party as a result of the passage of
       the Database Act and/or issuance of the Database License, deCODE will
       indemnify the state against all damages and costs in connection with the
       litigation; and

     - to compensate any third parties with whom the Icelandic government
       negotiates a settlement of liability claims arising from the Database Act
       and/or the issuance of the Database License, provided that the Icelandic
       government demonstrates that it was justified in agreeing to make
       payments pursuant to the settlement.

                                        27
<PAGE>

CONCERNS REGARDING THE USE OF GENETIC TESTING RESULTS MAY LIMIT THE COMMERCIAL
VIABILITY OF ANY PRODUCTS DECODE DEVELOPS

     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 deCODE's collaborators
and deCODE develops.

DECODE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY WITH OTHER COMPANIES AND
GOVERNMENT AGENCIES IN THE DEVELOPMENT AND MARKETING OF PRODUCTS AND 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 deCODE's other areas of business, including database services,
healthcare informatics and drug discovery and development, is intense and is
expected to increase. deCODE has numerous competitors, including major
pharmaceutical and diagnostic companies, specialized biotechnology firms,
universities and other research institutions, the United States-funded Human
Genome Project and other government-sponsored entities and companies providing
healthcare information products. deCODE's collaborators, including Roche, may
also compete with deCODE. Many of deCODE's competitors have considerably greater
capital resources, research and development staffs and facilities, and technical
and other resources than deCODE does, which may allow them to discover important
genes before deCODE does. deCODE believes that a number of its competitors are
developing competing products and services that may be commercially successful
and that are further advanced in development than its potential products and
services. To succeed, deCODE, together with its 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 deCODE's collaborators or deCODE is
successful in developing effective products or services, deCODE's products and
services may not successfully compete with those of its competitors. deCODE's
competitors may succeed in developing and marketing products and services that
are more effective than deCODE's or that are marketed before deCODE's.

     Competitors have established, and in the future may establish, patent
positions with respect to gene sequences related to deCODE's 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
deCODE's research projects and make it more difficult for deCODE to compete.
deCODE may also face competition from other entities in gaining access to DNA
samples used for research and development purposes.

     deCODE expects competition to intensify as technical advances are made and
become more widely known. deCODE's future success will depend in large part on
maintaining a competitive position in the genomics field. Others' or deCODE's
rapid technological development may result in products or technologies becoming
obsolete before deCODE recovers the expenses it incurs in developing them. Less
expensive or more effective technologies could make future products obsolete.
deCODE cannot be certain that it will be able to make the necessary enhancements
to any products it develops to compete successfully with newly emerging
technologies.

OTHERS MAY CLAIM INTELLECTUAL PROPERTY RIGHTS TO DECODE'S GENEALOGY DATABASE,
WHICH COULD PREVENT DECODE FROM USING SOME OR ALL OF ITS DATABASE AND IMPAIR ITS
ABILITY TO DERIVE REVENUES FROM ITS DATABASE AND GENE DISCOVERY SERVICES

     There are other firms and agencies that have prepared, or are currently
preparing, genealogy databases similar to the one deCODE has developed. If any
parties claim that any of deCODE's databases infringes on their intellectual
property rights, deCODE would have to defend against their claim, cease using
the infringing property or pay them for the use of the infringing property. Two
parties have filed a copyright infringement suit against deCODE in Iceland. They
claim to hold copyrights to approximately 100 Icelandic genealogy books and
claim that deCODE has used data from these books in the creation of its
genealogy database, in violation

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<PAGE>

of their rights. The claimants seek to prevent deCODE's use of its genealogy
database. They also seek monetary damages in the amount of approximately 616
million Icelandic kronas. deCODE believes that this suit is without merit and
intends to defend it vigorously, but if it were successful it could have a
material adverse effect on deCODE's database and gene discovery services.

DECODE MAY NOT BE ABLE TO PROTECT THE PROPRIETARY RIGHTS THAT ARE CRITICAL TO
ITS SUCCESS

     deCODE's success will depend on its ability to protect its genealogy
database and genotypic data and any other proprietary databases that it develops
and its proprietary software and other proprietary methods and technologies.
Despite deCODE's efforts to protect its proprietary rights, unauthorized parties
may be able to obtain and use information that deCODE regards as proprietary.
deCODE's commercial success will depend in part on obtaining patent protection.
The patent positions of pharmaceutical, biopharmaceutical and biotechnology
companies, including deCODE's, are generally uncertain and involve complex legal
and factual considerations. deCODE cannot be sure that any of its pending patent
applications will result in issued patents, that it will develop additional
proprietary technologies that are patentable, that any patents issued to deCODE
or deCODE's partners will provide a basis for commercially viable products, will
provide deCODE 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
deCODE's ability to do business.

     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
deCODE's proprietary rights is uncertain and, deCODE cannot predict the breadth
of claims allowed in any patents issued to it to others. deCODE could also incur
substantial costs in litigation if it is required to defend itself in patent
suits brought by third parties or if it initiates 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
deCODE's products. deCODE cannot be certain that its 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 deCODE
is granted patents it 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 deCODE or its partners claiming damages and seeking to
enjoin commercial activities relating to the affected products and processes
could, in addition to subjecting deCODE to potential liability for damages,
require deCODE or its partners to obtain a license in order to continue to
manufacture or market the affected products and processes. There can be no
assurance that its partners or deCODE 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, its partners or
deCODE may be required to cease marketing its products or practicing its
methods.

     If expressed sequence tags, single nucleotide polymorphisms, or SNPs, or
other sequence information become publicly available before deCODE applies for
patent protection on a corresponding full-length or partial gene, deCODE's
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 deCODE's or its 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 deCODE has 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.

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<PAGE>

     While deCODE requires 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 deCODE can meaningfully protect its trade secrets. If the
information processed by the deCODE Combined Data Processing system is disclosed
without deCODE's authorization, demand for its products and services may be
adversely affected.

REGULATORY APPROVALS FOR PRODUCTS RESULTING FROM DECODE'S GENE DISCOVERY
PROGRAMS MUST BE OBTAINED OR DECODE 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. deCODE cannot be certain that we can
obtain regulatory approval for any drugs or diagnostic products resulting from
its gene discovery programs. The regulatory process can take many years and
require substantial resources. Because some of the products likely to result
from deCODE's 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 deCODE's business, financial condition and
results of operations, including withdrawal of the product from the market.

DECODE'S DEPENDENCE UPON A SINGLE THIRD PARTY FOR SEQUENCING MACHINES MAY IMPAIR
ITS RESEARCH PROGRAMS

     deCODE currently uses a single manufacturer to supply the gene sequencing
machines that it uses in its gene discovery program and their necessary
supplies. While other types of gene sequencing machines are available from other
manufacturers, deCODE does not believe that the other machines are as efficient
as the machines it currently uses. deCODE cannot be sure that the gene
sequencing machines or their necessary supplies will remain available in
sufficient quantities at acceptable costs. If deCODE cannot obtain additional
supplies for its gene sequencing machines at commercially reasonable rates, or
if deCODE is required to change to a new supplier of gene sequencing machines,
its gene discovery programs would be adversely affected.

EFFORTS TO REDUCE HEALTHCARE COSTS MAY REDUCE MARKET ACCEPTANCE OF DECODE'S
PRODUCTS

     deCODE's success will depend in part on the price and extent to which it
will be paid for its 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. deCODE cannot be certain that any
third party insurance coverage will be available to patients for any products
deCODE discovers or develops. If third party payors do not provide adequate
coverage and reimbursement levels for deCODE's 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, deCODE's customers may reduce their
research and development spending which could reduce the business they outsource
to deCODE.

DECODE'S OPERATIONS MAY BE IMPAIRED UNLESS IT CAN SUCCESSFULLY MANAGE ITS GROWTH

     deCODE has recently experienced significant growth in the number of its
employees and the scope of its operations and its facilities, and will continue
to grow as a result of the MediChem acquisition. deCODE's management and
operations are, and may continue to be, under significant strain due to this
growth. To

                                        30
<PAGE>

manage deCODE's growth, deCODE must strengthen its management team and attract
and retain skilled employees. deCODE cannot be sure that it will be able to
retain qualified employees. deCODE's success will also depend on its ability to
improve its management information, research information and operational control
systems and to expand, train and manage its workforce.

CHANGES IN OUTSOURCING TRENDS AND CONSOLIDATION IN THE PHARMACEUTICAL AND
BIOTECHNOLOGY INDUSTRIES COULD ADVERSELY AFFECT DECODE'S GROWTH

     Economic factors and industry trends that affect deCODE's primary
customers, pharmaceutical and biotechnology companies also affect deCODE's
business. For example, the practice of many companies in these industries has
been to outsource from organizations like deCODE to conduct genetic research,
clinical research, sales and marketing projects and chemistry research and
development projects. Some industry commentators believe that the rate of growth
of outsourcing will trend downward. If these industries reduce their present
tendency to outsource those projects, deCODE's operations, financial condition
and growth rate could be materially and adversely affected. deCODE also believes
it has been negatively impacted by pending mergers and other factors in the
pharmaceutical industry, which appear to have slowed decision making by its
customers and delayed certain trials. A continuation of these trends would have
an ongoing adverse effect on its business. Our ability to generate new business
could be impaired by general economic downturns in our customers' industries.

SOME PARTS OF DECODE'S PRODUCT DEVELOPMENT SERVICES CREATE A RISK OF LIABILITY
FROM CLINICAL TRIAL PARTICIPANTS AND THE PARTIES WITH WHOM IT CONTRACTS

     deCODE, through its subsidiary Encode ehf., contracts with drug companies
to perform a wide range of services to assist them in bringing new drugs to
market. deCODE also contracts with physicians to serve as investigators in
conducting clinical trials. deCODE's services include:

     - supervising clinical trials;

     - data and laboratory analysis;

     - patient recruitment;

     - acting as investigators in conducting clinical trials; and

     - engaging in Phase I clinical trials.

     If, in the course of these trials or activities:

     - deCODE does not perform its services to contractual or regulatory
       standards;

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

     - there are deficiencies in the professional conduct of the investigators
       with whom deCODE contracts;

     - one of deCODE's laboratories inaccurately reports or fails to report lab
       results; or

     - deCODE's informatics products violate rights of third parties;

then, deCODE would have a risk of liability from the drug companies with whom it
contracts or the study participants. deCODE maintains insurance to cover
ordinary risks but any insurance might not be adequate, and it would not cover
the risk of a customer deciding not to do business with deCODE as a result of
poor performance.

USE OF THERAPEUTIC OR DIAGNOSTIC PRODUCTS DEVELOPED AS A RESULT OF DECODE'S
PROGRAMS MAY RESULT IN PRODUCT LIABILITY CLAIMS FOR WHICH DECODE HAS INADEQUATE
INSURANCE

     The users of any therapeutic or diagnostic products developed as a result
of deCODE's discovery or research programs or the use of its database or medical
decision-support products may bring product liability claims against deCODE.
deCODE currently does not carry liability insurance to cover such claims. deCODE
is not certain that its collaborators or it will be able to obtain such
insurance or, if obtained, that sufficient coverage can be acquired at a
reasonable cost. If deCODE cannot protect against potential liability claims,
deCODE's collaborators or deCODE may find it difficult or impossible to
commercialize products.

                                        31
<PAGE>

DECODE MAY BE UNABLE TO HIRE AND RETAIN THE KEY PERSONNEL UPON WHOM ITS SUCCESS
DEPENDS

     deCODE depends on the principal members of its management and scientific
staff, including Dr. Kari Stefansson, Chairman, President and Chief Executive
Officer, Hannes Smarason, Senior Vice President and Business Officer, and Dr.
Jeffrey Gulcher, Vice President, Research and Development, among others, and,
since the MediChem acquisition, key management and scientific staff of MediChem.
deCODE has not entered into agreements with any of these persons that bind them
to a specific period of employment, except that two key employees of MediChem's
wholly-owned subsidiary, Emerald BioStructures, Inc., have entered into
employment agreements with deCODE for a term of one year. If any of these people
leaves deCODE, deCODE's ability to conduct its operations may be negatively
affected. deCODE's future success also will depend in part on its ability to
attract, hire and retain additional personnel. There is intense competition for
such qualified personnel and deCODE cannot be certain that it 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 deCODE.

     In addition, the success of deCODE's business depends in part on the
continued service of key MediChem personnel. Despite deCODE's efforts to retain
quality employees, it might lose some of MediChem's key employees. In addition,
the acquisition may have caused current and prospective deCODE and/or MediChem
employees to experience uncertainty about their future roles with deCODE. This
may adversely affect deCODE's ability to attract and retain key management,
technical, sales and marketing personnel.

CURRENCY FLUCTUATIONS MAY NEGATIVELY AFFECT DECODE'S FINANCIAL CONDITION

     deCODE publishes its consolidated financial statements in U.S. dollars.
Currency fluctuations can affect its financial results because a portion of its
cash reserves and its 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 deCODE's cash reserves and revenues. Most
of deCODE's long-term liabilities are U.S. dollar denominated. However, deCODE
may enter into hedging transactions if it has substantial foreign currency
exposure in the future. deCODE may have increased exposure as a result of
investments or payments from collaborative partners.

DECODE'S CONTRACTS MAY BE TERMINABLE UPON SHORT NOTICE

     MediChem's contracts are generally terminable upon 10 to 90 days' notice.
deCODE's contracts thus will be subject to termination for numerous reasons, any
of which may be beyond its 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 deCODE's profitability and require it to reallocate under-
utilized physical and professional resources.

ITEM 2.  PROPERTIES

     In January 2002, deCODE moved its headquarters and laboratories, to an
approximately 150,000 square feet, three-story building 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 28,000 square feet and have leased an
additional 3,000 square feet in a building at Krokhals 5, Reykjavik, to house
additional laboratory facilities and storage. We also lease approximately 6,500
square feet of office space in Waltham, Massachusetts, for business development
and finance, approximately 3,000 square feet at Geirsgata 9, Reykjavik for
Encode's operation and maintain a facility for approximately 15 genealogist
located in Thverholt 14, Reykjavik.

     MediChem's principal executive offices and discovery laboratories center
are located in Woodridge, Illinois, and encompass approximately 100,000 square
feet. MediChem has the capability to expand its offices and laboratories to
200,000 square feet. MediChem occupies approximately 50,000 square feet of
additional leased office and laboratory space in Lemont, Illinois, which lease
expires in October 2003. MediChem also occupies 15,000 square feet of additional
laboratory space in Des Plaines, Illinois, which lease runs through October
2002, with an option to lease on a year-to-year basis. At December 31, 2001,
three satellite business development offices were leased in South San Francisco,
California, for 1,460 square feet, in New London, Connecticut, for 1,630 square
feet and in La Jolla Del Mar, California, for 150 square feet. Emerald

                                        32
<PAGE>

BioStructures, a wholly-owned subsidiary of MediChem, operates from an 8,500
square feet leased facility located near Seattle, Washington.

ITEM 3.  LEGAL PROCEEDINGS

     We are not a party to any material legal proceedings except as follows:

     In January 2000, Thorsteinn Jonsson and Genealogia Islandorum hf., the
alleged holders of copyrights to approximately 100 books of genealogical
information, commenced an action against us in the District Court of Reykjavik
in Iceland. They allege that our genealogy database infringes their copyrights
and seek damages in the amount of approximately 616 million Icelandic kronas and
a declaratory judgment to prevent us from using the allegedly infringing data.
We believe the suit is without merit and intend to defend this action
vigorously; however, the ultimate resolution of this matter cannot yet be
determined.

     In February 2000, Mannvernd, an organization known as the Association of
Icelanders for Ethics in Science and Medicine, issued a press release announcing
its intention to file lawsuits against the State of Iceland and any other
relevant parties, including us, to test the constitutionality of the Act. In its
press release, Mannvernd indicated that it hopes to halt the construction and/or
operation of the Icelandic Health Sector Database. In April 2001, a lawsuit was
filed against the Icelandic Directorate of Public Health but Mannvernd has not
commenced litigation against us; however, the ultimate resolution of this matter
cannot yet be determined.

     In April 2000, Ernir Snorrason, an original stockholder of deCODE, filed a
complaint in the Court of Chancery of the State of Delaware for New Castle
County alleging that we improperly exercised an option to repurchase 256,637
shares of common stock that we issued to Mr. Snorrason in 1996 pursuant to a
Founders' Stock Purchase Agreement and seeking an order requiring us to
recognize Mr. Snorrason as the owner of these shares. In June 2001, the parties
settled the matter without admission or adjudication of any issue of fact or law
and 166,814 shares of our common stock were issued to Mr. Snorrason for $0.001
per share, the par value, with the resulting loss ($1,292,642) being recorded as
a general and administrative expense at that time.

     Although we have not yet been served with copy of the complaint, management
is aware that on December 6, 2001, a purported class action 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.

     The plaintiff alleges violations of Section 11 of the Securities Act of
1933 against us and the Individual Defendants, violations of Section 15 of the
Securities Act of 1933 against the Individual Defendants and violations of
Sections 11 and 12(a)(2) of the Securities Act of 1933 and Section 10(b) of the
Securities Exchange Act of 1934 (and Rule 10b-5 promulgated thereunder) against
the Underwriter Defendants. Generally, the 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 and (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. The
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 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 7, 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
A. Scheindlin.

                                        33
<PAGE>

     We believe that the allegations against us and our officers are without
merit and we intend to contest them vigorously. The litigation is, however, in
the preliminary stage, and we cannot predict its outcome and the ultimate
effect, if any, on our financial condition. In addition, it is possible that
further lawsuits alleging substantially similar claims will be filed against us
and our officers. If we are required to pay significant monetary damages as a
result of such litigation, our business could be significantly harmed. Even if
such suit or suits conclude 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

     Not applicable.

                                    PART II

ITEM 5.  MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     The Company's Common Stock has been traded on the Nasdaq National Market
and the EASDAQ Market under the symbol "DCGN" since July 17, 2000. 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:

<Table>
<Caption>
2000                                                           HIGH      LOW
----                                                          ------    ------
<S>                                                           <C>       <C>
Third Quarter (commencing July 17, 2000)....................  $31.50    $22.00
Fourth Quarter..............................................  $26.63    $ 8.94
2001
----
First Quarter...............................................  $11.25    $ 6.56
Second Quarter..............................................  $15.15    $ 5.28
Third Quarter...............................................  $12.25    $ 5.75
Fourth Quarter..............................................  $10.60    $ 5.92
</Table>

     As of March 22, 2002, there were 5,876 holders of record of the Common
Stock, with beneficial stockholders in excess of such amount. On March 22, 2002,
the last sale price reported on the Nasdaq National Market for the Common Stock
was $5.79 per share.

     On November 15, 2001, we issued 94,444 shares of our common stock to
Medical Science Partners II, L.P. upon the net exercise of a warrant for 100,000
shares with an exercise price of $1.00 per share. The issuance of these
securities was deemed to be exempt from registration under the Securities Act by
virtue of Section 4(2) as a transaction not involving any public offering. The
transferee made appropriate representations as part of the settlement and had,
or had access to, adequate information about deCODE. Appropriate legends are
affixed to the stock certificate that was issued.

     We commenced an initial public offering of our common stock, $.001 par
value, on July 17, 2000 pursuant to registration statements on Form S-1
(Registration Nos. 333-31984 and 333-41598), which were declared effective by
the Securities and Exchange Commission on July 17, 2000. Net proceeds to us
after

                                        34
<PAGE>

deduction of expenses were approximately $182.0 million. Through December 31,
2001, we have used approximately $120.4 million dollars of the proceeds as
follows:

<Table>
<S>                                                           <C>
Discovery and research programs.............................  $ 61.0
ABI Prism 3700 DNA Analyzers................................    13.1
Construction of executive office and laboratory
  facilities................................................    23.7
Construction of other laboratory facilities.................     2.7
Computer equipment..........................................     3.0
Other laboratory equipment..................................     4.3
Other property and equipment................................     0.9
General and administrative activities.......................     9.5
Installment payments on capital lease obligations...........     1.8
Interest....................................................     0.4
                                                              ------
                                                              $120.4
                                                              ======
</Table>

     Pending use, we have invested the remaining proceeds primarily in U.S.
dollar denominated money market, checking and other accounts but also partly in
Icelandic krona denominated accounts.

                                        35
<PAGE>

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
consolidated statement of operations data for the fiscal years ended December
31, 1999, 2000 and 2001 and the consolidated balance sheet data at December 31,
2000 and 2001 are derived from consolidated financial statements included
elsewhere in this Annual Report that have been audited by PricewaterhouseCoopers
ehf., independent auditors. The consolidated statement of operations data for
the fiscal years ended December 31, 1997 and 1998 and the consolidated balance
sheet data at December 31, 1997, 1998 and 1999, are derived from statements that
have been audited by PricewaterhouseCoopers ehf. and are not included in this
Annual Report. Historical results are not necessarily indicative of future
results.

<Table>
<Caption>
                                                                         AS OF DECEMBER 31,
                                               -----------------------------------------------------------------------
                                                  1997           1998           1999           2000           2001
                                               -----------   ------------   ------------   ------------   ------------
<S>                                            <C>           <C>            <C>            <C>            <C>
Revenue......................................  $         0   $ 12,705,000   $ 16,591,485   $ 21,545,656   $ 31,550,626
Operating expenses
    Research and development.................    6,080,096     19,282,364     33,213,557     45,742,081     71,796,515
    General and administrative...............    1,967,684      4,893,202      8,220,758     15,373,223     12,402,283
                                               -----------   ------------   ------------   ------------   ------------
Total operating expenses.....................    8,047,780     24,175,566     41,434,315     61,115,304     84,198,798
                                               -----------   ------------   ------------   ------------   ------------
Operating loss...............................   (8,047,780)   (11,470,566)   (24,842,830)   (39,569,648)   (52,648,172)
Interest Income..............................      163,076        922,230      2,187,695      8,866,604      6,925,135
Other non-operating income and (expense),
  Net........................................     (171,537)      (359,894)    (1,133,312)      (415,459)    (2,115,434)
Taxes........................................            0              0              0              0              0
                                               -----------   ------------   ------------   ------------   ------------
Net loss.....................................   (8,056,241)   (10,908,230)    23,788,447)   (31,118,503)   (47,838,471)
                                               -----------   ------------   ------------   ------------   ------------
Accrued dividends and Amortized discount on
  preferred stock(2).........................     (620,385)    (2,571,523)    (7,542,787)    (7,540,879)             0
Premium on repurchase of preferred stock.....            0              0    (30,887,044)             0              0
                                               -----------   ------------   ------------   ------------   ------------
Net loss available to common
  stockholders(2)............................  $(8,676,626)  $(13,479,753)  $(62,218,278)  $(38,659,382)  $(47,838,471)
                                               ===========   ============   ============   ============   ============
Basic and diluted net loss per share.........  $     (3.85)  $      (3.06)  $      (9.65)  $      (1.63)  $      (1.08)
Shares used in computing basic and diluted
  net loss per share(1)(2)...................    2,254,413      4,400,576      6,446,055     23,671,113     44,289,911
Other non-GAAP Financial Data:
Pro forma basic and diluted net loss per
  share(3)...................................                               $      (0.86)  $      (0.85)
Shares used in computing pro forma basic and
  diluted net loss per share(3)..............                                 27,559,365     36,483,034
</Table>

<Table>
<Caption>
                                                                        AS OF DECEMBER 31,
                                              -----------------------------------------------------------------------
                                                 1997           1998           1999           2000           2001
                                              -----------   ------------   ------------   ------------   ------------
<S>                                           <C>           <C>            <C>            <C>            <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents...................  $ 2,714,225   $ 25,075,844   $ 29,845,664   $194,144,688   $153,061,132
Total assets................................    6,770,492     38,540,115     80,526,534    248,900,567    256,359,169
Total long-term liabilities.................    1,331,156      6,946,330      5,471,054      3,519,114     46,278,564
Redeemable, convertible preferred
  stock(2)..................................   12,603,990     43,158,079    121,589,367              0              0
Total stockholders' equity (deficit)(2).....   (9,907,939)   (18,222,123)   (72,772,138)   216,269,166    175,341,933
                                              -----------   ------------   ------------   ------------   ------------
</Table>

---------------
(1) See notes to the consolidated financial statements for an explanation of the
    determination of the shares used in computing basic and diluted net loss per
    share.

(2) 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.

(3) 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.

                                        36
<PAGE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

     You should read this section in conjunction with our consolidated financial
statements and related notes thereto appearing elsewhere in this document.

OVERVIEW

     deCODE was incorporated in August 1996. We are a genomics and health
informatics company that provides products and services for the healthcare
industry. Our approach to the discovery of healthcare knowledge brings together
three key types of non-personally identifiable population data derived from the
Icelandic nation: information from the healthcare system, information about
genealogical relationships among individuals covered by this system and
associated molecular genetics data.

     We are developing three avenues of commercialization: Discovery Services,
Database Services and Informatics related to analysis of human genome data and
healthcare. The Discovery Services focus on gene and drug target discovery, the
development and marketing of DNA-based diagnostics for major diseases and
pharmacogenomics, or the discovery of genes related to drug response. Database
Services include the Clinical Genome Miner, containing tools to discover or
validate disease-linked genes based on non-personally identifiable genotypic,
genealogical and phenotypic data. In addition, deCODE intends to construct and
commercialize the Icelandic Health Sector Database and the deCODE Combined Data
Processing system. The Icelandic Health Sector Database contains non-personally
identifiable data from Icelandic healthcare records, and the deCODE Combined
Data Processing system allows cross-referencing of data from the Icelandic
Health Sector Database with genealogical and genotypic data. Informatics will
encompass the building of tools for computerized analysis of healthcare data and
of genetic and disease related data, as well as software relating to computer
security, privacy protection and encryption.

     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, 2001 we had an accumulated deficit of
$158,592,171. We anticipate incurring additional losses over at least the next
several years as we expand our internal and collaborative gene discovery
efforts, continue our commercialization of discovery efforts, technology
development and construction of database services and informatics. We expect
that our 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.

COLLABORATIONS AND ALLIANCES

     In February 1998, we entered into a research collaboration and
cross-license agreement with F. Hoffmann-La Roche, or Roche, regarding research
into the genetic causes of twelve diseases. Under the terms of the agreement,
Roche has made equity investments and funded gene discovery programs in the
twelve diseases through January 2002 when the term of the agreement expired.

     In June 2001, we entered into a collaboration and cross-license agreement
with Roche regarding diagnostics. Under the terms of this new agreement, we are
collaborating on the development and marketing of DNA-based diagnostics for
major diseases. We are working with Roche to identify and validate molecular
targets which are useful for developing products and services that accurately
establish a patient's current diagnosis, predict future risk of disease, predict
drug response and determine responses to treatment or the health status of
individuals and enable early prevention or treatment of disease. We will also be
focusing on developing informatics products and services, which will include
software tools and databases. Under the agreement we will receive payments
including research funding, research milestones and royalties on any products
that are commercialized. The research term under the agreement is five years.

     In June 2001, we entered into a collaboration agreement with Genmab A/S and
Medarex, Inc. pursuant to which we are collaborating on the research,
development, and commercialization of new antibody therapeutic products. Under
this five-year collaboration, we are utilizing novel targets discovered in our
research on the genetics of common diseases along with Genmab's human antibody
technology. The

                                        37
<PAGE>

collaboration covers a broad range of disease areas including cardiovascular
disease, inflammatory disease and cancer. Together with Genmab and Medarex, we
will share equally in the development costs and revenues generated from the
outlicensing or sales of products developed under the agreement. Under the terms
of this collaboration, Medarex will also contribute resources and will share
certain costs and commercial rights.

     In June 2001, we entered into an agreement to provide Genmab A/S with
research and development services to develop DNA-based tests to predict
individual clinical response to Genmab's antibody treatment for rheumatoid
arthritis and possible related novel therapeutics. We will be paid as stages of
the research program are completed.

     In July 2001, we entered into a pharmacogenomics collaboration and license
agreement with Affymetrix, Inc. Under the terms of the agreement the parties are
collaborating in the research and development of gene expression tests and
nucleic acid based tests to predict the response of individual patients to
various drugs. We are undertaking the initial research activities to be
performed with respect to the initial ten drugs to be studied under the
collaboration. Affymetrix will supply various chips in connection with the
research. We will share revenues resulting from the collaboration, including
those from licensing and product commercialization, with Affymetrix.

     In July 2001, we entered into a joint development and commercialization
agreement with Applied Biosystems Group, or ABG. Under the terms of the
agreement, we are working with ABG to jointly develop and commercialize software
products for the collection, organization and analysis of genotyping
information. The agreement provides for the development to be overseen by a
joint steering committee that has specific responsibilities for the
implementation and management of the joint development and joint
commercialization programs. Under this agreement, ABG and we have granted to
each other licenses to products developed under the joint development program.

     In December 2001, we formed a pharmacogenomics alliance with Pharmacia
Corporation to identify the role of genetics in the development of advanced
forms of heart disease. Under the agreement, we will employ our population
resources and Clinical Genome Miner discovery system to find genetic markers
that can be used to identify patients who are highly predisposed to progressing
from an early to an advanced form of heart disease. If the results of the first
phase are encouraging, Pharmacia has the option to use the genetic markers as
the basis for clinical trials of cardiovascular drugs under development at
Pharmacia. We will receive contract fees as part of the first phase of this
agreement and, in addition, royalties on sales of diagnostic tests as well as
royalties on potential sales of cardiovascular drugs should Pharmacia exercise
its licensing options in the alliance.

     In January 2002, we entered into a new Collaboration and Cross-License
Agreement with Roche. This new, three-year alliance leverages our expanding
capabilities in drug discovery into developing novel treatments for common
diseases. Under this new alliance, Roche will provide research funding for a
minimum of the next two years for us to conduct downstream research in a
selection of four diseases, with the goal of using the targets identified to
discover and develop new therapeutic compounds and to take these compounds into
clinical trials. Also, we will receive development and regulatory approval
milestone payments for therapeutic drug compounds developed pursuant to the
agreement as well as royalties on Roche's sales of drugs developed under the
agreement. Additionally, we will pay Roche royalties should we develop and
market drugs for certain common diseases.

     We have a number of collaborative agreements with local medical
institutions and doctors regarding particular disease research. These agreements
generally extend for a period of five years. Under the agreements, these
institutions and/or physicians contribute data or other clinical information and
we contribute equipment, research supplies and our molecular genetics and
experimental design expertise. The agreements also require us to reimburse all
project-related expenses. If we sell project results, the agreements require us
to make specified payments and pay a portion of performance-based milestone
payments that we receive.

                                        38
<PAGE>

     We have a settlement agreement with a U.S. medical institution whereby we
are committed to pay royalties and milestone payments if we are successful in
developing and commercializing products that result from a particular technology
jointly owned by the medical institution and us.

ACQUISITION OF MEDICHEM

     In March 2002, we acquired MediChem Life Sciences, Inc. in a
stock-for-stock exchange to be accounted for as a purchase transaction. The
acquisition gives us capabilities in chemistry and structural proteomics that
will 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. Building upon the acquisition of MediChem, we will be creating
an integrated biopharmaceutical company capable of bringing our own targets into
proprietary drug discovery. Through the acquisition we added approximately 160
new employees and facilities in Illinois and Washington.

     In the first quarter of 2002, we will record the transaction as a purchase
for accounting purposes and allocate the purchase price (approximately $86.7
million), based upon independent valuations, to the assets purchased and
liabilities assumed based upon their respective fair values. We will allocate
the excess of the purchase price over the estimated fair market value of net
tangible assets acquired to identified intangibles, including developed
technology, patents, customer and other contracts and agreements that have
estimated useful lives ranging from three to ten years. Based upon a preliminary
review, we estimate the charge to earnings for acquired in-process research and
development to be approximately $0.5 million and the annual amortization charge
for other identifiable intangibles to amount to approximately $1.2 million. Also
based on this preliminary review, we estimate resulting goodwill will be
approximately $58.3 million. The amount allocated to identified intangibles will
be determined upon the completion of independent appraisals and, therefore, may
differ from our current estimate.

     Our consolidated financial statements will include the cash flows and
results of MediChem from March 18, 2002 and the integration of MediChem will
impact our results of operations and our financial position. With MediChem, our
revenues will increase but our operating expenses and likely our net losses will
also increase. In addition, we expect to fund the working capital needs and
operating activities of MediChem in the near term. The extent to which MediChem
will ultimately impact our results of operations and financial condition is
largely dependant upon how quickly and in what proportion MediChem's capacity is
brought to bear on our in-house programs and how much of their existing contract
services business is maintained and developed.

GENERAL

     We anticipate that collaborations 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. 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 or successfully
commercialize the deCODE Combined Data Processing system.

     We intend to invest in discovery services, database services and healthcare
informatics, and expect to report net losses for the next several years. If the
costs of these investments are greater than anticipated, or if they take longer
to complete, or if losses are incurred from strategic investments, we may incur
losses for a longer period of time.

     Our failure to successfully develop and market products over the next
several years, or to realize product revenues, would have a material 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 for at least several years, if at all.

                                        39
<PAGE>

     We have made and intend to continue to make strategic equity investments
in, and acquisitions of, technologies and businesses that are complementary to
our business. As a result, we may record losses or expenses related to our
proportionate ownership interest in such long-term equity investments, record
charges for the acquisition of in-process technologies, or record charges for
the recognition of the impairment in the value of the securities underlying such
investments.

     Our operating results through December 31, 2001 reflect the expenses
incurred in our gene discovery activities, partly offset by the revenues
received pursuant to our research and development collaborations with Roche and
other recent collaborations in connection with these activities. We will
continue these activities, but our operating results will also reflect the
substantial costs we expect to incur in building technology and services for the
Clinical Genome Miner and commencing the development of the Icelandic Health
Sector Database and the deCODE Combined Data Processing system. While we intend
to enter into collaborations to help fund and develop the these database
services, until we do so there will be no revenue from our database service
activities to offset against these costs.

CRITICAL ACCOUNTING POLICIES

     The preparation of financial statements in conformity with generally
accepted accounting principles 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 collaborative arrangements, property and
equipment, income taxes, litigation and other contingencies, materials and
supplies, 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. 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 may not
differ from the estimates referred to above.

     Collaborations and Revenue.  Our collaborative arrangements and the
recognition of revenue in such arrangements is the accounting policy most
critical to us. We have formed and will continue to form strategic alliances
with collaborative partners. These agreements will consist of a variety of
disease-focused programs under which we have or will conduct research funded by
our partners, form alliances that combine the transfer of intellectual property
with collaborative research and/or development in respect of a specific disease,
therapeutic or diagnostic approach, and license intellectual property developed
as a result of our proprietary research and development.

     Currently 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 the
company is 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. Upon notification of the achievement of
the milestone a portion of the milestone payment equal to the percentage of the
collaboration completed through that date is recognized, with the remainder
recognized as services are performed (generally straight-line) over the
remaining estimated term of the collaboration.

     We record revenue earned from our research contracts in accordance with the
applicable performance requirements and terms of our various contracts; that is,
when payment becomes contractually due. Revenue is
                                        40
<PAGE>

generally recorded as contract research costs are incurred, including the
percentage of completion basis, for non-refundable up-front fees or upon the
achievement of milestones. "Revenue recorded" is a focal metric for us as it is,
we believe, an important measure of value we create in a given reporting period.
As such, we discuss both revenue recognized under GAAP in our income statement
and revenue recorded to our balance sheet in Management's Discussion and
Analysis of Financial Condition and Results of Operations and elsewhere in this
Annual Report.

     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 a 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.
However, to date there have been no losses recorded with respect to such
contracts.

     We are also entitled to royalties or profit sharing under the terms of our
agreements. Due to the extended time period for the development and
commercialisation of a saleable product or therapy, we have not yet received
royalties or profit sharing under any of our contracts.

     Although we currently depend upon funded research arrangements for a
significant portion of our revenue, we are increasing our investment in
proprietary research and we will incur the costs of such research. In the near
term, this will require us to continue to make significant investments to expand
our in-house capabilities for downstream development which we believe will
better position us 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.

     This shift from primarily funded research activities to more proprietary
research activities will, we believe, increase the potential reward to us from
our research. In doing so, we may trade-off and amount of revenue guaranteed for
the short-term -- i.e., research funding -- that would go to support these
activities. We have undertaken this shift with the view of increasing our stake
in the long-term value of our discoveries.

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

     - Property and Equipment.  Our property and equipment are recorded at cost
       and depreciated using the straight-line method over the estimated useful
       lives of the related 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. For example, 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. The change resulted
       in an increase to depreciation expense of $1.4 million in 2001. 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.
       Should we determine that there has been an impairment of our fixed
       assets, goodwill or other intangible assets we would suffer an increase
       to our net loss or a reduction of our net income in the period such a
       determination is made.

     - 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 recent 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.

                                        41
<PAGE>

     - Income Taxes.  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 to primarily to our history of
       operating losses and the expectation that such losses will continue into
       the foreseeable future, we have concluded that currently there is
       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.

     - 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. We base our accruals on information
       available at the time of such determination. Although we are party to
       litigation and other actual or potential claims, our legal counsel and we
       are unable to estimate the probability of an unfavourable outcome or
       estimate any resulting loss. Consequently, we have not included an
       accrual for such costs in our financial statements. 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

     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 and how quickly and
in what proportion MediChem's capacity is brought to bear on our in-house
programs. 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 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, reliance
on the license to create and run the Icelandic Health Sector Database, 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.

                                        42
<PAGE>

     Revenues.  The following is a summary of deferred revenue:

<Table>
<Caption>
                                                            DECEMBER 31,
                                              -----------------------------------------
                                                 1999           2000           2001
                                              -----------    -----------    -----------
<S>                                           <C>            <C>            <C>
Revenue recorded during the year ended......  $17,674,818    $23,712,322    $40,292,874
Revenue recognized during the year ended....  (16,591,485)   (21,545,656)   (31,550,626)
                                              -----------    -----------    -----------
                                                1,083,333      2,166,666      8,742,248
Deferred revenue at beginning of year.......    1,155,000      2,238,333      4,404,999
                                              -----------    -----------    -----------
Deferred revenue at end of year.............  $ 2,238,333    $ 4,404,999    $13,147,247
                                              ===========    ===========    ===========
</Table>

     Our revenues increased to $31,550,626 for the year-ended December 31, 2001
as compared to $21,545,656 and $16,591,485 for the years ended December 31, 2000
and 1999, respectively. Revenues attributable to our research collaboration
agreement with Roche were $25,158,038 for the year ended December 31, 2001 as
compared $20,693,333 and $15,776,667 for the years ended December 31, 2000 and
1999, respectively. The $10,004,970 or 46% increase in total revenues from 2000
to 2001 principally results from the recognition of revenue from new milestone
achievements under our 1998 research collaboration with Roche but also from the
new diagnostics collaboration with Roche and the joint development and
commercialization with ABG. The $4,954,171 or 30% increase in revenues from 1999
to 2000 primarily resulted from new milestones having been achieved under the
agreement with Roche in 2000.

     At December 31, 2001, the total amount of deferred research revenue that
will be recognized in future periods aggregated $13,147,247. Revenues recorded
increased to $40,292,874 for the year-ended December 31, 2001 as compared to
$23,712,322 and $17,674,818 for the years ended December 31, 2000 and 1999,
respectively. The $16,580,552 or 70% increase in recorded revenues from 2000 to
2001 is principally attributable to our new diagnostics collaboration with Roche
and other recent collaborations, but also results from greater milestone
achievements under our 1998 research collaboration with Roche. The $6,037,504 or
34% increase in recorded revenues from 1999 to 2000 is principally attributable
to greater milestone achievements under the 1998 research collaboration with
Roche.

     Research and Development Expenses.  Our research and development expenses
increased to $71,796,515 for the year-ended December 31, 2001 as compared to
$45,742,081 and $33,213,557 for the years ended December 31, 2000 and 1999,
respectively. We have continued to expand our research and development
operations, including hiring of additional research personnel with the resulting
salary and benefits costs, an expansion of our laboratory facilities and
equipment acquisitions, and the resulting depreciation, purchase and use of
consumables, and our increased research efforts. The $26,054,434 or 57% increase
in research and development expenses from 2000 to 2001 is primarily attributable
to depreciation on the expanded asset base and increased purchases of
consumables in support of, among other things, our new ABI Prism 3700 DNA
Analyzers, salaries and contractor services, and the disposal of laboratory
equipment. The $12,528,524 or 38% increase in research and development expenses
from 1999 to 2000 resulted from depreciation on the expanded asset base and
salaries and contractor services and also from license fee costs payable to the
Icelandic government, as required by the Icelandic Health Sector Database
operating license, that were recorded in the year ended December 31, 2000 but no
such costs were recorded in the year ended December 31, 1999 because the license
had not yet been issued. We expect to continue to increase research and
development spending as we pursue and expand our efforts. We also expect
research and development to increase with the establishment of our new
subsidiaries, MediChem, Encode, and deCODE Cancer as well as a result of our new
diagnostics development contract with Roche, therapeutics development contract
with Roche and other recent collaborations.

     General and Administrative Expenses.  Our general and administrative
expenses were $12,402,283 for the year-ended December 31, 2001 as compared to
$15,373,223 and $8,220,758 for the years ended December 31, 2000 and 1999,
respectively. Without regard to a $1.3 million of non-cash litigation settlement
charge in the year ended December 31, 2001, $3.2 million of stock-based
contributions in the year ended December 31, 2000, and stock-based compensation
and remuneration charges during all periods, general and administrative expense
increased approximately $2.2 million or 28% from 2000 to 2001 and $2.8 million
or

                                        43
<PAGE>

60% from 1999 to 2000 as a result of added salaries, contractor services and
other general and administrative expenses in the continued expansion of our
operations. We expect general and administrative expenses will increase as we
continue to build our operations, notably with the inclusion and integration of
MediChem into the business.

     Stock-Based Compensation and Remuneration Expense.  Stock-based
compensation and remuneration expense decreased to $4,650,739 for the year-ended
December 31, 2001 as compared to $8,686,507 and $9,045,865 for the years ended
December 31, 2000 and 1999, respectively. With little compensation 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.

     Interest Income.  Our interest income was $6,925,135 for the year-ended
December 31, 2001 as compared to $8,866,604 and $2,187,695 for the years ended
December 31, 2000 and 1999, respectively. The decrease of $1,941,469 or 22% from
2000 to 2001 is attributable to the decline of prevailing interest rates but
also from an overall decrease in our cash balance as we continue to use the
proceeds of our initial public offering for operations. The increase of
$6,678,909 or 305% from 1999 to 2001 resulted from overall higher cash reserves
as a result of our initial public offering.

     Other non-operating income and expense, net.  Our other non-operating
income and expense, net increased to a net expense of $2,115,434 for the
year-ended December 31, 2001 as compared to $415,459 and $1,133,312 for the
years ended December 31, 2000 and 1999, respectively. The increase in net other
non-operating expense primarily results from foreign exchange losses in the
current periods.

     Income Taxes.  As of December 31, 2001, we had an accumulated deficit of
$158,592,171 and did not owe any Icelandic or U.S. federal income taxes nor did
we pay any in the years ended December 31, 1999, 2000 or 2001. Realization of
deferred tax assets is dependent on future earnings, if any. As of December 31,
2001, we had net operating losses able to be carried forward for U.S. federal
income tax purposes of approximately $4.1 million to offset future taxable
income in the United States that expire at various dates through 2021. Also, as
of December 31, 2001 our foreign subsidiaries had net operating loss
carryforwards of approximately $22.0 million that expire in varying amounts
beginning in 2004.

     Net Loss and Basic and Diluted Net Loss Per Share.  Net loss and basic and
diluted net loss per share were $47,838,471 and $1.08 for the year ended
December 31, 2001, respectively, as compared to $31,118,503 and $1.63 for the
year ended December 31, 2000 and $23,788,447 and $9.65 for the year ended
December 31, 2001, respectively. This is an increase of 54% in net loss and a
decrease of 34% in basic and diluted net loss per share from 2000 to 2001 and an
increase of 31% in net loss and a decrease of 83% in basic and diluted net loss
per share from 1999 to 2000. Although net loss has increased in the three years
ended December 31, 2001, basic and diluted net loss per share has decreased
primarily as a result of the greater number of average shares outstanding as a
result of our initial public offering in July 2000.

     Pro Forma Basic and Diluted Net Loss Per Share.  Pro forma basic and
diluted net loss per share is computed for periods prior to our initial public
offering 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 for such periods, net loss has not been increased for the dividends
accumulated or discounts on preferred stock amortized during such periods. Basic
and diluted net loss per share increased to $1.08 for the year ended December
31, 2001 as compared to pro forma basic and diluted net loss per share of $0.85
and $0.86 for the years ended December 31, 2000 and 1999, respectively.

LIQUIDITY AND CAPITAL RESOURCES

     We have financed our operations primarily through funding from
collaborative agreements and the issuance of equity securities and debt
instruments. For the previous three years, we have received cash of
approximately $66 million from collaborative research agreements, $183 million
from the issuance of common

                                        44
<PAGE>

stock, $76 million from the issuance of preferred stock and warrants, and $44
million from privately placed bonds, bank loans and equipment financing. During
1999, 2000 and 2001 we received total research and development funding of $62
million from Roche. As of December 31, 2001, future funding under terms of our
existing agreements is approximately $88 million excluding milestone payments
and royalties that we may earn under such collaborations.

     Cash and Cash Equivalents.  As of December 31, 2001, we had $167,061,132 in
cash and cash equivalents, including part of a bridge loan ($14 million) that is
restricted as to its use as of December 31, 2001. 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. Inflation has been significant in Iceland during the year
ended December 31, 2001 but has not had a material effect on our business.

     Operating Activities.  Funds from working capital sources provided
$8,249,064 of cash for operating activities for year ended December 31, 2001 as
compared to a use of funds of $2,928,466 for the year ended December 31, 2000
and $392,927 provided for the year ended December 31, 1999. As a result,
although net loss increased $16,719,968 for the year ended December 31, 2001 as
compared to December 31, 2000, net cash used in operating activities increased
just $5,345,238 to $21,470,233 in the year ended December 31, 2001 as compared
to a use of funds of $16,124,995 in the year ended December 31, 2000.

     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, 2001 were $47,680,574
as compared to $15,469,623 in the year ended December 31, 2000 and $2,885,644 in
the year ended December 31,1999, primarily due to the expansion of our
facilities and operations. Particularly, during the year ended December 31, 2001
we expended $23.7 million in respect of the new building to house our operations
in the University District of Reykjavik and we paid for the fifty new ABI Prism
3700 DNA Analyzers acquired late in 2000 ($13.1 million). Net cash used in
investing activities may in the future fluctuate significantly from period to
period due to the timing of our capital expenditures and other investments.

     Financing Activities.  Net cash of $28,076,941 was provided in financing
activities in the year ended December 31, 2001 as compared to $196,865,248
provided in the year ended December 31, 2000 and $19,553,293 in the year ended
December 31, 1999. Net cash provided by financing activities in 2000 was largely
due to approximately $182 million of net proceeds from our July 2000 initial
public offering. Net cash provided by financing activities in 2001 was
principally due to the financing of certain equipment and of our new
headquarters facility.

     In December 2001, we established a bridge loan with an Icelandic financial
institution for the purposes of financing the construction of our new
headquarters facility. Total borrowing was $27.5 million and carried an annual
interest rate equal to a short-term LIBOR rate plus 0.5%. Portions of the bridge
loan expired upon settlement in January and March 2002 out of the proceeds of
Tier A bonds and the Tier C bonds/Tier D bank loan, respectively, as discussed
below. Monies received in respect of the Tier A bonds ($13.5 million) are
included in cash and cash equivalents at December 31, 2001 and monies received
in respect of the Tier C bonds and the Tier D bank loan ($14.0 million) are
included in restricted cash as a result of the contractual terms with the
financial institution.

     In December 2001, we borrowed $17.8 million from an Icelandic bank for the
construction of our new headquarters facility. The borrowing is collateralized
by the property and improvements and consists of: privately placed bonds (Tier
A) approximately $13.8 million denominated in Icelandic krona and linked to the
Icelandic Consumer Price Index that is payable annually beginning December 2002
and bears annual interest of 8.5% that is payable annually beginning December
2002; and, a $4.0 million bank loan (Tier B) -- denominated in U.S. dollars that
is payable quarterly beginning March 2002 and bears annual interest of
three-month LIBOR plus 3.0% that is payable quarterly beginning March 2002. The
lender may demand
                                        45
<PAGE>

prepayment of the Tier B bank loan in certain circumstances. The Tier A bonds
and the Tier B bank loan were placed in January 2002 and December 2001,
respectively.

     Concurrently, we entered into a cross-currency swap as an economic hedge
against foreign exchange rate fluctuations that may occur on Tier A bonds. As of
December 31, 2001 we had this outstanding contract with a face amount of $13.8
million bearing annual interest of three-month LIBOR plus 2.85%.

     In March 2002, we borrowed a further $13.8 million from an Icelandic bank
for the construction of our new headquarters facility. The borrowing is
collateralized by the property and improvements and consists of: privately
placed bonds (Tier C) -- approximately $7.3 million denominated in Icelandic
krona and linked to the Icelandic Consumer Price Index that is payable in March
2007 and bears annual interest of 12.0% that is payable annually beginning March
2003; and, a $6.6 million bank loan (Tier D) -- denominated in U.S. dollars that
is payable in March 2007 and bears annual interest of three-month LIBOR plus
6.0% that is payable quarterly beginning June 2002. 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 starting December 2003.

     Concurrently, we entered into a cross-currency swap as an economic hedge
against foreign exchange rate fluctuations that may occur on the Tier C bonds.
This contract with a face amount of $7.3 million expires in March 2007 and bears
annual interest of twelve-month LIBOR plus 6%.

     In connection with the Tier C bonds and the Tier D bank loan, we issued a
warrant giving the holder the right to purchase a total of 933,800 shares of our
common stock at $15.00 per share, as adjusted. The warrants expire in March 2007
and convert to shares of our common stock automatically in the event the market
value of a share of our common stock should exceed $24.00 for thirty consecutive
days of trading.

     Contractual Commitments.  Our major outstanding contractual commitments
relate to the privately placed bonds and bank loans, equipment lease financings,
our license for the Icelandic health sector database, a minimum purchase
commitment to ABG and the remaining construction costs with respect to our new
headquarters facility. Our contractual commitments as of December 31, 2001 were
as follows:

<Table>
<Caption>
                                                           PAYMENTS DUE BY PERIOD
                                          --------------------------------------------------------
                                                    LESS THAN                              DUE
                                           TOTAL     1 YEAR     2-3 YEARS   4-5 YEARS   THEREAFTER
                                          -------   ---------   ---------   ---------   ----------
                                                               (IN THOUSANDS)
<S>                                       <C>       <C>         <C>         <C>         <C>
Long-term debt..........................  $31,500    $ 2,571     $ 5,143     $5,143      $18,643
Capital lease obligations, including
  interest..............................   16,263      5,533       9,356        786          588
Operating leases........................    3,922      1,004       1,794      1,017          107
Icelandic health sector database
  license...............................    6,800        680       1,360      1,360        3,400
Minimum purchase commitment to ABG......   16,300     16,300
New building construction...............    3,700      3,700
                                          -------    -------     -------     ------      -------
                                          $78,485    $29,788     $17,653     $8,306      $22,738
                                          =======    =======     =======     ======      =======
</Table>

     General.  We expect cash requirements to continue to increase significantly
as we: invest in genotyping, sequencing and bioinformatics capabilities;
integrate MediChem into our operations, invest in software and hardware to
support the continuing development of the database services; continue to seek
access to technologies through investments, research and development alliances,
license agreements and/or acquisitions; and continue to make improvements in
existing facilities and invest in new facilities.

     Based upon our current plans, and taking into consideration the proceeds of
the initial public offering and recent debt financings, we believe that our
existing resources will be adequate to satisfy our capital needs for several
years. Our cash requirements depend on numerous factors, including our ability
to obtain new research collaboration agreements, to obtain subscription and
collaboration agreements for the database services; 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

                                        46
<PAGE>

genotyping operations remain competitive; and capital expenditures required to
expand our facilities. Changes in our research and development plans or other
changes affecting our operating expenses may result in changes in the timing and
amount of expenditures of our capital resources.

     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. No assurance
can be given that additional financing or collaborations and licensing
arrangements will be available when needed, or that if 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.

     Recent Accounting Pronouncements.  In July 2001, the FASB issued SFAS No.
141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 eliminates the pooling-of-interests method of accounting
for business combinations except for qualifying business combinations that were
initiated prior to July 1, 2001. Under SFAS No. 142, goodwill and indefinite
lived intangible assets are no longer amortized. With respect to goodwill and
intangible assets acquired prior to July 1, 2001, we are required to adopt SFAS
No. 142 for fiscal year 2002 and we are currently in the process of evaluating
the impact SFAS No. 142 will have on our financial position and results from
operations.

     In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. It requires that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value can be
made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. We are required to adopt SFAS No. 143
for fiscal year 2003 and we do not believe its adoption will have a significant
impact on our financial position or results of operations.

     In October 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No.
121, "Accounting for the Impairment of long Lived Assets to Be Disposed Of" and
provides a single accounting model for long-lived assets to be disposed of. We
are required to adopt SFAS No. 144 for fiscal year 2002 and do not believe its
adoption will have a significant 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 are not subject to market risk because the interest paid on such
funds fluctuates with the prevailing interest rate. As of December 31, 2001, all
of our cash and cash equivalents were in money market 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

                                        47
<PAGE>

purchased instruments to hedge these risks through the use of derivative
financial instruments, principally foreign currency forward exchange contracts.

     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 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.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

     Not applicable.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

     For information concerning this item, see the information under "Election
of Directors," "Executive Officers" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's Proxy Statement to be filed with respect
to the 2002 Annual Meeting of Stockholders, which information is incorporated
herein by reference.

ITEM 11.  EXECUTIVE COMPENSATION

     For information concerning this item, see the information under "Executive
Compensation" in the Company's Proxy Statement to be filed with respect to the
2002 Annual Meeting of Stockholders, which information is incorporated herein by
reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     For information concerning this item, see the information under "Security
Ownership of Certain Beneficial Owners and Management" in the Company's Proxy
Statement to be filed with respect to the 2002 Annual Meeting of Stockholders,
which information is incorporated herein by reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     For information concerning this item, see the information under "Certain
Relationships and Related Transactions" in the Company's Proxy Statement to be
filed with respect to the 2002 Annual Meeting of Stockholders, 2001, which
information is incorporated herein by reference.

                                        48
<PAGE>

                                    PART IV

ITEM 14. 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:

<Table>
<Caption>
                                                                PAGE
                                                                ----
<S>                                                             <C>
Report of Independent Accountants...........................    F-2
Consolidated Statements of Operations.......................    F-3
Consolidated Balance Sheets.................................    F-4
Consolidated Statements of Changes in Stockholders'
  Equity....................................................    F-5
Consolidated Statements of Cash Flows.......................    F-7
Notes to Consolidated Financial Statements..................    F-8
</Table>

     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:

<Table>
<Caption>
EXHIBIT
NUMBER                            DESCRIPTION
-------                           -----------
<C>       <S>
     2.1  Agreement and Plan of Merger dated as of January 7, 2002, by
          and among deCODE genetics, Inc., Saga Acquisition Corp, and
          MediChem Life Sciences, Inc. (Incorporated by reference to
          Annex A to the Proxy Statement/Prospectus included in
          Pre-Effective Amendment No. 1 to deCODE's Registration
          Statement on Form S-4 (Registration No. 333-81848) filed on
          February 12, 2002).
     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).
     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).
    10.1  Form of License from The Icelandic Data Protection
          Commission (now, The Icelandic Data Protection Authority) to
          Islensk erfoagreining 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.
</Table>

                                        49
<PAGE>

<Table>
<Caption>
EXHIBIT
NUMBER                            DESCRIPTION
-------                           -----------
<C>       <S>
    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 March 23, 2001).
    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 Friorik Skulason (FS) and
          Islensk erfoagreining 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 December 1, 1997, together with
          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).
    10.7* 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).
    10.8* Amended and Restated Non-Recourse Promissory Note between
          deCODE genetics, Inc. and Hannes Smarason, dated March 24,
          1999 (Incorporated by reference to Exhibit 10.10 to the
          Company's Registration Statement on Form S-1 (Registration
          No. 333-31984) which became effective on July 17, 2000).
    10.9+ Research Collaboration and Cross-license Agreement among F.
          Hoffman-La Roche Ltd, Hoffman-La Roche Inc. and deCODE
          genetics, Inc., dated February 1, 1998 (Incorporated by
          reference to Exhibit 10.11 to the Company's Registration
          Statement on Form S-1 (Registration No. 333-31984) which
          became effective on July 17, 2000).
    10.10 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).
    10.11* Employment Agreement between Islensk erfoagreining ehf. and
          Kristjan Erlendsson, dated September 4, 1998 (Incorporated
          by reference to Exhibit 10.21 to the Company's Registration
          Statement on Form S-1 (Registration No. 333-31984) which
          became effective on July 17, 2000).
    10.12 Co-operation Agreement between Reykjavik Hospital and
          Islensk erfoagreining 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).
    10.13 Co-operation Agreement between the Iceland State Hospital
          and Islensk erfoagreining 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).
    10.14* Non-Recourse Promissory Note between deCODE genetics, Inc.
          and Hannes Smarason, dated September 15, 1999 (Incorporated
          by reference to Exhibit 10.35 to the Company's Registration
          Statement on Form S-1 (Registration No. 333-31984) which
          became effective on July 17, 2000).
</Table>

                                        50
<PAGE>

<Table>
<Caption>
EXHIBIT
NUMBER                            DESCRIPTION
-------                           -----------
<C>       <S>
    10.15 Research Collaboration Agreement by and between Islenskar
          hveraorverur ehf. (now Prokaria, ehf.) and Islensk
          erfoagreining ehf., dated December 28, 1999 (Incorporated by
          reference to Exhibit 10.38 to the Company's Registration
          Statement on Form S-1 (Registration No. 333-31984) which
          became effective on July 17, 2000).
    10.16 Agreement between The Minister for Health and Social
          Security and Islensk erfoagreining ehf. relating to the
          Issue of an Operating License for the Creation and Operation
          of a Health Sector Database, dated January 21, 2000
          (Incorporated by reference to Exhibit 10.39 to the Company's
          Registration Statement on Form S-1 (Registration No.
          333-31984) which became effective on July 17, 2000).
    10.17 Operating License issued to Islensk erfoagreining ehf., for
          the Creation and Operation of a Health Sector Database,
          dated January 22, 2000 (Incorporated by reference to Exhibit
          10.40 to the Company's Registration Statement on Form S-1
          (Registration No. 333-31984) which became effective on July
          17, 2000).
    10.18 Agreement between The University of Iceland, Islensk
          erfoagreining ehf., and the City of Reykjavik, dated
          February 15, 2000 (Incorporated by reference to Exhibit
          10.42 to the Company's Registration Statement on Form S-1
          (Registration No. 333-31984) which became effective on July
          17, 2000).
    10.19* 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).
    10.20 Series C Preferred Stock and Warrant Purchase Agreement
          between Roche Finance Ltd and deCODE genetics, Inc., dated
          as of February 1, 1998 (Incorporated by reference to Exhibit
          10.45 to the Company's Registration Statement on Form S-1
          (Registration No. 333-31984) which became effective on July
          17, 2000).
    10.21+ Strategic Alliance Agreement between Partners HealthCare
          System, Inc., The General Hospital Corporation, d.b.a.
          Massachusetts General Hospital, The Brigham and Women's
          Hospital, Inc. and deCODE genetics Ltd. (Islensk
          erfoagreining), dated May 11, 2000 (Incorporated by
          reference to Exhibit 10.48 to the Company's Registration
          Statement on Form S-1 (Registration No. 333-31984) which
          became effective on July 17, 2000).
    10.22+ Crosswalk Development Agreement between Partners HealthCare
          System, Inc., The General Hospital Corporation, d.b.a.
          Massachusetts General Hospital, The Brigham and Women's
          Hospital, Inc. and deCODE genetics Ltd. (Islensk
          erfoagreining), dated May 11, 2000 (Incorporated by
          reference to Exhibit 10.49 to the Company's Registration
          Statement on Form S-1 (Registration No. 333-31984) which
          became effective on July 17, 2000).
    10.23* Employment Agreement between Islensk erfoagreining ehf. and
          Hakon Guobjartson, dated May 5, 1999 (Incorporated by
          reference to Exhibit 10.52 to the Company's Annual Report on
          Form 10K filed March 23, 2001).
    10.24 Form of Contract on the Processing of Clinical Data and
          their Transfer to a Health Sector Database between several
          Health Institutions and Islensk erfoagreining ehf.
          (Incorporated by reference to Exhibit 10.58 to the Company's
          Annual Report on Form 10-K filed March 23, 2001).
    10.25* Amended and Restated Promissory Note, dated January 1, 2001,
          by Hannes Smarason and the Company (Incorporated by
          reference to Exhibit 10.2 to the Company's Quarterly Report
          on Form 10-Q filed on May 15, 2001).
</Table>

                                        51
<PAGE>

<Table>
<Caption>
EXHIBIT
NUMBER                            DESCRIPTION
-------                           -----------
<C>       <S>
    10.26 Work Contract dated March 15, 2001 between Islensk
          erfdagreining ehf. and Eykt ehf., an Icelandic civil-works
          engineer, on concrete casting, external finish work,
          conduits and ventilation systems, electrical and specialized
          systems in Sturlugata 8, Reykjavik (Incorporated by
          reference to Exhibit 10.3 to the Company's Quarterly Report
          on Form 10-Q filed on May 15, 2001).
    10.27* 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).
    10.28* 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).
    10.29* 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).
    10.30+ Collaboration Agreement between Genmab A/S, Medarex, Inc.
          and deCODE genetics, ehf. dated June 12, 2001 (Incorporated
          by reference to Exhibit 10.4 to the Company's Quarterly
          Report on Form 10-Q filed on August 14, 2001).
    10.31+ Contract Services Agreement Re. Gene Expression Profiles In
          Rheumatoid Arthritis between Encode ehf. and Genmab A/S
          dated June 12, 2001 (Incorporated by reference to Exhibit
          10.5 to the Company's Quarterly Report on Form 10-Q filed on
          August 14, 2001).
    10.32+ 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).
    10.33+ Joint Development and Commercialization Agreement between
          deCODE genetics, ehf. and PE Corporation (NY) through its
          Applied Biosystem Group dated July 16, 2001 (Incorporated by
          reference to Exhibit 10.7 to the Company's Quarterly Report
          on Form 10-Q filed on August 14, 2001).
    10.34+ Reagent Supply Agreement between deCODE genetics, ehf and PE
          Corporation (NY) through its Applied Biosystem Group dated
          July 16, 2001 (Incorporated by reference to Exhibit 10.8 to
          the Company's Quarterly Report on Form 10-Q filed on August
          14, 2001).
    10.35+ Pharmacogenomics Collaboration and License Agreement between
          Encode ehf. and Affymetrix, Inc. dated July 16, 2001
          (Incorporated by reference to Exhibit 10.9 to the Company's
          Quarterly Report on Form 10-Q filed on August 14, 2001).
    10.36 Contract on Financial Leasing between Lysing hf, and Islensk
          erfoagreining ehf., dated as of December 13, 2001.
    10.37 Land Lease Agreement between the City of Reykjavik and
          Islensk erfoagreining ehf., dated as of December 21, 2001.
    10.38 Agreement on the Details of the Arrangement of Encumbrances
          in the Site Agreement between the University of Iceland and
          Islensk erfoagreining ehf., dated as of December 21, 2001.
    10.39 Annex to the Agreement on the Details of the Arrangement of
          Encumbrances in the Site Agreement between the University of
          Iceland and Islensk erfoagreining ehf., dated as of January
          4, 2002.
    10.40# Loan Agreement between Sturlugata 8, ehf. and
          Islandsbanki-FBA, hf., dated as of December 21, 2001.
</Table>

                                        52
<PAGE>

<Table>
<Caption>
EXHIBIT
NUMBER                            DESCRIPTION
-------                           -----------
<C>       <S>
    10.41# Loan Agreement between Sturlugata 8, ehf. and
          Islandsbanki-FBA, hf., dated as of December 27, 2001.
    10.42 Currency Exchange Agreement between Sturlugata 8 ehf. and
          Islandsbanki-FBA hf., dated as of December 21, 2001.
    10.43# Agreement on the Sale and Listing of Bonds Issued by
          Sturlugata 8 ehf. between Islandsbanki-FBA, hf. and Islensk
          erfoagreining ehf., dated as of December 21,2001.
    10.44 General Bond with Consumer Price Index between
          Islandsbanki-FBA, hf. and Sturlugata 8 ehf., dated as of
          December 21, 2001.
    10.45 General Bond with Consumer Price Index between
          Islandsbanki-FBA, hf. and Sturlugata 8 ehf., dated as of
          December 21, 2001.
    10.46# Research Collaboration and Cross-License Agreement among
          F.Hoffman-La Roche Ltd and Hoffman-La Roche Inc. and deCODE
          genetics, ehf. (Islensk erfoagreining), effective as of
          February 1, 2002.
    10.47 Loan Agreement between Kristjan Erlendsson and Islensk
          erfoagreining ehf., dated as of October 11, 2001.
    21.1  Subsidiaries of deCODE genetics, Inc.
    23.1  Consent of PricewaterhouseCoopers ehf., independent public
          accountants.
    99.1  Government Regulation on a Health Sector Database, dated
          January 22, 2000 (Incorporated by reference to Exhibit 99.1
          to the Company's Registration Statement on Form S-1
          (Registration No. 333-31984) which became effective on July
          17, 2000).
    99.2  Act. No. 139/1998 on a Health Sector Database (Incorporated
          by reference to Exhibit 99.2 to the Company's Registration
          Statement on Form S-1 (Registration No. 333-31984) which
          became effective on July 17, 2000).
</Table>

---------------
+ 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.

(b) REPORTS ON FORM 8-K

     We did not file any reports on Form 8-K during the quarter ended December
31, 2001.

                                        53
<PAGE>

                                   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/
                                              DR. KARI STEFANSSON   MARCH 27,
                                                           2002
                                            ------------------------------------
                                             Dr. Kari Stefansson, President and
                                                  Chief Executive Officer

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

<Table>
<Caption>
                     SIGNATURE                                      TITLE                      DATE
                     ---------                                      -----                      ----
<C>                                                    <S>                                <C>

              /s/ DR. KARI STEFANSSON                  Chairman, President, Chief         March 27, 2002
---------------------------------------------------      Executive Officer (principal
                Dr. Kari Stefansson                      executive officer) and
                                                         Director

                /s/ LANCE THIBAULT                     Chief Financial Officer and        March 27, 2002
---------------------------------------------------      Treasurer (principal
                  Lance Thibault                         financial officer and
                                                         principal accounting officer)

             /s/ JEAN-FRANCOIS FORMELA                 Director                           March 27, 2002
---------------------------------------------------
               Jean-Francois Formela

               /s/ TERRANCE MCGUIRE                    Director                           March 27, 2002
---------------------------------------------------
                 Terrance McGuire

                 /s/ SIR JOHN VANE                     Director                           March 27, 2002
---------------------------------------------------
                   Sir John Vane
</Table>

                                        54
<PAGE>

                             deCODE GENETICS, INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<Table>
<Caption>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Report of Independent Accountants...........................   F-2
Consolidated Statements of Operations.......................   F-3
Consolidated Balance Sheets.................................   F-4
Consolidated Statements of Changes in Stockholders'
  Equity....................................................   F-5
Consolidated Statements of Cash Flows.......................   F-7
Notes to Consolidated Financial Statements..................   F-8
</Table>

                                       F-1
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

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
(deficit) and cash flows present fairly, in all material respects, the
consolidated financial position of deCODE genetics, Inc. (deCODE) at December
31, 2000 and 2001 and the consolidated results of its operations and its
consolidated cash flows for each of the three years in the period ended December
31, 2001, in conformity with generally accepted accounting principles in the
United States. These financial statements are the responsibility of deCODE'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 generally accepted auditing standards in the United States,
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 the opinion expressed above.

PricewaterhouseCoopers ehf.
Reykjavik, Iceland
March 8, 2002

                                       F-2
<PAGE>

                             deCODE GENETICS, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<Table>
<Caption>
                                                         FOR THE YEARS ENDED DECEMBER 31,
                                                   --------------------------------------------
                                                       1999            2000            2001
                                                   ------------    ------------    ------------
<S>                                                <C>             <C>             <C>
Revenue..........................................  $ 16,591,485    $ 21,545,656    $ 31,550,626
Operating expenses
  Research and development.......................    33,213,557      45,742,081      71,796,515
  General and administrative.....................     8,220,758      15,373,223      12,402,283
                                                   ------------    ------------    ------------
          Total operating expenses...............    41,434,315      61,115,304      84,198,798
                                                   ------------    ------------    ------------
Operating loss...................................   (24,842,830)    (39,569,648)    (52,648,172)
Interest income..................................     2,187,695       8,866,604       6,925,135
Other non-operating income and (expense), net....    (1,133,312)       (415,459)     (2,115,434)
Taxes............................................             0               0               0
                                                   ------------    ------------    ------------
Net loss.........................................   (23,788,447)    (31,118,503)    (47,838,471)
Accrued dividends and amortized discount on
  preferred stock................................    (7,542,787)     (7,540,879)              0
Premium on repurchase of preferred stock.........   (30,887,044)              0               0
                                                   ------------    ------------    ------------
Net loss available to common stockholders........  $(62,218,278)   $(38,659,382)   $(47,838,471)
                                                   ============    ============    ============
Basic and diluted net loss per share.............  $      (9.65)   $      (1.63)   $      (1.08)
Shares used in computing basic and diluted net
  loss per share.................................     6,446,055      23,671,113      44,289,911
</Table>

   The accompanying notes are an integral part of the Consolidated Financial
                                  Statements.
                                       F-3
<PAGE>

                             deCODE genetics, INC.

                          CONSOLIDATED BALANCE SHEETS

<Table>
<Caption>
                                                                       DECEMBER 31,
                                                              ------------------------------
                                                                  2000             2001
                                                              -------------    -------------
<S>                                                           <C>              <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................  $ 194,144,688    $ 153,061,132
  Restricted cash...........................................              0       14,000,000
  Receivables and other current assets......................     14,482,336       26,043,029
                                                              -------------    -------------
          Total current assets..............................    208,627,024      193,104,161
Property and equipment, net.................................     37,100,690       61,207,537
Other long-term assets and deferred charges.................      3,172,853        2,047,471
                                                              -------------    -------------
          Total assets......................................  $ 248,900,567    $ 256,359,169
                                                              =============    =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued expenses.....................  $  22,957,481    $  21,164,576
  Current portion of capital lease obligations..............      1,749,807        4,855,420
  Current portion of long-term debt.........................              0        2,571,429
  Deferred research revenue.................................      4,404,999        6,147,247
                                                              -------------    -------------
          Total current liabilities.........................     29,112,287       34,738,672
Capital lease obligations, net of current portion...........      2,801,853        9,922,318
Long-term debt, net of current portion......................              0       28,928,571
Deferred research revenue...................................              0        7,000,000
Other long-term liabilities.................................        717,261          427,675
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: 60,000,000 shares;
     Issued and outstanding: 45,041,969 at December 31,
     2000; and 45,328,227 and 45,257,386, respectively, at
     December 31, 2001......................................         45,042           45,328
  Additional paid-in capital................................    350,398,909      351,960,182
  Notes receivable..........................................    (11,850,953)     (10,788,635)
  Deferred compensation.....................................    (11,568,776)      (6,173,592)
  Accumulated deficit.......................................   (110,753,700)    (158,592,171)
  Accumulated other comprehensive income....................         (1,356)          52,596
  Treasury stock............................................              0       (1,161,775)
                                                              -------------    -------------
          Total stockholders' equity........................    216,269,166      175,341,933
                                                              -------------    -------------
          Total liabilities and stockholders' equity........  $ 248,900,567    $ 256,359,169
                                                              =============    =============
</Table>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                       F-4
<PAGE>

                             deCODE GENETICS, INC.

      CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<Table>
<Caption>
                                                                                                      DIVIDENDS
                                                                                                      ACCRETED
                                                                                                         ON
                                       SHARES                                                        REDEEMABLE,
                               ----------------------    ADDITIONAL                                  CONVERTIBLE
                                                PAR       PAID-IN         NOTES         DEFERRED      PREFERRED     ACCUMULATED
                               COMMON STOCK    VALUE      CAPITAL       RECEIVABLE    COMPENSATION      STOCK         DEFICIT
                               ------------   -------   ------------   ------------   ------------   -----------   -------------
<S>                            <C>            <C>       <C>            <C>            <C>            <C>           <C>
BALANCE AT DECEMBER 31,
 1998........................    9,381,500    $ 9,382   $ 17,842,611   $ (4,033,347)  $(8,549,906)   $(3,215,628)  $ (20,275,235)
Issuance of common stock.....       68,000         68      1,449,012
Forfeiture of unvested
 Founder stock and unvested
 common stock issued upon
 early exercise of stock
 options.....................     (359,655)                                 219,111       513,424
Exchange of common stock for
 Series B preferred stock....     (333,333)                  750,000
Issuance of common stock upon
 exercise of stock options...      847,500        154        663,392     (5,895,594)
Deferred compensation arising
 from stock options..........                             12,941,712                  (12,941,712)
Cancellation of stock options
 previously giving rise to
 deferred compensation.......                               (115,072)                     115,072
Amortization of deferred
 compensation................                                                           8,313,365
Payments of notes
 receivable..................                                               112,000
Premium on repurchase of
 preferred stock.............                                                                            582,514     (31,469,558)
Beneficial conversion feature
 of issuance of Series C
 preferred stock.............                              1,540,920
Accretion of dividends and
 amortization of discount on
 preferred stock.............                                                                         (5,751,837)     (1,790,950)
Comprehensive income (loss):
Net loss for the period......                                                                                        (23,788,447)
Other comprehensive income
 (loss):
Foreign currency
 translation.................
Total comprehensive income
 (loss):.....................
                                ----------    -------   ------------   ------------   ------------   -----------   -------------
BALANCE AT DECEMBER 31,
 1999........................    9,604,012    $ 9,604   $ 35,072,575   $ (9,597,830)  $(12,549,757)  $(8,384,951)  $ (77,324,190)
                                ----------    -------   ------------   ------------   ------------   -----------   -------------

<Caption>

                                ACCUMULATED
                                   OTHER
                               COMPREHENSIVE                          TOTAL
                                  INCOME          TREASURY        STOCKHOLDERS'
                                  (LOSS)            STOCK        EQUITY (DEFICIT)
                               -------------   ---------------   ----------------
<S>                            <C>             <C>               <C>
BALANCE AT DECEMBER 31,
 1998........................   $         0    $             0     $(18,222,123)
Issuance of common stock.....                                         1,449,080
Forfeiture of unvested
 Founder stock and unvested
 common stock issued upon
 early exercise of stock
 options.....................                         (732,895)            (360)
Exchange of common stock for
 Series B preferred stock....                       (4,500,000)      (3,750,000)
Issuance of common stock upon
 exercise of stock options...                        5,232,895              847
Deferred compensation arising
 from stock options..........                                                 0
Cancellation of stock options
 previously giving rise to
 deferred compensation.......                                                 0
Amortization of deferred
 compensation................                                         8,313,365
Payments of notes
 receivable..................                                           112,000
Premium on repurchase of
 preferred stock.............                                       (30,887,044)
Beneficial conversion feature
 of issuance of Series C
 preferred stock.............                                         1,540,920
Accretion of dividends and
 amortization of discount on
 preferred stock.............                                        (7,542,787)
Comprehensive income (loss):
Net loss for the period......                                       (23,788,447)
Other comprehensive income
 (loss):
Foreign currency
 translation.................         2,411                               2,411
                                                                   ------------
Total comprehensive income
 (loss):.....................                                       (23,786,036)
                                -----------    ---------------     ------------
BALANCE AT DECEMBER 31,
 1999........................   $     2,411    $             0     $(72,772,138)
                                -----------    ---------------     ------------
</Table>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                       F-5
<PAGE>
                             deCODE GENETICS, INC.

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                            (DEFICIT) -- (CONTINUED)
<Table>
<Caption>
                                                                                                      DIVIDENDS
                                                                                                      ACCRETED
                                                                                                         ON
                                       SHARES                                                        REDEEMABLE,
                               ----------------------    ADDITIONAL                                  CONVERTIBLE
                                                PAR       PAID-IN         NOTES         DEFERRED      PREFERRED     ACCUMULATED
                               COMMON STOCK    VALUE      CAPITAL       RECEIVABLE    COMPENSATION      STOCK         DEFICIT
                               ------------   -------   ------------   ------------   ------------   -----------   -------------
<S>                            <C>            <C>       <C>            <C>            <C>            <C>           <C>
BALANCE AT DECEMBER
 31,1999.....................    9,604,012    $ 9,604   $ 35,072,575   $ (9,597,830)  $(12,549,757)  $(8,384,951)  $ (77,324,190)
Common stock issued upon
 initial public offering, net
 of issuance cost............   11,040,000     11,040    181,940,726
Issuance of common stock upon
 exercise of warrants........      306,943        307           (307)
Other issuances of common
 stock.......................      165,910        166      3,670,002                     (665,700)
Redeemable, convertible
 preferred stock converted to
 to common stock.............   23,737,081     23,737    118,735,067                                  13,614,823
Beneficial conversion feature
 of issuance of Series C
 preferred stock.............                              2,040,880
Accretion of dividends and
 amortization of discount on
 preferred stock.............                                                                         (5,229,872)     (2,311,007)
Forfeiture of unvested common
 stock issued upon early
 exercise of stock options...      (26,977)                                 109,325       185,676
Issuance of common stock upon
 exercise of stock options...      215,000        188      2,130,417     (2,362,448)
Deferred compensation arising
 from stock options..........                              6,809,549                   (6,809,549)
Amortization of deferred
 compensation................                                                           8,270,554
Comprehensive income (loss):
Net loss for the period......                                                                                        (31,118,503)
Other comprehensive income
 (loss):
Foreign currency
 translation.................
Total comprehensive income
 (loss):.....................
                                ----------    -------   ------------   ------------   ------------   -----------   -------------
BALANCE AT DECEMBER 31,
 2000........................   45,041,969     45,042    350,398,909    (11,850,953)  (11,568,776)             0    (110,753,700)
Issuance of common stock upon
 exercise of warrants........       94,444         94            (94)
Other issuances of common
 stock.......................      191,814        192      1,555,117
Forfeiture of unvested common
 stock issued upon early
 exercise of stock options...      (70,841)                                 409,509       750,695
Payment of notes.............                                               652,809
Deferred compensation arising
 from stock options..........                                  6,250                       (6,250)
Amortization of deferred
 compensation................                                                           4,650,739
Comprehensive income (loss):
Net loss for the period......                                                                                        (47,838,471)
Other comprehensive income
 (loss):
Foreign currency
 translation.................
Total comprehensive income
 (loss)......................
                                ----------    -------   ------------   ------------   ------------   -----------   -------------
BALANCE AT DECEMBER 31,
 2001........................   45,257,386    $45,328   $351,960,182   $(10,788,635)  $(6,173,592)   $         0   $(158,592,171)
                                ==========    =======   ============   ============   ============   ===========   =============

<Caption>

                                ACCUMULATED
                                   OTHER
                               COMPREHENSIVE                          TOTAL
                                  INCOME          TREASURY        STOCKHOLDERS'
                                  (LOSS)            STOCK        EQUITY (DEFICIT)
                               -------------   ---------------   ----------------
<S>                            <C>             <C>               <C>
BALANCE AT DECEMBER
 31,1999.....................   $     2,411    $             0     $(72,772,138)
Common stock issued upon
 initial public offering, net
 of issuance cost............                                       181,951,766
Issuance of common stock upon
 exercise of warrants........                                                 0
Other issuances of common
 stock.......................                                         3,004,468
Redeemable, convertible
 preferred stock converted to
 to common stock.............                                       132,373,627
Beneficial conversion feature
 of issuance of Series C
 preferred stock.............                                         2,040,880
Accretion of dividends and
 amortization of discount on
 preferred stock.............                                        (7,540,879)
Forfeiture of unvested common
 stock issued upon early
 exercise of stock options...                         (295,028)             (27)
Issuance of common stock upon
 exercise of stock options...                          295,028           63,185
Deferred compensation arising
 from stock options..........                                                 0
Amortization of deferred
 compensation................                                         8,270,554
Comprehensive income (loss):
Net loss for the period......                                       (31,118,503)
Other comprehensive income
 (loss):
Foreign currency
 translation.................        (3,767)                             (3,767)
                                                                   ------------
Total comprehensive income
 (loss):.....................                                       (31,122,270)
                                -----------    ---------------     ------------
BALANCE AT DECEMBER 31,
 2000........................        (1,356)                 0      216,269,166
Issuance of common stock upon
 exercise of warrants........                                                 0
Other issuances of common
 stock.......................                                         1,555,309
Forfeiture of unvested common
 stock issued upon early
 exercise of stock options...                       (1,161,775)          (1,571)
Payment of notes.............                                           652,809
Deferred compensation arising
 from stock options..........                                                 0
Amortization of deferred
 compensation................                                         4,650,739
Comprehensive income (loss):
Net loss for the period......                                       (47,838,471)
Other comprehensive income
 (loss):
Foreign currency
 translation.................        53,952                              53,952
                                                                   ------------
Total comprehensive income
 (loss)......................                                       (47,784,519)
                                -----------    ---------------     ------------
BALANCE AT DECEMBER 31,
 2001........................   $    52,596    $    (1,161,775)    $175,341,933
                                ===========    ===============     ============
</Table>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                       F-6
<PAGE>

                             deCODE GENETICS, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<Table>
<Caption>
                                                                   FOR THE YEARS ENDED DECEMBER 31,
                                                              ------------------------------------------
                                                                  1999           2000           2001
                                                              ------------   ------------   ------------
<S>                                                           <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................................  $(23,788,447)  $(31,118,503)  $(47,838,471)
Adjustments to reconcile net loss to net cash used in
  operating activities:
  Depreciation and amortization.............................     3,374,039      5,203,715     10,028,378
  Amortization of deferred stock compensation...............     8,313,365      8,270,554      4,650,739
  Other stock-based remuneration and stock contributions....       732,500      3,609,930         52,500
  Loss on disposal of equipment.............................             0              0      1,607,583
  Litigation settlement.....................................             0              0      1,292,642
  Equity in net loss of affiliate...........................       486,366        738,359        461,948
  Accrued interest on receivable from share issuance........      (893,836)       893,836              0
  Equipment received for services provided..................      (414,000)             0              0
  Other.....................................................             0       (794,420)        25,384
Changes in operating assets and liabilities:
  Receivables and other current assets......................    (1,748,007)   (11,671,110)    (6,560,693)
  Accounts payable and accrued expenses.....................       906,977      6,315,817     11,357,095
  Deferred research revenue.................................     1,083,333      2,166,666      8,742,248
  Unbilled research revenue.................................             0              0     (5,000,000)
  Other long-term liabilities...............................       150,624        260,161       (289,586)
                                                              ------------   ------------   ------------
    Net cash used in operating activities...................   (11,797,086)   (16,124,995)   (21,470,233)
                                                              ------------   ------------   ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment........................    (2,885,644)   (15,469,623)   (47,680,574)
  Investment in affiliated company, net.....................      (104,324)      (446,345)             0
  Acquisitions and investments, net.........................         3,581       (350,471)             0
  Other.....................................................             0       (174,790)        (9,690)
                                                              ------------   ------------   ------------
    Net cash used in investing activities...................    (2,986,387)   (16,441,229)   (47,690,264)
                                                              ------------   ------------   ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Issuance of preferred stock and warrants..................    41,658,444     34,534,276              0
  Issuance of common stock, net.............................           848    182,014,951              0
  Repurchase of preferred stock.............................   (20,310,555)   (17,467,077)             0
  Repayment of notes receivable for common stock............       112,000              0        652,809
  Forfeiture of common stock................................          (360)           (27)        (1,571)
  Proceeds from financing of facility.......................             0              0     17,199,625
  Proceeds from equipment sale-leaseback financing..........                                  12,000,000
  Installment payments on capital lease obligations.........    (1,907,084)    (2,216,875)    (1,773,922)
                                                              ------------   ------------   ------------
    Net cash provided by financing activities...............    19,553,293    196,865,248     28,076,941
                                                              ------------   ------------   ------------
Net increase (decrease) in cash.............................     4,769,820    164,299,024    (41,083,556)
Cash and cash equivalents at beginning of period............    25,075,844     29,845,664    194,144,688
                                                              ------------   ------------   ------------
Cash and cash equivalents at end of period..................  $ 29,845,664   $194,144,688   $153,061,132
                                                              ============   ============   ============
Supplemental cash flow information:
  Cash paid for interest....................................  $    574,226   $    495,143   $    388,005
Supplemental schedule of non-cash transactions:
  Series A preferred stock issued in settlement of current
    liability...............................................       150,000              0              0
  Receivable from share issuance............................    33,143,836              0              0
  Payable to preferred shareholders.........................    17,467,077              0              0
  Series B Preferred Stock issued in exchange for shares in
    affiliate...............................................       779,064              0              0
  Common stock issued in exchange for shares in
    subsidiary..............................................     1,449,080      2,394,523        210,000
  Supplies received in exchange for services provided.......       239,600              0              0
  Payable for laboratory equipment..........................  $          0   $ 13,150,000   $          0
</Table>

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

                                       F-7
<PAGE>

                             deCODE GENETICS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THE COMPANY

     References in this report to deCODE and "we" and "us" refer to deCODE
genetics, Inc., a Delaware corporation, and deCODE genetics, Inc.'s wholly owned
subsidiary, Islensk erfoagreining ehf., an Icelandic company registered in
Reykjavik, and its subsidiaries Encode ehf., deCODE Cancer ehf. and
Vetrargardurinn ehf.

     deCODE is a genomics and health informatics company which applies and
develops modern informatics to collect and analyze data about the Icelandic
population in order to develop products and services for the healthcare
industry. Founded in 1996, deCODE conducts its operations and has its facilities
in Reykjavik, Iceland, with business offices also in Massachusetts.

BASIS OF PRESENTATION

     These financial statements are reported in United States dollars, deCODE's
functional currency, and prepared in accordance with generally accepted
accounting principles in the United States.

PRINCIPLES OF CONSOLIDATION

     The consolidated financial statements include the accounts and operations
of deCODE genetics, Inc. and its wholly owned subsidiary, Islensk erfoagreining
ehf., including its subsidiaries. deCODE conducts its operations through Islensk
erfoagreining ehf. No dividends have been paid by this subsidiary. All
significant intercompany accounts and transactions are eliminated upon
consolidation. Investments in which deCODE has significant influence, but does
not control, are accounted for using the equity method.

USE OF ESTIMATES

     The preparation of financial statements in conformity with generally
accepted accounting principles 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. 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, protection of
proprietary technology, ability to obtain additional financing, ability to
negotiate collaborative arrangements, reliance on the license to create and run
the Icelandic Health Sector Database, and compliance with governmental and other
regulations.

CONCENTRATION OF RISK

     deCODE has no significant off-balance sheet concentration 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 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.

                                       F-8
<PAGE>
                             deCODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

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 & SUPPLIES

     Materials and supplies are valued at the lower of cost (first-in, first-out
method) or market.

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 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. deCODE has made
no adjustments to the carrying values of long-lived assets during the years
ended December 31, 1999, 2000 or 2001.

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.

                                       F-9
<PAGE>
                             deCODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

FINANCE COSTS RELATED TO LONG-TERM DEBT

     Costs associated with obtaining long-term debt are deferred and amortized
over the term of the debt.

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 evaluates contracts for embedded derivatives and considers whether
any embedded derivatives have to be bifurcated, or separated, from the host
contracts in accordance with SFAS 133 requirements. Embedded derivatives may
have terms that are not clearly and closely related to the terms of the host
contract in which they are included. If embedded derivatives exist and are not
clearly and closely related to the host contract, they are accounted for
separately from the host contract as derivatives, with changes in their fair
value recorded in current earnings.

     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 at December 31, 2001.

REVENUE

     Revenues consist of fees earned from research and development collaboration
agreements and are recorded and recognized in accordance with the applicable
performance requirements and terms of the respective contracts either as
contract research costs are incurred, including the percentage of completion
basis, or upon the achievement of certain milestones. Research revenues are
recorded and recognized on an accrual basis as services are provided and are
recorded with reference to contracted rates. Such funding payments are not
refundable in the event that the related efforts are not successful.
Non-refundable up-front payments are deferred and recognized on a straight-line
basis over the research term. Milestone payments are recorded when
acknowledgement of having achieved applicable performance requirements is
received and are recognized as revenue on a retrospective basis over the
contractual term of the underlying agreement. Accordingly, upon achievement of
the milestone a portion of the milestone payment equal to the percentage of the
collaboration completed through that date is recognized, with the remainder
recognized as services are performed (generally straight-line) over the
remaining estimated term of the collaboration. Unbilled costs and fees represent
revenue recognized prior to billing. Contractual payments due to deCODE are
recorded as deferred revenue until earned.

                                       F-10
<PAGE>
                             deCODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The following is a summary of deferred revenue:

<Table>
<Caption>
                                                                   DECEMBER 31,
                                                   --------------------------------------------
                                                       1999            2000            2001
                                                   ------------    ------------    ------------
<S>                                                <C>             <C>             <C>
Revenue recorded during the year ended...........  $ 17,674,818    $ 23,712,322    $ 40,292,874
Revenue recognized during the year ended.........   (16,591,485)    (21,545,656)    (31,550,626)
                                                   ------------    ------------    ------------
                                                      1,083,333       2,166,666       8,742,248
Deferred revenue at beginning of year............     1,155,000       2,238,333       4,404,999
                                                   ------------    ------------    ------------
Deferred revenue at end of year..................  $  2,238,333    $  4,404,999    $ 13,147,247
                                                   ============    ============    ============
</Table>

RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS

     All research and development costs, including costs associated with the
development of computer software to be used in deCODE's research and development
activities, are expensed as incurred.

PATENT COSTS

     Patent application costs are charged to expense as incurred.

STOCK-BASED COMPENSATION

     deCODE follows Statement of Financial Accounting Standards No. 123 (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 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.

FOREIGN CURRENCY TRANSLATION

     deCODE's functional currency is the U.S. dollar. Islensk erfoagreining also
consolidates its subsidiaries, several of which use 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.

     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. Net transaction gains (losses) were
$(97,798), $1,488,599 and $(1,264,196) in 1999, 2000 and 2001, respectively.

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.

                                       F-11
<PAGE>
                             deCODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

SEGMENT INFORMATION

     Management is organizing deCODE's main business units along three avenues
of commercialization: discovery services, database services, and healthcare
informatics. Discovery services include the development and applications of
proprietary bioinformatics tools to discover disease-related genes and
associated drug targets, the development and marketing of DNA-based diagnostics
for major diseases, and pharmacogenomic services. deCODE intends that this
business unit will also ultimately encompass therapeutic products. The database
services business unit involves the commercialization of the Clinical Genome
Miner, containing tools to discover or validate disease linked genes based on
non-personally identifiable genotypic and phenotypic data and deCODE's
genealogical database. The healthcare informatics business unit will seek to
commercialize bioinformatics tools developed in deCODE's gene and drug target
discovery and database efforts. Products of the healthcare informatics business
unit are expected to include medical decision-support systems designed to assist
the decision making process in the delivery of healthcare and privacy protection
products derived from deCODE's expertise in encryption tools for complex and
sensitive medical and genetic data.

     To date deCODE's efforts have largely been directed toward discovery
services and financial information available for evaluation by senior management
and members of the Board in deciding how to allocate resources and assess
performance is that of the business as a whole. For these reasons, deCODE has a
single reportable segment. All of deCODE's revenue from inception have been
generated in Iceland, and all of deCODE's significant long-lived assets are
located in Iceland. Roche accounted for 95%, 96% and 80% of consolidated revenue
in the years ended December 31, 1999, 2000 and 2001, respectively.

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 consists of the following:

<Table>
<Caption>
                                                           FOR THE YEAR ENDED DECEMBER 31,
                                                      -----------------------------------------
                                                         1999           2000           2001
                                                      -----------    -----------    -----------
<S>                                                   <C>            <C>            <C>
Net loss............................................  $23,788,447    $31,118,503    $47,838,471
Accrued dividends on Series A, Series B and Series C
  preferred stock...................................    5,751,837      5,229,872              0
Amortized discount on Series A and Series C
  preferred stock...................................    1,790,950      2,311,007              0
                                                      -----------    -----------    -----------
Accrued dividends and amortized discount on
  preferred stock...................................    7,542,787      7,540,879              0
Premium on repurchase of preferred stock............   30,887,044              0              0
                                                      -----------    -----------    -----------
Net loss available to common stockholders...........  $62,218,278    $38,659,382    $47,838,471
                                                      ===========    ===========    ===========
</Table>

     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

                                       F-12
<PAGE>
                             deCODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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:

<Table>
<Caption>
                                                             FOR THE YEAR ENDED DECEMBER 31,
                                                           ------------------------------------
                                                              1999         2000         2001
                                                           ----------    ---------    ---------
                                                            (SHARES)     (SHARES)     (SHARES)
<S>                                                        <C>           <C>          <C>
Preferred stock convertible into shares of common
  stock..................................................  22,969,544            0            0
Warrants to purchase shares of common stock..............   2,110,037    1,167,500    1,067,500
Options to purchase shares of common stock...............      45,000      823,000    1,919,604
</Table>

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 and gains and losses on derivative financial instruments
designated and effective as part of a foreign cash-flow hedge transaction.

RECENT ACCOUNTING PRONOUNCEMENTS

     In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 eliminates
the pooling-of-interests method of accounting for business combinations except
for qualifying business combinations that were initiated prior to July 1, 2001.
Under SFAS No. 142, goodwill and indefinite lived intangible assets are no
longer amortized but are reviewed annually for impairment. Separable intangible
assets that are not deemed to have an indefinite life will continue to be
amortized over their useful lives. With respect to goodwill and intangible
assets acquired prior to July 1, 2001, deCODE is required to adopt SFAS No. 142
for fiscal year 2002. deCODE is currently in the process of evaluating the
impact SFAS No. 142 will have on its financial position and results of
operations.

     In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. It requires that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value can be
made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. deCODE is required to adopt SFAS No.
143 for fiscal year 2003 and does not believe its adoption will have a
significant impact on its financial position or results of operations.

     In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" and provides a single accounting model for long-lived
assets to be disposed of. deCODE is required to adopt SFAS No. 144 for fiscal
year 2002 and does not believe its adoption will have a significant impact on
its financial position or results of operations.

                                       F-13
<PAGE>
                             deCODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

RECEIVABLES AND OTHER CURRENT ASSETS

     Receivables and other current assets consist of the following:

<Table>
<Caption>
                                                                     DECEMBER 31,
                                                              --------------------------
                                                                 2000           2001
                                                              -----------    -----------
<S>                                                           <C>            <C>
Receivables.................................................  $ 8,000,000    $ 9,145,182
Receivables, related party..................................    1,347,946        379,690
Unbilled costs and fees.....................................            0      2,302,086
Unbilled and deferred revenue...............................            0      5,000,000
Materials and supplies......................................            0      6,024,351
Value added taxes...........................................    3,662,206      1,447,771
Other current assets........................................    1,472,184      1,743,949
                                                              -----------    -----------
          Total.............................................  $14,482,336    $26,043,029
                                                              ===========    ===========
</Table>

INVESTMENTS AND OTHER

GAGNALIND HF. AND eMR HF.

     In January and February 1999, deCODE acquired equity interests totalling
25.2% in Gagnalind hf. (Gagnalind) in exchange for $254,444 in cash and 70,824
shares of Series B preferred stock. On the date of issuance, these Series B
shares had an aggregate estimated value of $779,064, or $11.00 per share. In
November 1999, deCODE entered into an agreement in which it acquired common
shares of eMR hf. (eMR), an Icelandic software company, in an integrated series
of transactions as follows:

     - On November 19, 1999, deCODE issued 68,000 shares of common stock to two
       Icelandic companies in exchange for an additional 30.4% equity interest
       in Gagnalind. On this date, these common shares had an aggregate
       estimated value of $1,449,080, or $21.31 per share.

     - In March and April 2000, deCODE acquired 29,925,000 common shares (35.0%)
       in eMR in exchange for $341,436 in cash and 31,169,112 shares (55.6%) in
       Gagnalind.

     - On April 19, 2000, deCODE sold 12,825,000 common shares (15.0%) in eMR to
       the Icelandic Investment Bank for $963,568.

     deCODE's investment in Gagnalind was accounted for under the equity method
until November 19, 1999. On this date, deCODE acquired a majority interest and
Gagnalind was consolidated. deCODE's equity in net loss of Gagnalind for the
period through November 19, 1999 included in other non-operating income and
expense is comprised of deCODE's share of the loss of Gagnalind and amortization
of the difference between deCODE's cost and the underlying equity in the net
assets of Gagnalind at acquisition. Minority interest in the loss of Gagnalind
(44.4%) from November 19, 1999 to year-end 1999 and in the year ended December
31, 2000 was $2,842 and $(32,149), respectively, and is included in other
non-operating income and expense. eMR has not declared nor paid any dividends to
date.

     In December 2000, the Icelandic Investment Bank and deCODE nullified the
previous sale of 12,825,000 common shares (15%) in eMR. deCODE's investment in
the common shares of eMR (35%) is accounted for under the equity method and is
included in other long-term assets, amounting to $920,274 and $458,326 at
December 31, 2000 and 2001, respectively. Equity in net loss of affiliate in the
years ended December 31, 2000 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.

                                       F-14
<PAGE>
                             deCODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

PROKARIA EHF.

     Prokaria ehf. (Prokaria), a consolidated affiliate for a time, underwent a
recapitalization during 2000 resulting in its deconsolidation from deCODE and
resulting in a gain of $786,794. Such gain is included in other non-operating
income and expense in the year ended December 31, 2000. The cash flows and
results of Prokaria are included in the consolidated financial statements
through September 2000, revenues and net loss for the period being $32,367 and
$699,418, respectively. Two of deCODE's executive officers own an aggregate
37.5% of the share capital and are board members of Prokaria.

     Subsequent to Prokaria's recapitalization, deCODE and Prokaria entered into
a collaboration and research licensing agreement, the terms of which include:

     - Prokaria settled non-interest bearing debts owed deCODE amounting to
       $540,654.

     - deCODE sold certain intellectual property rights to certain research,
       including a patent application, to Prokaria in exchange for: $508,754
       cash; royalties on revenue Prokaria may receive from the rights related
       to the patent application; and, a license for the use of the patent
       application rights in deCODE's own operations for the duration of the
       patent. The payment of $508,754 has been recognized and is included in
       other revenue in the year ended December 31, 2000.

     - deCODE agreed to provide certain sequencing and advisory services in
       exchange for appropriate fees. deCODE recognized $31,600 in other revenue
       in respect of such sequencing services provided during the period October
       to December 2000 and $322,021 in the year ended December 31, 2001.

     - Prokaria agreed to reimburse deCODE in respect of certain legal costs
       incurred by deCODE on Prokaria's behalf.

PROPERTY AND EQUIPMENT

     Property and equipment, substantially all located in Iceland, consist of
the following:

<Table>
<Caption>
                                                                  DECEMBER 31,
                                                           ---------------------------
                                                              2000            2001
                                                           -----------    ------------
<S>                                                        <C>            <C>
Building construction-in-progress........................  $ 3,539,184    $ 27,263,789
Buildings................................................    8,123,169      10,763,285
Laboratory equipment.....................................   32,400,291      29,706,265
Furniture and fixtures...................................    1,940,895       2,812,332
Other equipment..........................................      605,141       1,004,039
                                                           -----------    ------------
                                                            46,608,680      71,549,710
Less: accumulated depreciation and amortization..........   (9,507,990)    (10,342,173)
                                                           -----------    ------------
          Total..........................................  $37,100,690    $ 61,207,537
                                                           ===========    ============
</Table>

     The total depreciation and amortization of property and equipment for the
years ended December 31, 1999, 2000 and 2001 was, $2,791,449, $4,723,967 and
$8,870,263 respectively.

     In January 1998, deCODE purchased the building then housing its research
operations and corporate headquarters for total consideration amounting to
$2,375,803, comprised of cash and 74,670 shares of Series B preferred stock. In
June 1998, deCODE sold the building for $2,403,846 of cash proceeds and leased
it back from the counter-party (an Icelandic bank). As ownership of the property
will be transferred to deCODE at the end of the lease without any further
payment, the transaction has been recorded as a financing and no immediate gain
was recognized.

                                       F-15
<PAGE>
                             deCODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     During 1999, laboratory equipment and consumables were received by deCODE
from a customer as consideration for equipment testing services provided.
Revenue was recorded, and fair value was determined with reference to list
prices for such laboratory equipment and consumables. Laboratory equipment
valued at $414,000 has been capitalized and is being depreciated according to
deCODE's normal depreciation policy and consumables valued at $239,600 were
expensed in 1999.

     During 2000, deCODE paid $1,423,000 and was granted permission to construct
a building of approximately 15,000 square meters in the University District
which will house the operations of deCODE. deCODE began excavation on the site
during October 2000 and, in January 2001, engaged a contractor for the
construction of the building itself. Total project cost is estimated to be
approximately $31 million. The building was placed into service during January
2002 at which time depreciation of the capitalized costs commenced.

     In September 2000, deCODE acquired fifty new gene sequencing machines in
exchange for $13,150,000 and twenty-four of its used gene sequencing machines.
This laboratory equipment was placed into service in September and October 2000
and depreciation on the equipment commenced at that time. No gain was recognized
in the exchange of deCODE's used equipment. The $13,150,000 is included in
accounts payable and accrued liabilities at December 31, 2000. Payment was made
in February 2001 and included in investing cash flows for the purchase of
property and equipment during the year ended December 31, 2001.

     In light of current conditions and pace of technological change, effective
from April 1, 2001 deCODE changed the estimated useful life of sequencing
instruments for purposes of depreciation to 4 years. This change in estimate had
the effect of increasing depreciation expense $1.4 million in the year ended
December 31, 2001.

     In December 2001, deCODE sold certain laboratory equipment for $12 million
of cash proceeds and leased the equipment back from the counter-party (an
Icelandic leasing company) for a three-year 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 has an
amount equal to 75% of the remaining lease payments on deposit with an Icelandic
bank.

     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 $10,590,668 and $4,975,162,
respectively, as of December 31, 2000 and $16,488,241 and $1,520,934,
respectively, as of December 31, 2001.

     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% of the original lease amount at lease end,
with the exception of the leased building, in which ownership transfers upon
lease expiration.

ACQUISITIONS

CYCLOPS EHF.

     In November 2000, deCODE acquired the outstanding shares of Cyclops ehf.
(Cyclops), an Icelandic company performing research involving the solubility and
absorption of drugs, in exchange for 107,910 shares of deCODE's common stock. In
addition, deCODE issued 30,000 shares of its common stock to the selling
shareholders of Cyclops in connection with the continuing employment by the two
former owners of Cyclops and that are subject to repurchase by deCODE. deCODE
also agreed that the same two former owners of Cyclops would receive a portion
of any net royalties deCODE may earn from certain ongoing projects of

                                       F-16
<PAGE>
                             deCODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Cyclops. The consolidated financial statements include the cash flows and
results of Cyclops from the date of acquisition.

     The acquisition was accounted for using the purchase method, whereby the
total purchase price ($2,394,523) has been allocated to Cyclops' assets and
liabilities based on their estimated fair values on the date of acquisition. The
excess of purchase price over the fair value of the net tangible assets acquired
has been allocated to patents that are being amortized using the straight-line
method over three years. Other long-term assets include the recorded amount of
patents less accumulated amortization on such, together amounting to $2,252,579
and $1,199,856 as of December 31, 2000 and 2001, respectively.

     In addition, compensation in respect of the 30,000 shares of deCODE common
stock issued to the selling shareholder of Cyclops ($665,700) is not part of the
purchase price but has been recorded as deferred compensation, a component of
stockholders' equity, and is being recognized as expense over four years from
the date of the acquisition.

ENCODE EHF.

     In November 2000, deCODE acquired the outstanding shares of Islenskar
lyfjarannsoknir ehf. (Encode), an Icelandic research company serving the
pharmaceutical industry. The acquisition was accounted for using the purchase
method, whereby the total purchase price has been allocated to Encode's assets
and liabilities based on their estimated fair values on the date of acquisition.
The consolidated financial statements include the cash flows and results of
Encode from the date of acquisition.

DIGITALIS EHF.

     In January 2001, deCODE issued 20,000 shares of its common stock to several
persons, including four of its employees, in consideration for all the
outstanding capital stock of Digitalis ehf. (Digitalis), an Icelandic software
company. The acquisition was accounted for using the purchase method, whereby
the total purchase price ($210,000) has been allocated to Digitalis' assets and
liabilities based on estimated fair values on the date of acquisition. The
excess of purchase price over the fair value of the net tangible assets acquired
has been allocated to intangibles that are being amortized using the
straight-line method over two years. The consolidated financial statements
include the cash flows and results of Digitalis from the date of acquisition.

ACCOUNTS PAYABLE AND ACCRUED EXPENSES

     Accounts payable and accrued expenses consist of the following:

<Table>
<Caption>
                                                                   DECEMBER 31,
                                                            --------------------------
                                                               2000           2001
                                                            -----------    -----------
<S>                                                         <C>            <C>
Suppliers.................................................  $ 5,501,428    $14,223,265
Salaries and other employee benefits......................    2,583,131      4,285,176
Other.....................................................    1,722,922      2,656,135
Payable for laboratory equipment..........................   13,150,000              0
                                                            -----------    -----------
          Total...........................................  $22,957,481    $21,164,576
                                                            ===========    ===========
</Table>

DEBT

     In December 2001, deCODE established a bridge loan with an Icelandic
financial institution for the purposes of financing the construction of its new
headquarters facility. Total borrowing was $27.5 million and carried an annual
interest rate equal to a short-term LIBOR rate plus 0.5%. Portions of the bridge
loan expired upon settlement in January and March 2002 out of the proceeds of
Tier A bonds and the Tier C bonds/Tier D

                                       F-17
<PAGE>
                             deCODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

bank loan, respectively, as discussed below. As deCODE intended to and did
refinance the bridge loan on a long-term basis subsequent to year-end, the
bridge loan has been classified as long-term as of December 31, 2001. Monies
received in respect of the Tier A bonds ($13.5 million) are included in cash and
cash equivalents at December 31, 2001 and monies received in respect of the Tier
C bonds and the Tier D bank loan ($14.0 million) are included in restricted cash
as a result of the contractual terms with the financial institution.

     In December 2001, deCODE borrowed $17.8 million from an Icelandic bank for
the construction of its new headquarters facility. The borrowing is
collateralized by the property and improvements and consists of: privately
placed bonds (Tier A) -- approximately $13.8 million denominated in Icelandic
krona and linked to the Icelandic Consumer Price Index that is payable annually
beginning December 2002 and bears annual interest of 8.5% that is payable
annually beginning December 2002; and, a $4.0 million bank loan (Tier B) --
denominated in U.S. dollars that is payable quarterly beginning March 2002 and
bears annual interest of three-month LIBOR plus 3.0% 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 and the Tier B bank loan were placed
in January 2002 and December 2001, respectively.

     Concurrently, deCODE entered into a cross-currency swap as an economic
hedge against foreign exchange rate fluctuations that may occur on Tier A bonds.
As of December 31, 2001 deCODE had this outstanding contract with a face amount
of $13.8 million bears annual interest of three-month LIBOR plus 2.85%. Fair
value of the outstanding contract at December 31, 2001 was $14.0 million.

     In March 2002, deCODE borrowed a further $13.8 million from an Icelandic
bank for the construction of its new headquarters facility. The borrowing is
collateralized by the property and improvements and consists of: privately
placed bonds (Tier C) -- approximately $7.3 million denominated in Icelandic
krona and linked to the Icelandic Consumer Price Index that is payable in March
2007 and bears annual interest of 12.0% that is payable annually beginning March
2003; and, a $6.6 million bank loan (Tier D) -- denominated in U.S. dollars that
is payable in March 2007 and bears annual interest of three-month LIBOR plus
6.0% that is payable quarterly beginning June 2002. 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 starting December 2003.

     Concurrently, deCODE entered into a cross-currency swap as an economic
hedge against foreign exchange rate fluctuations that may occur on the Tier C
bonds. This contract with a face amount of $7.3 million expires in March 2007
and bears annual interest of twelve-month LIBOR plus 6%.

     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.

     Debt maturities, excluding capital leases, total $2,571,429 per year in
each of the next five years.

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, 2001, deCODE had entered into just the one cross-currency swap for
purposes of managing these risks.

     deCODE seeks to maintain a desired level of floating-rate debt with respect
to its overall debt portfolio denominated in US Dollars. To this end, deCODE
uses interest rate and cross-currency swaps to manage

                                       F-18
<PAGE>
                             deCODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

interest rate and foreign currency risk arising from long-term debt obligations
in Icelandic krona. For the year ended December 31, 2001 deCODE had a loss of
$223,136 recorded in other non-operating expense related to a derivative
instrument designated as an economic hedge of fixed rate foreign currency debt,
but not qualifying for hedge accounting under SFAS 133. This instrument was
recorded in other long-term liabilities as of December 31, 2001.

     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 calculated for each
derivative using common market valuation methods with reference to available
market data as of the balance sheet date.

LEASE COMMITMENTS

     deCODE leases certain property, laboratory equipment and other assets under
obligations that expire at varying dates through 2007. At December 31, 2001,
future minimum lease payments under all noncancelable leases with terms in
excess of one-year are as follows:

<Table>
<Caption>
                                                     OPERATING       CAPITAL
                                                     ----------    -----------
<S>                                                  <C>           <C>
2002...............................................  $1,003,964    $ 5,524,141
2003...............................................     950,708      4,667,721
2004...............................................     843,097      4,671,449
2005...............................................     663,483        385,071
2006...............................................     353,875        383,458
2007 and thereafter................................     106,976        571,348
                                                     ----------    -----------
Total minimum lease payments.......................  $3,922,103     16,203,188
                                                     ==========
Less amount representing interest..................                 (1,425,450)
                                                                   -----------
Present value of future minimum lease payments.....                 14,777,738
Less: current portion..............................                 (4,855,420)
                                                                   -----------
Long-term portion..................................                $ 9,922,318
                                                                   ===========
</Table>

     Rental expense for operating leases was $871,851 in the year ended December
31, 2001. Included in operating and capital lease commitments are leases on
facilities that deCODE is or will be vacating during 2002 as a result of the
move to the new headquarters facility. Total remaining minimum lease payments on
these facilities are $3.4 million as of December 31, 2001. Management is
currently assessing its alternatives with respect to these leased facilities.

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.

     Pursuant to the Agreement, on December 31, 1999 deCODE issued 10,000 shares
of Series A preferred stock. The value of the shares issued ($217,500), which
resulted from the difference between the contractual

                                       F-19
<PAGE>
                             deCODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

share issuance price and the estimated fair value of the shares on the date of
issuance, has been expensed in the statement of operations as stock-based
remuneration for the year ended December 31, 1999.

     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.

COLLABORATIVE PARTIES

     F. Hoffman-La Roche.  In February 1998, deCODE entered into a research
collaboration and cross-license agreement with Roche to collaborate on the
discovery of genetic variations that affect the cause of diseases for the
purpose of developing new methods to diagnose diseases and obtain drug targets
useful in drug discovery. Under the agreement, deCODE conducted research
activities and Roche funded the collaborative gene discovery programs in twelve
diseases by making specified payments according to a payment schedule. Roche's
obligation under the agreement to fund these programs continued until February
1, 2002 when the term of the agreement expired. In addition to research funding
payments, Roche made payments to deCODE upon the achievement of specified
scientific development milestones.

     Partners HealthCare System, Inc.  In May 2000, deCODE entered into a
strategic alliance agreement and crosswalk development agreement with Partners
HealthCare System, Inc., The General Hospital Corporation, d.b.a. Massachusetts
General Hospital, and The Brigham and Women's Hospital, Inc. (collectively
Partners) pursuant to which deCODE will (a) fund research by investigators of
Partners pursuant to sponsored research agreements and/or clinical trial
agreements to be entered into from time to time, (b) collaborate with Partners
on, and provide funding for, development of an information technology bridge,
called the crosswalk, to facilitate studies with the deCODE Combined Data
Processing system and Partners' Research Patient Data Registry and (c) develop
and market, in consultation with Partners, new information technology products
and services relating to the use of the crosswalk for future pharmaceutical and
biotechnology applications.

     The strategic alliance agreement provides that a steering committee, the
membership of which is equally divided between the parties, will oversee the
alliance (including the development of the crosswalk) and select the research
projects and/or clinical trials that deCODE will fund at Partners. deCODE has an
exclusive option to acquire an exclusive license to any patents or copyrights
developed under such sponsored research or clinical trial agreements on
financial terms to be negotiated by the parties based on pre-determined criteria
contained in the strategic alliance agreement. Each party has the right to use
the crosswalk to facilitate studies with the databases for non-commercial
internal research purposes. Each party also has the right to use the crosswalk
to facilitate studies with such party's own database to conduct commercially
sponsored research. Partners is required to pay deCODE a royalty on revenue it
receives from such use. In addition, deCODE has the exclusive right to use the
crosswalk to develop and market products and services but are obligated to pay
Partners a royalty on revenue from the sale of such products and services.

     The agreements are for a three-year term, which, in the case of the
strategic alliance agreement, may be extended for an additional two-year term by
the mutual agreement of the parties and, in the case of the crosswalk
development agreement, may be extended for an additional term to be agreed upon
by the parties. The agreements may also be terminated by either party if the
other party is in default. In addition, deCODE may terminate the agreements
under certain circumstances, including infeasibility of the alliance or if the
alliance jeopardizes the mission or objectives of either party.

     F. Hoffman-La Roche.  In June 2001, deCODE entered into a collaboration and
cross-license agreement with Roche regarding diagnostics. Under the terms of
this new agreement, deCODE is collaborating on the development and marketing of
DNA-based diagnostics for major diseases, working with Roche to identify

                                       F-20
<PAGE>
                             deCODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

and validate molecular targets that are useful for developing products and
services that accurately establish a patient's current diagnosis, predict future
risk of disease, predict drug response and determine responses to treatment or
the health status of individuals and enable early prevention or treatment of
disease. deCODE will also be focusing on developing informatics products and
services, which will include software tools and databases. As part of the
alliance deCODE has also provided Roche with access to intellectual property,
including deCODE's Clinical Genome Miner. Under the agreement deCODE is or will
receive payments including research funding, research milestones and royalties
on any products which are commercialized. The research term under the agreement
is five years.

     Genmab.  In June 2001, deCODE entered into a collaboration agreement with
Genmab A/S and Medarex, Inc. pursuant to which the parties are collaborating on
the research, development, and commercialization of new antibody therapeutic
products. Under this five year collaboration, deCODE is utilizing novel targets
discovered in its research on the genetics of common diseases along with
Genmab's human antibody technology. The collaboration covers a broad range of
disease areas including cardiovascular disease, inflammatory disease and cancer.
Together with Genmab and Medarex, deCODE will share equally in the development
costs and revenues generated from the outlicensing or sales of products
developed under the agreement.

     In June 2001, deCODE entered into an agreement to provide Genmab A/S with
research and development services to develop DNA-based tests to predict
individual clinical response to Genmab's antibody treatment for rheumatoid
arthritis and possible related novel therapeutics. deCODE will be paid as stages
of the research program are completed. Additionally, deCODE will receive
milestone and royalty payments on commercialized products should Genmab A/S
exercise its option for first opportunity to enter into a royalty-bearing
license agreement.

     Affymetrix Inc.  In July 2001, deCODE entered into a pharmacogenomics
collaboration and license agreement with Affymetrix, Inc. Under the terms of the
agreement the parties are collaborating in the research and development of gene
expression tests and nucleic acid based tests to predict the response of
individual patients to various drugs. deCODE is undertaking the initial research
activities to be performed with respect to the initial ten drugs to be studied
under the collaboration. Affymetrix will supply various chips in connection with
the research. The parties will share revenues resulting from the collaboration,
including those from licensing and product commercialization.

     Applied Biosystems Group.  In July 2001, deCODE entered into a joint
development and commercialization agreement with Applied Biosystems Group (ABG).
Under the terms of the agreement, the parties are collaborating to develop and
commercialise software products for the collection, organization and analysis of
genotyping information. Under this agreement, deCODE and ABG have granted to
each other licenses to products developed under the joint development program.

     In July 2001, deCODE also entered into a separate three-year reagent supply
agreement with ABG. Under the terms of the agreement, ABG has agreed to supply
and deCODE has agreed to purchase reagents and other supplies over three years,
including a remaining minimum of $16.3 million through September 2002.

     Pharmacia.  In December 2001, deCODE formed a pharmacogenomics alliance
with Pharmacia Corporation (Pharmacia) to identify the role of genetics in the
development of advanced forms of heart disease. Under the agreement, deCODE will
employ its population resources and Clinical Genome Miner discovery system to
find genetic markers that can be used to identify patients who are highly
predisposed to progressing from an early to an advanced form of heart disease.
If the results of the first phase are encouraging, Pharmacia has the option to
use the genetic markers as the basis for clinical trials of cardiovascular drugs
under development at Pharmacia. deCODE will receive contract fees as part of the
first phase of this agreement. In addition, deCODE will receive royalties on
sales of diagnostic tests as well as royalties on potential sales of
cardiovascular drugs should Pharmacia exercise its licensing options in the

                                       F-21
<PAGE>
                             deCODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

alliance. Pharmacia may terminate this arrangement for a full refund through
April 18, 2002 for certain defined circumstances.

     Hospital and Physician Collaborations.  deCODE has entered into
collaboration agreements and arrangements with the Icelandic Heart Association
and several physician groups. The goal of these collaborations is the discovery
of genetic factors which contribute to the genesis of certain disorders on which
the various physician groups maintain patient information. Under the agreements,
these institutions and/or physicians contribute data or other clinical
information and deCODE contributes equipment, research supplies and our
molecular genetics and experimental design expertise. The agreements also
require deCODE to reimburse all project-related expenses. If deCODE sells
project results, the agreements require it to make specified payments and pay a
portion of any performance-based milestones and royalties that it receives.
deCODE has already sold the results of many of these projects to a third party,
Roche. deCODE shares the ability to make management decisions regarding the
projects with the physician groups, and jointly forms an executive or steering
committee to monitor the project. deCODE's collaboration agreements with the
physician groups normally continue for a term of no more than five years.

     To further facilitate deCODE's research projects and enable it to construct
lists of patients with specific diseases, deCODE has also entered into
collaboration agreements and arrangements with two of the largest hospitals in
Iceland. Under the terms of these agreements, the hospitals provide research
data. deCODE's projects are monitored by a surveillance committee that is
jointly appointed with the hospitals. deCODE is obligated to pay all of the
expenses (other than the hospitals' administrative expenses) incurred as a
result of the collaboration. The agreements with the hospitals will continue
until terminated by the parties.

     The Icelandic Health Sector Database license requires deCODE to enter into
agreements with Icelandic health institutions and self-employed health service
workers regarding access to and the processing of information from medical
records. To date, deCODE has entered into such agreements with nine Icelandic
health institutions.

ICELANDIC HEALTH SECTOR DATABASE LICENSE

     On January 22, 2000, the Ministry of Health and Social Security, or the
Ministry, granted deCODE an operating license to create and run the Icelandic
Health Sector Database, or the License. The License, which has a term of twelve
years, allows deCODE to collect data from medical records of Icelandic
healthcare institutions and self-employed healthcare professionals and to
transfer such data in encrypted form into a centralized database. As required by
the License and concurrently with the issuance of the License, deCODE entered
into an agreement with the Ministry whereby deCODE must pay the Icelandic
government a fixed annual fee of 70 million Icelandic kronas and an additional
annual fee of 6% of its net profit, up to a maximum of 70 million Icelandic
kronas per year. At December 31, 2001, $1,356,590 in respect of these annual
fees has been provided and is included in accounts payable and other accrued
expenses. The agreement also provides that deCODE's rights to the Icelandic
Health Sector Database will be transferred to the Ministry on the expiration or
termination of the license, January 2012.

     deCODE's preparation of the Icelandic Health Sector Database is subject to
technical requirements imposed by the Icelandic Data Protection Authority, or
the Authority, in areas such as data encryption and privacy protection. These
requirements are subject to change from time to time and may require greater
technical capabilities than deCODE currently has. Compliance with these
requirements can be expensive and time-consuming and may delay the development
of the Icelandic Health Sector Database and the deCODE Combined Data Processing
system or make such development more expensive than anticipated. In addition,
deCODE's compliance is subject to evaluation by the agencies imposing these
requirements. deCODE cannot control the time required for this evaluation, and
accordingly, the evaluation process may lead to delay in the development of the
Icelandic Health Sector Database and the deCODE Combined Data Processing system.

                                       F-22
<PAGE>
                             deCODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     deCODE is subject to a very extensive indemnity clause in the agreement
with the Ministry, pursuant to which it has:

     - agreed not to make any claim against the government if the Act or the
       License are amended as a result of the Act or rules relating to the
       Icelandic Health Sector Database being found to be inconsistent with the
       rules of the European Economic Area or other international rules and
       agreements to which Iceland is or becomes a party;

     - agreed that if the Icelandic state by a final judgment is found to be
       liable or subject to payment to any third party as a result of the
       passage of legislation on the Icelandic Health Sector Database and/or
       issuance of the License, deCODE will indemnify it against all damages and
       costs in connection with the litigation; and

     - agreed to compensate any third parties with whom the Icelandic government
       negotiates a settlement of liability claims arising from the legislation
       on the Icelandic Health Sector Database and/or the issue of the License,
       provided that the Icelandic government demonstrates that it was justified
       in agreeing to make payments pursuant to the settlement.

     The License and the agreement under which deCODE received the license also
require it to:

     - pay the costs incurred by the health institutions (including the costs of
       medical record software) in connection with the entering of data from
       medical records before transfer to the Icelandic Health Sector Database;

     - financially segregate the operation of the Icelandic Health Sector
       Database from its other activities by maintaining a separate operating
       unit, and separate accounts for the Icelandic Health Sector Database;

     - pay the costs of the governmental agencies which monitor deCODE's
       Icelandic Health Sector Database activities;

     - indemnify and agree not to sue the Icelandic government for any liability
       resulting from the passage of the legislation on the Icelandic Health
       Sector Database and its operation and/or the issuance of the Icelandic
       Health Sector Database; and

     - observe international science ethics rules.

     The License prohibits deCODE from, among other things, abusing its position
by charging unreasonable fees, refusing business to our competitors or
discriminating among customers by imposing discriminatory or other onerous
business terms on our customers; or assigning or pledging our rights in the
License.

     The Icelandic Health Sector Database license will expire in January 2012,
unless an extension is granted.

LITIGATION

     In January 2000, Thorsteinn Jonsson and Genealogia Islandorum hf., the
alleged holders of copyrights to approximately 100 books of genealogical
information, commenced an action against deCODE in the District Court of
Reykjavik in Iceland. They allege that deCODE's genealogy database infringes
their copyrights and seek damages in the amount of approximately 616 million
Icelandic kronas and a declaratory judgment to prevent deCODE from using the
allegedly infringing data. deCODE believes the suit is without merit and intends
to defend this action vigorously; however, the ultimate resolution of this
matter cannot yet be determined.

     In February 2000, Mannvernd, an organization known as the Association of
Icelanders for Ethics in Science and Medicine, issued a press release announcing
its intention to file lawsuits against the State of Iceland and any other
relevant parties, including deCODE, to test the constitutionality of the Act. In
its press release, Mannvernd indicated that it hopes to halt the construction
and/or operation of the Icelandic Health

                                       F-23
<PAGE>
                             deCODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Sector Database. In April 2001, a lawsuit was filed against the Icelandic
Directorate of Public Health but Mannvernd has not commenced litigation against
deCODE; however, the ultimate resolution of this matter cannot yet be
determined.

     In April 2000, Ernir Snorrason, an original stockholder of deCODE, filed a
complaint in the Court of Chancery of the State of Delaware for New Castle
County alleging that deCODE improperly exercised an option to repurchase 256,637
shares of common stock that deCODE issued to Mr. Snorrason in 1996 pursuant to a
Founders' Stock Purchase Agreement and seeking an order requiring deCODE to
recognize Mr. Snorrason as the owner of these shares. In June 2001, the parties
settled the matter without admission or adjudication of any issue of fact or law
and 166,814 shares of deCODE common stock were issued to Mr. Snorrason for
$0.001 per share, the par value, with the resulting loss ($1,292,642) being
recorded as a general and administrative expense at that time.

     Although deCODE has not yet been served with copy of the complaint,
management is aware that on December 6, 2001, a purported class action 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 its 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.

     The plaintiff alleges violations of Section 11 of the Securities Act of
1933 against deCODE and the Individual Defendants, violations of Section 15 of
the Securities Act of 1933 against the Individual Defendants and violations of
Sections 11 and 12(a)(2) of the Securities Act of 1933 and Section 10(b) of the
Securities Exchange Act of 1934 (and Rule 10b-5 promulgated thereunder) against
the Underwriter Defendants. Generally, the 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
deCODE's stock sold in the IPO and (ii) entered into agreements with customers
whereby the Underwriter Defendants agreed to allocate shares of deCODE's stock
sold in the IPO to those customers in exchange for which the customers agreed to
purchase additional shares of deCODE's stock in the aftermarket at
pre-determined prices. The 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 suit seeks
unspecified monetary and recissionary damages and certification of a plaintiff
class consisting of all persons who purchased shares of deCODE common stock from
July 7, 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 A. Scheindlin.

     deCODE believes that the allegations against deCODE and its officers are
without merit and intends to contest them vigorously. The litigation is,
however, in the preliminary stage, and deCODE cannot predict its outcome and the
ultimate effect, if any, on deCODE's financial condition. In addition, it is
possible that further lawsuits alleging substantially similar claims will be
filed against deCODE and its officers. If deCODE is required to pay significant
monetary damages as a result of such litigation its business could be
significantly harmed. Even if such suit or suits conclude in its favor, deCODE
may be required to expend significant funds to defend against the allegations.
deCODE is unable to estimate the range of possible loss from the litigation and
no amounts have been provided for such matters in its financial statements.

                                       F-24
<PAGE>
                             deCODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

PREFERRED STOCK

     Prior to deCODE's initial public offering of common stock, deCODE was
authorized to issue a total of 32,641,926 shares of preferred stock. Of these
shares, 11,041,926 shares, 10,300,000 shares, and 4,583,334 shares had been
designated Series A, Series B and Series C, respectively, and 6,716,666 remain
undesignated.

     In accordance with the terms of the then outstanding preferred stock,
shares of Series A, Series B, and Series C preferred stock were converted into
9,624,282, 10,046,132 and 4,066,667 shares of common stock, respectively,
effective upon the closing of deCODE's initial public offering in July 2000.
Effective concurrently with the initial public offering, all authorized shares
of Series A, Series B and Series C preferred stock were retired.

     In respect of the remaining 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.

                                       F-25
<PAGE>
                             deCODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                      NUMBER OF SHARES                                AMOUNT
                            -------------------------------------   -------------------------------------------
                             SERIES A     SERIES B      SERIES C      SERIES A       SERIES B        SERIES C
                            PREFERRED     PREFERRED    PREFERRED     PREFERRED       PREFERRED      PREFERRED
                              STOCK         STOCK        STOCK         STOCK           STOCK          STOCK           TOTAL
                            ----------   -----------   ----------   ------------   -------------   ------------   -------------
<S>                         <C>          <C>           <C>          <C>            <C>             <C>            <C>
BALANCE AT DECEMBER 31,
  1997....................  11,790,375             0            0   $ 12,603,990   $           0   $          0   $  12,603,990
Issuance of Series A
  preferred stock.........     120,000                                   366,000                                        366,000
Issuance of Series B
  preferred stock.........                 4,712,990                                  22,616,316                     22,616,316
Issuance of Series C
  preferred stock warrants
  and options.............                              2,500,000                                     5,000,250       5,000,250
Accretion of dividends and
  amortization of discount
  on preferred stock......                                             1,042,473       1,113,560        415,490       2,571,523
                            ----------   -----------   ----------   ------------   -------------   ------------   -------------
BALANCE AT DECEMBER 31,
  1998....................  11,910,375     4,712,990    2,500,000     14,012,463      23,729,876      5,415,740      43,158,079
Repurchase and retirement
  of Series A preferred...  (2,358,074)                               (2,916,259)                                    (2,916,259)
Exchange of common stock
  for Series B
  preferred...............                   250,000                                   3,750,000                      3,750,000
Repurchase of Series B
  preferred stock.........                  (250,000)                                 (3,750,000)                    (3,750,000)
Repurchase of Series C
  preferred stock and held
  in treasury.............                               (100,000)                                     (224,329)       (224,329)
Issuance of Series A
  preferred stock.........      10,000                                   367,500                                        367,500
Issuance of Series B
  preferred stock.........                 5,180,824                                  71,869,064                     71,869,064
Issuance of Series C
  preferred stock and
  warrants................                              1,111,111                                     1,792,525       1,792,525
Accretion of dividends and
  amortization of discount
  on preferred stock......                                               942,183       4,266,212      2,334,392       7,542,787
                            ----------   -----------   ----------   ------------   -------------   ------------   -------------
BALANCE AT DECEMBER 31,
  1999....................   9,562,301     9,893,814    3,511,111     12,405,887      99,865,152      9,318,328     121,589,367
Issuance of Series A
  preferred stock upon
  exercise of warrants....      61,981                                    61,981                                         61,981
Issuance of Series B
  preferred stock.........                   152,318                                   3,000,000                      3,000,000
Issuance of Series C
  preferred stock and
  warrants upon exercise
  of option...............                                555,556                                       181,400         181,400
Accretion of dividends and
  amortization of discount
  on preferred stock......                                               494,980       4,418,652      2,627,247       7,540,879
Redeemable, convertible
  preferred stock
  converted to common
  stock...................  (9,624,282)  (10,046,132)  (4,066,667)   (12,962,848)   (107,283,804)   (12,126,975)   (132,373,627)
                            ----------   -----------   ----------   ------------   -------------   ------------   -------------
BALANCE AT DECEMBER 31,
  2000 AND 2001...........           0             0            0   $          0   $           0   $          0   $           0
                            ==========   ===========   ==========   ============   =============   ============   =============
</Table>

SERIES A PREFERRED STOCK

     In connection with the sale of 5,090,376 shares of Series A preferred stock
in October 1997, deCODE issued 1,137,814 warrants to purchase Series A preferred
stock for $1.00 per share. The total consideration received under the issuance
was allocated between the preferred shares and the warrants based upon their
relative fair values at the date of issuance. The consideration allocated to the
warrants was $650,240, and the resulting discount on the preferred shares was
being amortized over seven years, the earliest redemption date

                                       F-26
<PAGE>
                             deCODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of the Series A preferred stock. One stockholder exercised 61,981 warrants in
March 2000 and, in connection with deCODE's initial public offering and in
accordance with the their terms, the remaining 1,075,833 warrants were converted
in July 2000 into warrants to purchase the same number of shares of common
stock.

SERIES B PREFERRED STOCK

     In January 2000, deCODE and the Icelandic Ministry for Health and Social
Security agreed to jointly establish an independent foundation, the objective of
which is to tend to matters of interest for children in Iceland. In May 2000,
deCODE provided capital to the foundation in the amount of 150,000 shares of
deCODE's Series B preferred stock for $0.001 per share; such issuance resulting
in $3 million being recorded immediately as a contribution expense.

SERIES C PREFERRED STOCK

     Pursuant to a stock and warrant purchase agreement signed in February 1998,
Roche purchased 2,500,000 shares of Series C preferred stock at $2.00 per share
in February 1998, 555,555 shares of Series C preferred stock at $3.00 per share
in February 1999, 555,556 shares of Series C preferred stock at $3.00 per share
in May 1999, and 555,556 shares of Series C preferred stock at $4.00 per share
in June 2000. There are no future performance obligations or any stated or
unstated rights or privileges associated with these purchases of Series C
preferred stock by Roche. In connection with these share purchases, Roche also
obtained warrants to purchase an additional 416,667 shares of Series C preferred
stock for a weighted-average exercise price of $2.53 per share. The total
consideration received under these issuances was allocated between the preferred
shares and the warrants based upon their relative fair values at the dates of
issuance.

     Options and warrants to purchase 861,112 shares of Series C preferred stock
were issued to Roche in February 1998. The consideration allocated to these
options and warrants was $400,250, and the resulting discount on the preferred
shares was being amortized over seven years, the earliest redemption date of the
Series C preferred stock. An option to purchase 555,556 shares of Series C
preferred stock and an option to purchase warrants in respect of 55,556 shares
of Series C preferred stock were exercised in June 2000 (refer above and below).
The remaining 250,000 warrants expire in February 2007.

     The consideration allocated to the 55,555 warrants issued in February 1999
was $41,668, and the resulting discount on the preferred shares was being
amortized over seven years, the earliest redemption date of the Series C
preferred stock. These warrants expire in February 2008.

     The consideration allocated to the 55,556 warrants issued in May 1999 was
$125,804 resulting in the preferred shares being issued at a discount. As the
preferred shares issued with these warrants were issued with beneficial
conversion features, the remaining consideration to be allocated was recorded as
additional paid-in capital resulting in no consideration being allocated to the
preferred shares. This resulting discount on the preferred shares was amortized
entirely on the date of issuance, as the preferred shares are convertible upon
issuance. These warrants expire in May 2009.

     The consideration allocated to the 55,556 warrants issued in June 2000 was
$181,400 resulting in the preferred shares being issued at a discount. As the
preferred shares issued with these warrants were issued with beneficial
conversion features, the remaining consideration to be allocated was recorded as
additional paid-in capital resulting in no consideration being allocated to the
preferred shares. This resulting discount on the preferred shares was amortized
entirely on the date of issuance, as the preferred shares are convertible upon
issuance. These warrants expire in June 2009.

     In connection with deCODE's initial public offering and in accordance with
the their terms, the remaining Series C preferred stock warrants outstanding
(416,667) were converted in July 2000 into warrants to purchase the same number
of shares of common stock.

                                       F-27
<PAGE>
                             deCODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

ISSUANCE OF SERIES B PREFERRED STOCK

     On June 30, 1999, deCODE entered into a Stock Purchase Agreement (the
Purchase Agreement) to sell five million shares of Series B preferred stock at
$7.50 per share (the Purchase Price) to a Luxembourg-based financial buyer (the
Buyer). The sale closed on August 8, 1999.

     Contemporaneously with the execution of the Purchase Agreement, deCODE and
the Buyer entered into an agreement pursuant to which the parties agreed upon
the following:

     - Sales of Series B preferred stock in the Icelandic market shortly before
       the date of the Purchase Agreement indicated that the market price was
       approximately $15 per share;

     - The Buyer would sell the Series B preferred stock to Icelandic investors
       at the market price;

     - The Purchase Price at which the Buyer would buy the Series B shares from
       deCODE would be increased to $15.00 per share (the Adjusted Purchase
       Price) if (i) the Buyer was able to sell at least 50% of the Series B
       shares at or above the Adjusted Purchase Price and (ii) the trading price
       in the Icelandic market remained at or above the Adjusted Purchase Price
       from the time of such resale through the end of 1999;

     - In the event that deCODE received the incremental Adjusted Purchase Price
       proceeds from the Buyer, deCODE would also receive interest on such
       amount at a rate of 6% per annum from the closing date; and

     - The Buyer would receive a commission of 7% of the proceeds from the sale
       of the Series B preferred stock for the placement of deCODE's stock. This
       commission would only become payable in the event that the Purchase Price
       was subsequently increased to the Adjusted Purchase Price.

     On August 8, 1999, the closing date, the Buyer advised deCODE that it had
arranged for the sale of at least 50% of the Series B shares at a price of
$15.00 per share.

EXCHANGE OF COMMON STOCK FOR SERIES B PREFERRED STOCK

     On August 8, 1999, deCODE exchanged 333,333 shares of common stock held by
deCODE's chief executive officer, or CEO, for 250,000 shares of newly issued
Series B preferred stock. At that time, the common shares were estimated to have
a fair value equal to 90% of the fair value of the Series B preferred shares.
This exchange resulted in a deemed contribution by deCODE's CEO of $750,000
being recorded. The 333,333 shares of common stock were held in treasury and
subsequently re-issued during 1999.

REPURCHASE OF SERIES A, SERIES B AND SERIES C PREFERRED STOCK

     On August 8, 1999, deCODE repurchased the 250,000 shares of Series B
preferred stock issued to its CEO pursuant to a Resolution adopted by the Board
of Directors. The 250,000 shares of Series B preferred stock were held in
treasury and subsequently re-issued during 1999.

     On August 11, 1999, deCODE repurchased and retired 2,358,074 shares of
Series A preferred stock.

     On August 24, 1999, deCODE repurchased and held in treasury 100,000 shares
of Series C preferred stock.

     Pursuant to the Series A and Series C preferred stock repurchase agreements
and the Board Resolution, the initial repurchase price deCODE paid for such
shares of Series A, Series B and Series C preferred stock was $7.50 per share
(the Repurchase Price). deCODE paid the Repurchase Price to the selling
shareholders in August 1999. However, pursuant to agreements between the
respective stockholders and deCODE on July 12, 1999, it was agreed that the
repurchase price paid for the Series A, Series B and Series C preferred

                                       F-28
<PAGE>
                             deCODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

stock would be equal to the Purchase Price per share, net of any commission
payable to the Buyer, at which deCODE sold shares of its Series B preferred
stock in the August 8, 1999 offering.

ADJUSTMENT TO ISSUANCE AND REPURCHASE PRICES

     On December 28, 1999, the conditions requiring an increase of the Purchase
Price were met, and deCODE and the Buyer agreed on an Adjusted Purchase Price of
$15.00 per share for the five million shares of Series B preferred stock sold to
the Buyer on August 8, 1999. It was also agreed that the Buyer would receive the
commission in the amount of $5,250,000, representing 7% of the total aggregate
Adjusted Purchase Price for the Series B shares.

     As of December 31, 1999, deCODE had recorded a receivable from the Buyer in
the amount of $33,143,836 representing the incremental amount due from the Buyer
with respect to the Adjusted Purchase Price of $37,500,000, less commissions and
plus accrued interest. The receivable from the Buyer was paid in February 2000.
The total amount received was $33,476,712.

     As a result of the Purchase Price being adjusted, on December 28, 1999,
deCODE and the Series A stockholders, deCODE's CEO and the Series C stockholder
agreed upon an adjusted repurchase price for the Series A, Series B and Series C
preferred stock of $13.95 per share, that being the Adjusted Purchase Price of
$15.00 per share less a commission of 7% of the Adjusted Purchase Price. This
adjustment to the repurchase price resulted in the Series A and Series C shares
being repurchased for total premiums of $29,978,873 and $1,170,671,
respectively, and the Series B shares being repurchased for a net discount of
$262,500.

     The incremental repurchase price per share of $6.45, or $17,467,077 in
aggregate, was paid to the respective sellers of Series A, Series B and Series C
preferred stock in February 2000, and accordingly, was reflected in the balance
sheet at December 31, 1999 as a current liability.

COMMON STOCK

     The total authorized shares of common stock, par value $0.001, of deCODE is
60,000,000 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.

     In July 2000, deCODE completed its initial public offering of common stock.
A total of 11,040,000 shares were sold by deCODE at a price of $18.00 per share.
The offering resulted in net proceeds to deCODE of approximately $182.0 million,
net of an underwriting discount of $13.9 million and offering expenses of $2.9
million.

     Of the 6,015,000 shares of common stock that were issued and paid at the
inception of deCODE, 5,789,438 were issued to the founders of deCODE subject to
certain vesting provisions (Founder Stock). The unvested shares of Founder Stock
were subject to repurchase by deCODE at the original issue price in the event
that a founder did not continue in employment, according to individual terms.
All remaining Founder Stock is fully vested as of December 31, 2001.

     Of the Founder Stock, 3,125,292 shares of common stock are entitled to
piggyback registration rights with respect to the registration of such shares
under the Securities Act. Should deCODE propose to register any further shares
of common stock under the Securities Act either for deCODE's own account or for
the account of other security holders, the holders of shares having piggyback
rights are entitled to receive notice of the registration and are entitled, with
some limitation, to include their shares in the registration.

                                       F-29
<PAGE>
                             deCODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Forfeited unvested Founder Stock and unvested common stock issued upon
early exercise of stock options totaling 26,977 in 2000 and 2001 were held in
treasury and subsequently re-issued during those same years. At December 31,
2001, forfeited unvested common stock issued upon early exercise of stock
options totaling 70,841 shares were held in treasury. At December 31, 2001,
375,020 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.

     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, 325,000 were exercised during the period from the public
offering and December 31, 2000 and 100,000 were exercised in the year ended
December 31, 2001. At December 31, 2001, 1,067,500 warrants to purchase the same
number of shares of common stock are outstanding. 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.

STOCK OPTION PLAN

     In August 1996, deCODE adopted the deCODE genetics, Inc. 1996 Equity
Incentive Plan (the "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. As of December 31, 2001, 950,188 shares were available for grant
under the Plan.

                                       F-30
<PAGE>
                             deCODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Options transactions pursuant to the Plan are summarized as follows:

<Table>
<Caption>
                                 EXERCISE PRICE           EXERCISE PRICE           EXERCISE PRICE
                               GREATER THAN GRANT          EQUALS GRANT           LESS THAN GRANT
                             DATE STOCK FAIR VALUE    DATE STOCK FAIR VALUE    DATE STOCK FAIR VALUE           TOTAL
                             ----------------------   ----------------------   ----------------------   --------------------
                                          WEIGHTED                 WEIGHTED                 WEIGHTED                WEIGHTED
                                           AVERAGE                  AVERAGE                  AVERAGE                AVERAGE
                               NUMBER     EXERCISE      NUMBER     EXERCISE      NUMBER     EXERCISE     NUMBER     EXERCISE
                             OF SHARES      PRICE     OF SHARES      PRICE     OF SHARES      PRICE     OF SHARES    PRICE
                             ----------   ---------   ----------   ---------   ----------   ---------   ---------   --------
<S>                          <C>          <C>         <C>          <C>         <C>          <C>         <C>         <C>
Outstanding at
  December 31, 1998........    17,000      $ 4.00        15,000     $ 4.00        15,000      $0.20        47,000    $ 2.79
Granted....................         0        0.00             0       0.00       855,500       5.85       855,500      5.85
Exercised..................    (7,000)       4.00             0       0.00      (840,500)      5.62      (847,500)     5.61
Cancelled..................   (10,000)       4.00             0       0.00             0       0.00       (10,000)     4.00
                              -------      ------     ---------     ------      --------      -----     ---------    ------
Outstanding at
  December 31, 1999........         0        0.00        15,000       4.00        30,000       9.25        45,000      7.50
Granted....................     5,000       18.00       658,500      15.02       420,500       8.39     1,084,000     12.46
Exercised..................         0        0.00      (140,000)     12.54       (75,000)      0.84      (215,000)     8.46
Cancelled..................         0        0.00       (93,000)     17.86             0       0.00       (93,000)    17.86
                              -------      ------     ---------     ------      --------      -----     ---------    ------
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       (50,396)     12.04             0       0.00       (50,396)    12.04
                              -------      ------     ---------     ------      --------      -----     ---------    ------
Outstanding at
  December 31, 2001........   105,000      $ 7.92     1,439,104     $10.12       375,500      $9.97     1,919,604    $ 9.97
                              =======      ======     =========     ======      ========      =====     =========    ======
</Table>

     The following table summarizes information about stock options outstanding
at December 31, 2001:

<Table>
<Caption>
                                                              OUTSTANDING
                                                        -----------------------        VESTED AND
                                                                     WEIGHTED         EXERCISABLE
                                                                      AVERAGE     --------------------
                                                                     REMAINING                WEIGHTED
                                                                    CONTRACTUAL               AVERAGE
                                                         NUMBER        LIFE        NUMBER     EXERCISE
                    EXERCISE PRICE                      OF SHARES   (IN YEARS)    OF SHARES    PRICE
                    --------------                      ---------   -----------   ---------   --------
<S>                                                     <C>         <C>           <C>         <C>
$1.00 to $8.00........................................    654,500      9.53         84,000     $ 2.86
$8.13 to $8.65........................................    588,500      9.30         56,004       8.13
$10.00 to $18.29......................................    676,604      8.69        249,589      14.45
                                                        ---------      ----        -------     ------
$1.00 to $18.29.......................................  1,919,604      9.16        389,593     $11.04
                                                        =========      ====        =======     ======
</Table>

     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 compensation is amortized and recorded as compensation
expense ratably over the vesting period of the options. Stock-based compensation
expense of $5,815,010, $8,246,419 and $4,597,989 was recognized in the
statements of operations during the years ended December 31, 1999, 2000 and 2001
for employee stock options, and stock-based remuneration expense of $2,498,355,
$24,135 and $52,750 was recognized in the statements of operations during the
years ended December 31, 1999, 2000 and 2001 for non-employee stock options.

                                       F-31
<PAGE>
                             deCODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     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.

     Employee stock options granted in 1997 and 1998 were amended in March 1999.
Such amendment eliminated prepayment terms with respect to principal and
interest pursuant to the company-provided note and fixed the interest rate at
6%. With this, these option grants, which were originally variable awards,
became fixed. Total compensation measured at March 1999 with respect to the
options granted in 1997 and 1998 aggregated $14,872,579. Of this amount,
$1,265,947 was recognized as compensation in the consolidated statements of
operations in the period January through March 1999. Compensation deferred as of
and to be recognized subsequent to March 1999 with respect to the options
granted in 1997 and 1998, amounted to $8,939,134.

OTHER STOCK AND STOCK OPTION ARRANGEMENTS

     In February 1998, deCODE granted a stock option to a collaborator that was
not granted under the provisions of the Plan. This option was for 80,000 shares
of common stock at an exercise price of $0.40 per share. The option had no
vesting provisions and was immediately exercised using company-provided
financing that was subsequently paid in 1999.

     In 2000, deCODE issued 20,000 shares of common stock to collaborators
amounting to $415,953 in exchange for services provided. This remuneration
amount was charged to expense in the statement of operations in the year ended
December 31, 2000.

PRO FORMA NET LOSS PER COMMON SHARE

     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, deCODE's net loss and basic and diluted net loss per share would have
been changed to the pro forma amounts indicated below:

<Table>
<Caption>
                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                      -----------------------------------------
                                                         1999           2000           2001
                                                      -----------    -----------    -----------
<S>                                                   <C>            <C>            <C>
Net loss attributable to common stockholders -- as
  reported..........................................  $62,218,278    $38,659,382    $47,838,471
Net loss attributable to common
  stockholders -- proforma..........................   58,348,278     35,862,382     49,818,838
Basic and diluted net loss per share as
  reported -- proforma..............................         9.65           1.63           1.08
Basic and diluted net loss per share................         9.05           1.52           1.12
</Table>

     Pro forma net loss and net loss per share for the years ended December 31,
1999 and 2000 is less than net loss and net loss per share as reported as a
result of deCODE's employee stock options initially being accounted for as
variable awards under APB No. 25. The variable award accounting combined with
the growth in the estimated fair value of deCODE's common stock during these
years resulted in significant stock-based compensation expense being recognized
in the statements of operations for 1999, 2000 and 2001 under APB No. 25. Recent
stock option awards are accounted for as fixed awards under APB No. 25 with
little or no compensatory element.

     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

                                       F-32
<PAGE>
                             deCODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

things, the vesting period of the stock options and the fair value of additional
stock options that may be granted in future years. The weighted-average grant
date fair values using the Black-Scholes option pricing model were:

<Table>
<Caption>
                                                               FOR THE YEARS ENDED DECEMBER 31,
                                                              ----------------------------------
                                                                1999         2000         2001
                                                              ---------    ---------    --------
<S>                                                           <C>          <C>          <C>
Exercise price greater than grant date stock fair value.....   $   --       $   --       $7.42
Exercise price equals grant date stock fair value...........   $   --       $ 9.82       $8.23
Exercise price less than grant date stock fair value........   $11.89       $17.65       $  --
</Table>

     The fair values of the options granted during 1999, 2000 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
60%, 80% and 100%, respectively; expected terms of 3.9 years, 5.0 years and 5.0,
respectively; and risk-free interest rates of 5.74%, 5.42% and 4.39%,
respectively.

STOCK-BASED COMPENSATION AND REMUNERATION

     Stock-based compensation represents the expense charged in the statements
of operations relating to employee and non-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:

<Table>
<Caption>
                                                            FOR THE YEARS ENDED DECEMBER 31,
                                                         --------------------------------------
                                                            1999          2000          2001
                                                         ----------    ----------    ----------
<S>                                                      <C>           <C>           <C>
Research and development expense.......................  $5,566,897    $4,072,819    $3,313,456
General and administrative expense.....................   3,478,968     4,613,688     1,337,283
                                                         ----------    ----------    ----------
          Total........................................  $9,045,865    $8,686,507    $4,650,739
                                                         ==========    ==========    ==========
</Table>

     Included in the above is $131,250 that was paid in the form of shares
20,669 of deCODE common stock that were issued in March 2002. Compensation
related to these shares has been expensed in December 2001 and is included in
accrued expenses at December 31, 2001.

     In addition, general and administrative expenses in the year ended December
31, 2000 include charitable contributions of 150,000 shares of Series B
preferred stock amounting to $3.0 million and of 8,000 shares of common stock
amounting to $193,992 and general and administrative expenses in the year ended
December 31, 2001 include a charitable contribution of 5,000 shares of its
common stock amounting to $52,500.

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 $747,939, $979,306, and
$1,434,368 for the years ended December 31, 1999, 2000 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 $773 in the year ended December 31, 2001.

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-33
<PAGE>
                             deCODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<Table>
<Caption>
                                                                      DECEMBER 31,
                                                              ----------------------------
                                                                  2000            2001
                                                              ------------    ------------
<S>                                                           <C>             <C>
Net Operating Losses........................................  $  6,221,000    $  5,583,000
Capitalized Research and Development Costs..................     6,375,000       5,064,000
Deferred Revenue............................................       908,000         881,000
Fixed Asset Depreciation....................................      (616,000)        837,000
Patents.....................................................      (710,000)       (355,000)
Other.......................................................       268,000         503,000
                                                              ------------    ------------
          Total deferred tax asset, net.....................    12,446,000      12,513,000
Valuation Allowance.........................................   (12,446,000)    (12,513,000)
                                                              ------------    ------------
                                                              $          0    $          0
                                                              ============    ============
</Table>

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

<Table>
<Caption>
                                                              FOR THE YEARS
                                                                  ENDED
                                                               DECEMBER 31,
                                                              --------------
                                                              2000     2001
                                                              -----    -----
<S>                                                           <C>      <C>
Income taxes at federal statutory rates.....................  (34.0)%  (34.0)%
State income taxes, net of federal benefit..................    0.0     (0.6)
Non-deductible equity compensation..........................    7.4      3.8
Non-deductible goodwill amortization........................    4.0      0.8
Foreign rate differential...................................   10.9      3.6
Foreign deferred tax asset adjustment.......................    0.0     15.0
Foreign inflation adjustment................................   (0.6)    (8.9)
Foreign currency adjustment.................................   (0.6)    20.1
Other.......................................................    0.7      0.1
Net Change in valuation allowance...........................   12.2      0.1
                                                              -----    -----
                                                                0.0%     0.0%
                                                              =====    =====
</Table>

     As of December 31, 2001, deCODE had U.S. federal net operating loss ("NOL")
carryforwards of approximately $4.1 million that may be available to offset
future U.S. federal income tax liabilities and expire at various dates through
2021. Also as of December 31, 2001, deCODE's Icelandic subsidiaries had NOL
carryforwards of approximately $22.0 million that begin to expire in 2004.
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. Management
re-evaluates the positive and negative evidence periodically.

     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 $7.2 million. For

                                       F-34
<PAGE>
                             deCODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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, 2000 and 2001, the adjustment to taxable income was a benefit of
approximately $0.7 million and 14.1 million, respectively. For periods beginning
on or after January 1, 2002, the Income Tax and Capital Tax Act was amended to
remove these provisions. During the year ending 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 deCODE's deferred tax assets
and liabilities which was offset by a reduction in the tax valuation allowance
of $32.4 million.

SUBSEQUENT EVENTS

     MediChem.  In March 2002, deCODE completed the acquisition of MediChem Life
Sciences, Inc. (MediChem) in a stock-for-stock exchange to be accounted for as a
purchase transaction. The acquisition gives deCODE capabilities in chemistry and
structural proteomics that will 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.

     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 approximately 8.4 million shares of deCODE common
stock. In addition, options to purchase approximately 1.9 million shares of
MediChem common stock that vested immediately upon consummation of the merger
have been assumed by deCODE, resulting in the issuance of approximately 0.6
million options to purchase deCODE common stock. Under the terms of the merger
agreement, deCODE will also grant a further 136,356 deCODE stock options to
certain employees of MediChem under the 1996 Equity Incentive Plan.

     The total cost of the acquisition is currently estimated to be $86.8
million consisting of the following:

<Table>
<Caption>
                                                              (IN THOUSANDS)
<S>                                                           <C>
Market value of deCODE common stock issued in exchange for
  outstanding MediChem common stock.........................     $79,677
Fair value of MediChem employee stock options assumed.......       3,860
Estimated direct transaction costs of deCODE, consisting
  primarily of financial advisory, legal and accounting
  fees......................................................       3,300
                                                                 -------
                                                                 $86,837
                                                                 =======
</Table>

     deCODE's common stock has been valued using an average price for the period
from three days before to three days after the companies reached agreement and
the proposed merger was announced. The fair value of options to be assumed is
estimated using the Black-Scholes method. The terms of MediChem's outstanding
stock options provided that the options fully vested upon a change of control;
that is, there were no unvested options upon consummation of this merger.

     deCODE will account for the acquisition of MediChem under the purchase
method of accounting for business combinations as defined by Statement of
Financial Accounting Standard No. 141 "Business Combinations" and, accordingly,
the purchase price will be allocated to the tangible and identifiable intangible
assets of MediChem acquired by deCODE and liabilities of MediChem assumed by
deCODE on the basis of

                                       F-35
<PAGE>
                             deCODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

their fair values on the acquisition date. deCODE has preliminarily allocated
the total cost of the merger to the net assets of MediChem as follows:

<Table>
<Caption>
                                                              (IN THOUSANDS)
<S>                                                           <C>
Net tangible assets acquired................................     $22,095
In-process research and development.........................         483
Identifiable intangible assets..............................       5,975
Goodwill....................................................      58,284
                                                                 -------
                                                                 $86,837
                                                                 =======
</Table>

     The allocation of the purchase price is preliminary and deCODE will be
finalizing independent valuations of MediChem's assets and liabilities and, as
such, the preliminary allocation of the purchase price could be subject to
significant change. Intangible assets of MediChem identified to-date include
developed technology, patents, customer and other contracts and agreements that
have estimated useful lives ranging from three to ten years. The amounts
attributed to MediChem's tangible assets and liabilities acquired, as well as to
identifiable intangible assets, their estimated useful lives and the amount
attributed to acquired in-process research and development will ultimately be
determined upon completion of the appraisals and, therefore, may be different
from that presented above.

     F.Hoffman-La Roche.  In January 2002, deCODE and Roche entered into a new
Collaboration and Cross-License Agreement. This new, three-year alliance
leverages deCODE's expanding capabilities in drug discovery into developing
novel treatments for common diseases. Under this new alliance, Roche will
provide research funding for a minimum of the next two years for deCODE to
conduct downstream research in a selection of four diseases, with the goal of
using the targets identified to discover and develop new therapeutic compounds
and to take these compounds into clinical trials. Also, deCODE will receive
development and regulatory approval milestone payments for therapeutic drug
compounds developed pursuant to the agreement as well as royalties on Roche's
sales of drugs developed under the agreement. Additionally, deCODE will pay
Roche royalties should deCODE develop and market drugs for certain common
diseases.

SELECTED QUARTERLY DATA (UNAUDITED)

     The following is a summary of quarterly financial results:

<Table>
<Caption>
                                                       FOR THE THREE MONTHS ENDED
                                        ---------------------------------------------------------
                                         MARCH 31        JUNE 30      SEPTEMBER 30    DECEMBER 31
                                        -----------    -----------    ------------    -----------
<S>                                     <C>            <C>            <C>             <C>
FISCAL 2000
  Revenue.............................  $ 4,618,386    $ 3,828,527    $ 5,576,112     $ 7,522,631
  Operating loss......................    7,562,319     10,937,571     10,560,229      10,509,529
  Net loss............................    6,898,139     10,391,448      7,575,366       6,253,550
  Basic and diluted net loss per
     share............................         1.25           1.94           0.23            0.14
FISCAL 2001
  Revenue.............................  $ 5,032,986    $ 6,197,906    $ 9,720,955     $10,598,779
  Operating loss......................   18,185,871     13,861,572      9,946,666      10,654,063
  Net loss............................   16,087,763     12,290,505      8,867,423      10,592,780
  Basic and diluted net loss per
     share............................         0.37           0.28           0.20            0.24
</Table>

                                       F-36
<PAGE>
                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit
Number      Description
------      -----------
<S>         <C>
2.1         Agreement and Plan of Merger dated as of January 7, 2002, by and
            among deCODE genetics, Inc., Saga Acquisition Corp, and MediChem
            Life Sciences, Inc. (Incorporated by reference to Annex A to the
            Proxy Statement/Prospectus included in Pre-Effective Amendment No. 1
            to deCODE's Registration Statement on Form S-4 (Registration No.
            333-81848) filed on February 12, 2002).

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).

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).

10.1        Form of License from The Icelandic Data Protection Commission (now,
            The Icelandic Data Protection Authority) to Islensk erfoagreining
            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 March 23,
            2001).

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 Friorik Skulason (FS) and Islensk
            erfoagreining 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).
</TABLE>


<PAGE>

<TABLE>
<S>         <C>
10.6*       Consultancy Contract between deCODE genetics, Inc. and Vane
            Associates, dated December 1, 1997, together with 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).

10.7*       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).

10.8*       Amended and Restated Non-Recourse Promissory Note between deCODE
            genetics, Inc. and Hannes Smarason, dated March 24, 1999
            (Incorporated by reference to Exhibit 10.10 to the Company's
            Registration Statement on Form S-1 (Registration No. 333-31984)
            which became effective on July 17, 2000).

10.9+       Research Collaboration and Cross-license Agreement among F.
            Hoffman-La Roche Ltd, Hoffman-La Roche Inc. and deCODE genetics,
            Inc., dated February 1, 1998 (Incorporated by reference to Exhibit
            10.11 to the Company's Registration Statement on Form S-1
            (Registration No. 333-31984) which became effective on July 17,
            2000).

10.10       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).

10.11*      Employment Agreement between Islensk erfoagreining ehf. and Kristjan
            Erlendsson, dated September 4, 1998 (Incorporated by reference to
            Exhibit 10.21 to the Company's Registration Statement on Form S-1
            (Registration No. 333-31984) which became effective on July 17,
            2000).

10.12       Co-operation Agreement between Reykjavik Hospital and Islensk
            erfoagreining 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).

10.13       Co-operation Agreement between the Iceland State Hospital and
            Islensk erfoagreining 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).

10.14*      Non-Recourse Promissory Note between deCODE genetics, Inc. and
            Hannes Smarason, dated September 15, 1999 (Incorporated by reference
            to Exhibit 10.35 to the Company's Registration Statement on Form S-1
            (Registration No. 333-31984) which became effective on July 17,
            2000).

10.15       Research Collaboration Agreement by and between Islenskar
            hveraorverur ehf. (now Prokaria, ehf.) and Islensk erfoagreining
            ehf., dated December 28, 1999 (Incorporated by reference to Exhibit
            10.38 to the Company's Registration Statement on Form S-1
            (Registration No. 333-31984) which became effective on July 17,
            2000).

10.16       Agreement between The Minister for Health and Social Security and
            Islensk erfoagreining ehf. relating to the Issue of an Operating
            License for the Creation and Operation of a Health Sector Database,
            dated January 21, 2000 (Incorporated by reference to Exhibit 10.39
            to the Company's Registration Statement on Form S-1 (Registration
            No. 333-31984) which became effective on July 17, 2000).
</TABLE>


<PAGE>

<TABLE>
<S>         <C>
10.17       Operating License issued to Islensk erfoagreining ehf., for the
            Creation and Operation of a Health Sector Database, dated January
            22, 2000 (Incorporated by reference to Exhibit 10.40 to the
            Company's Registration Statement on Form S-1 (Registration No.
            333-31984) which became effective on July 17, 2000).

10.18       Agreement between The University of Iceland, Islensk erfoagreining
            ehf., and the City of Reykjavik, dated February 15, 2000
            (Incorporated by reference to Exhibit 10.42 to the Company's
            Registration Statement on Form S-1 (Registration No. 333-31984)
            which became effective on July 17, 2000).

10.19*      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).

10.20       Series C Preferred Stock and Warrant Purchase Agreement between
            Roche Finance Ltd and deCODE genetics, Inc., dated as of February 1,
            1998 (Incorporated by reference to Exhibit 10.45 to the Company's
            Registration Statement on Form S-1 (Registration No. 333-31984)
            which became effective on July 17, 2000).

10.21+      Strategic Alliance Agreement between Partners HealthCare System,
            Inc., The General Hospital Corporation, d.b.a. Massachusetts General
            Hospital, The Brigham and Women's Hospital, Inc. and deCODE genetics
            Ltd. (Islensk erfoagreining), dated May 11, 2000 (Incorporated by
            reference to Exhibit 10.48 to the Company's Registration Statement
            on Form S-1 (Registration No. 333-31984) which became effective on
            July 17, 2000).

10.22+      Crosswalk Development Agreement between Partners HealthCare System,
            Inc., The General Hospital Corporation, d.b.a. Massachusetts General
            Hospital, The Brigham and Women's Hospital, Inc. and deCODE genetics
            Ltd. (Islensk erfoagreining), dated May 11, 2000 (Incorporated by
            reference to Exhibit 10.49 to the Company's Registration Statement
            on Form S-1 (Registration No. 333-31984) which became effective on
            July 17, 2000).

10.23*      Employment Agreement between Islensk erfoagreining ehf. and Hakon
            Guobjartson, dated May 5, 1999 (Incorporated by reference to Exhibit
            10.52 to the Company's Annual Report on Form 10K filed March 23,
            2001).

10.24       Form of Contract on the Processing of Clinical Data and their
            Transfer to a Health Sector Database between several Health
            Institutions and Islensk erfoagreining ehf. (Incorporated by
            reference to Exhibit 10.58 to the Company's Annual Report on Form
            10-K filed March 23, 2001).

10.25*      Amended and Restated Promissory Note, dated January 1, 2001, by
            Hannes Smarason and the Company (Incorporated by reference to
            Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed on
            May 15, 2001).

10.26       Work Contract dated March 15, 2001 between Islensk erfdagreining
            ehf. and Eykt ehf., an Icelandic civil-works engineer, on concrete
            casting, external finish work, conduits and ventilation systems,
            electrical and specialized systems in Sturlugata 8, Reykjavik
            (Incorporated by reference to Exhibit 10.3 to the Company's
            Quarterly Report on Form 10-Q filed on May 15, 2001).

10.27*      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).
</TABLE>

<PAGE>

<TABLE>
<S>         <C>
10.28*      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).

10.29*      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).

10.30+      Collaboration Agreement between Genmab A/S, Medarex, Inc. and deCODE
            genetics, ehf. dated June 12, 2001 (Incorporated by reference to
            Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q filed on
            August 14, 2001).

10.31+      Contract Services Agreement Re. Gene Expression Profiles In
            Rheumatoid Arthritis between Encode ehf. and Genmab A/S dated June
            12, 2001 (Incorporated by reference to Exhibit 10.5 to the Company's
            Quarterly Report on Form 10-Q filed on August 14, 2001).

10.32+      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).

10.33+      Joint Development and Commercialization Agreement between deCODE
            genetics, ehf. and PE Corporation (NY) through its Applied Biosystem
            Group dated July 16, 2001 (Incorporated by reference to Exhibit 10.7
            to the Company's Quarterly Report on Form 10-Q filed on August 14,
            2001).

10.34+      Reagent Supply Agreement between deCODE genetics, ehf and PE
            Corporation (NY) through its Applied Biosystem Group dated July 16,
            2001 (Incorporated by reference to Exhibit 10.8 to the Company's
            Quarterly Report on Form 10-Q filed on August 14, 2001).

10.35+      Pharmacogenomics Collaboration and License Agreement between Encode
            ehf. and Affymetrix, Inc. dated July 16, 2001 (Incorporated by
            reference to Exhibit 10.9 to the Company's Quarterly Report on Form
            10-Q filed on August 14, 2001).

10.36       Contract on Financial Leasing between Lysing hf, and Islensk
            erfoagreining ehf., dated as of December 13, 2001.

10.37       Land Lease Agreement between the City of Reykjavik and Islensk
            erfoagreining ehf., dated as of December 21, 2001.

10.38       Agreement on the Details of the Arrangement of Encumbrances in the
            Site Agreement between the University of Iceland and Islensk
            erfoagreining ehf., dated as of December 21, 2001.

10.39       Annex to the Agreement on the Details of the Arrangement of
            Encumbrances in the Site Agreement between the University of Iceland
            and Islensk erfoagreining ehf., dated as of January 4, 2002.

10.40#      Loan Agreement between Sturlugata 8, ehf. and Islandsbanki-FBA, hf.,
            dated as of December 21, 2001.

10.41#      Loan Agreement between Sturlugata 8, ehf. and Islandsbanki-FBA, hf.,
            dated as of December 27, 2001.

10.42       Currency Exchange Agreement between Sturlugata 8 ehf. and
            Islandsbanki-FBA hf., dated as of December 21, 2001.
</TABLE>

<PAGE>


<TABLE>
<S>         <C>
10.43#      Agreement on the Sale and Listing of Bonds Issued by Sturlugata 8
            ehf. between Islandsbanki-FBA, hf. and Islensk erfoagreining ehf.,
            dated as of December 21,2001.

10.44       General Bond with Consumer Price Index between Islandsbanki-FBA, hf.
            and Sturlugata 8 ehf., dated as of December 21, 2001.

10.45       General Bond with Consumer Price Index between Islandsbanki-FBA, hf.
            and Sturlugata 8 ehf., dated as of December 21, 2001.

10.46#      Research Collaboration and Cross-License Agreement among
            F.Hoffman-La Roche Ltd and Hoffman-La Roche Inc. and deCODE
            genetics, ehf. (Islensk erfoagreining), effective as of February 1,
            2002.

10.47       Loan Agreement between Kristjan Erlendsson and Islensk erfoagreining
            ehf., dated as of October 11, 2001.

21.1        Subsidiaries of deCODE genetics, Inc.

23.1        Consent of PricewaterhouseCoopers ehf., independent public
            accountants.

99.1        Government Regulation on a Health Sector Database, dated January 22,
            2000 (Incorporated by reference to Exhibit 99.1 to the Company's
            Registration Statement on Form S-1 (Registration No. 333-31984)
            which became effective on July 17, 2000).

99.2        Act. No. 139/1998 on a Health Sector Database (Incorporated by
            reference to Exhibit 99.2 to the Company's Registration Statement on
            Form S-1 (Registration No. 333-31984) which became effective on July
            17, 2000).
</TABLE>

-----------------

+     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.