<PAGE>

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

                                   FORM 10-K
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, 2002
                                       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 OTHER 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.  [X]

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

     The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant, based on the closing price of the common
stock ($4.68 per share), as of June 28, 2002, was $217,747,123.

     Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of March 1, 2003.

<Table>
<Caption>
                      CLASS                                          NUMBER OF SHARES
                      -----                                          ----------------
<S>                                                  <C>
          Common Stock, $.001 par value                                 53,566,682
</Table>

                      DOCUMENTS INCORPORATED BY REFERENCE

     The Proxy Statement to be filed with respect to the 2003 Annual Meeting of
Stockholders is incorporated by reference into Part III.

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<PAGE>

                                     PART I

ITEM 1.  BUSINESS

OVERVIEW

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

     Our business is divided into two components: products and services. Our
primary product focus is on the discovery and commercialization of novel
therapeutics designed against targets identified in our population-based gene
discovery work. Through the acquisition in 2002 of MediChem Life Sciences and
its subsidiary, Emerald BioStructures, now our pharmaceuticals and biostructures
groups, we have integrated capabilities for applying genetics findings to the
development of drugs, both through our own programs and in alliance with
corporate partners. We are also applying the links we have identified between
genetic factors and disease to create DNA-based diagnostic and pharmacogenomic
tests. We believe that such tests will become a standard part of healthcare
within the coming decade, making it possible to gauge individual predisposition
to particular illnesses and to design effective prevention strategies; to
complement traditional clinical diagnosis; and to identify patients who are
likely to respond or not respond to particular drugs. We are also marketing
software systems we have developed for making correlations between genetic
variation and disease and drug response.

     Our service offerings include contract service businesses in drug discovery
and medicinal chemistry, through our Chicago-based pharmaceuticals group;
three-dimensional protein crystallography products and contract services,
through our Seattle-based biostructures group; pharmacogenomics and clinical
trials services, through our wholly-owned subsidiary Encode; database services,
through subscriptions to our Clinical Genome Miner(TM) system integrating
anonymized population data on disease, genotypes and genealogy; and genotyping
services through our genotyping laboratory in Reykjavik.

     In Iceland, we have comprehensive population resources that enable our
scientists to efficiently conduct genome- and population-wide scans to identify
key genes and gene variations contributing to complex diseases. These include a
computerized genealogy database covering the entire Icelandic population and
going back as far as 1100 years to the settlement of the country; genotypic and
disease data from more than 90,000 volunteer participants in more than 50
different disease programs; one of the highest-throughput genotyping facilities
in the world; and statistical algorithms and software programs for rapidly
analyzing data from large numbers of individuals to identify genetic factors
that correlate with disease. As of late 2002, we had mapped genes involved in
more than two dozen common diseases and we are applying our discovery of key
genes, disease pathways and drug targets to the development of drugs and
diagnostics in many of these.

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

     In this report, references to we or us refer to deCODE genetics, Inc., our
wholly-owned subsidiary, Islensk erfdagreining ehf., and its wholly-owned
subsidiaries, including Encode ehf., an Icelandic private limited company. After
the closing of the acquisition of MediChem Life Sciences Inc. (MediChem) on
March 18th 2002 we or us also refers to MediChem, a wholly owned subsidiary of
deCODE genetics, Inc., and to MediChem's wholly owned subsidiaries, including
Emerald BioStructures. Dollar amounts are in thousands except share and per
share amounts, unless otherwise noted.

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

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<PAGE>

PRODUCTS

     The products we are developing include drugs, DNA-based diagnostic tests,
pharmacogenomic tests, and bioinformatics systems. Our drug and diagnostic
development programs are based upon genes and related targets we have identified
through our population genetics research in some 50 common diseases. 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.

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

     We are pursuing the commercial development of our gene- and drug-target
discovery programs through the development and marketing of drugs, DNA-based
diagnostics, pharmacogenomic tests, and bioinformatics systems we have developed
for making correlations between genetic variation and disease. We are pursuing
this strategy through the application of 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 will be required to pay us royalties on sales of any products
developed using the results of our gene discovery programs; and by entering into
collaborative arrangements for the development and marketing of products from
these programs.

     Our acquisition in early 2002 of MediChem Life Sciences and Emerald
BioStructures is a central element in our strategy to transform deCODE from a
company focused on gene discovery into a biopharmaceutical company capable of
creating and capturing the greatest possible value from its discovery
capabilities. The acquisition has benefited us in three ways: enabling us to
advance our in-house programs in drug discovery; enabling us to negotiate much
more favorable terms in our alliances with pharmaceutical companies, in which we
take our discoveries much further down the drug development process and receive
a more significant share of revenues from sales of products that are developed;
and providing us with a service business generating revenue in the short term
and maintaining the infrastructure for conducting drug discovery work on several
programs at once. At present, our pharmaceuticals group is focused mainly on
conducting work on our targets in collaboration with our corporate partners and
on drug discovery work for our fee-for-service customers.

GENE DISCOVERY

     Our product development begins with gene discovery. We believe that we have
an unrivalled track record in the identification of the inherited components of
common diseases, and through these discoveries we are identifying novel markers
for diagnostics and targets for drug development. A detailed description of our
population approach to gene discovery can be found in the section "Population
approach and resources" below, and a brief description of some of our discovery
programs and achievements follows here.

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

     Cardiopulmonary Diseases.  We are studying a variety of common
cardiovascular conditions, and have identified novel genes in stroke, myocardial
infarction (heart attack), hypertension (high blood pressure), and peripheral
arterial occlusive disease (PAOD). We have mapped genes in asthma and chronic
obstructive pulmonary disease (COPD).

     Central Nervous System Diseases.  We are studying the genetic basis for
psychiatric and central nervous system diseases including Alzheimer's disease,
anxiety, bipolar disease/depression, familial essential tremor,

                                        2
<PAGE>

multiple sclerosis, Parkinson's disease, schizophrenia, autism, attention
deficit and hyperactivity disorder, dyslexia, restless leg syndrome, and
migraine. We have identified a strong link between schizophrenia and the
Neuregulin 1 gene and confirmed this link in association studies in other
populations. We have mapped genes in Alzheimer's disease, Parkinson's disease,
anxiety disorder and depression, and familial essential tremor.

     Metabolic and Other Diseases and Conditions.  We have isolated genes in
osteoarthritis, osteoporosis and non-insulin-dependent diabetes (NIDDM), and
have mapped genes in obesity, familial combined hyperlipidemia, and longevity.
We are also studying nocturnal enuresis.

     Eye Disease.  We are studying a range of eye diseases, including macular
degeneration and myopia. 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 mapped a
susceptibility gene for pre-eclampsia to chromosome 2p13.

     Cancer.  We are conducting research in many forms of cancer, including lung
cancer, melanoma, renal cancer, colon cancer, testicular cancer, thyroid cancer,
and prostate cancer. We have mapped a gene linked to benign prostatic
hypertrophy.

AN EXAMPLE OF OUR APPROACH: SCHIZOPHRENIA

     Our work in schizophrenia offers one concrete example of how our population
genetics approach is pointing the way towards the development of new, more
effective drugs targeting the root biological causes of disease.

     Schizophrenia is a chronic and progressive mental illness affecting between
0.5 and 1.0 percent of the adult population worldwide. Patients frequently
suffer from delusions, hallucinations, and blunted emotions, and current
treatments are effective only in alleviating some of these symptoms.

     Our scientists established the link between schizophrenia and the
Neuregulin 1 gene, located on the short arm of chromosome 8, through the
analysis of detailed genotypic data from more than 800 volunteer patients and
unaffected relatives from across Iceland. By analyzing this data in the context
of our nationwide genealogy database, we were able to home in on a particular
haplotype -- a small segment of DNA that is inherited as a unit -- within
Neuregulin 1 that confers more than twice the average risk for developing
schizophrenia. Data from association studies in Western European and Asian
populations have confirmed the significant role of this and related haplotypes
in schizophrenia in other populations. The findings are further supported by at
least five previous international studies that offered suggestive linkage
between schizophrenia and the region on the short arm of chromosome 8 containing
the Neuregulin 1 gene.

     Our subsequent functional studies in mice offer compelling additional
evidence for the involvement of the Neuregulin 1 pathway in some of the major
biological dysfunctions involved in schizophrenia. Neuregulin 1 is critical to
the proper transmission of messages within the central nervous system and to the
plasticity of neurons, an important factor in the way brain responds and adapts
to experience and stimuli in the environment. Our scientists analyzed mice in
which certain segments of the Neuregulin 1 or of one of its key receptors, ERB4,
were knocked out, and found that the knockout mice exhibited behaviors and
disruptions in normal neurotransmission similar to those seen in schizophrenics.

     Using key proteins in the Neuregulin 1 pathway as drug targets, we are now
working to discover new compounds that can help to correct the biological
dysfunctions behind schizophrenia and thereby more effectively treat the
disease. We have performed a high-throughput screen against one promising target
to identify potentially useful therapeutic compounds. Under our alliance with
Roche, we are continuing drug discovery work on the initial results from our
compound screening at our Chicago-based pharmaceuticals group.

DRUG DISCOVERY PIPELINE

     The principal goal of our gene discovery work and the main focus of our
product development strategy is to discover and bring to market new drugs to
treat common diseases. In all of the diseases for which we have isolated genes
we have identified "druggable" targets, that is, targets against which medicinal
chemists have

                                        3
<PAGE>

proven that drugs can be made. These targets are either products of the genes
themselves or are located within the pathways we have identified through our
functional analyses of those genes.

     Our most advanced drug discovery programs are in schizophrenia, stroke and
PAOD. In each case we have isolated key disease genes through our population
genetics research, conducted extensive functional work on our findings and
identified drug targets within the disease pathways. We have also conducted
high-throughput screens and identified lead series of compounds against targets
in each of these diseases, and are working on identifying lead compounds at our
pharmaceuticals group. Our schizophrenia and stroke programs are part of our
drug discovery and development alliance with Roche, while our drug discovery
program in PAOD is proprietary to deCODE. We aim to file our first
investigational new drug application (IND) from these programs in 2004.

     In our target discovery work on our findings in myocardial infarction and
hypertension, we believe we may be able to bypass much of the drug discovery
process and enter directly into phase II clinical trails as early as mid-2003.
In both of these diseases, the genes we have isolated have led us to drug
targets against which drugs have already been developed for other conditions. If
we are able to license these compounds from the companies that developed them,
we would be able to eliminate the customarily lengthy process of identifying
leads and developing them into safe compounds and instead enter directly into
clinical trials to test for the efficacy of compounds in treating these
conditions.

DIAGNOSTICS

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

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

     In 2001, we established a partnership with Roche Diagnostics to develop and
market DNA-based diagnostics for common diseases. One of our most advanced
programs is in osteoporosis, where we have identified a series of seven SNPs
(genetic variations know as single nucleotide polymorphisms) within a gene on
chromosome 20 that can be used to identify individuals who are at a nearly
threefold average increased risk of developing osteoporosis. We are also
advancing in our programs in stroke, type 2 diabetes and several other major
diseases. We hope to be able to offer our first DNA-based diagnostic test under
this alliance in 2004.

PHARMACOGENOMICS

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

                                        4
<PAGE>

     We have two capabilities for identifying the genetic basis of drug
response. Through our wholly-owned pharmacogenomics and clinical trials
subsidiary Encode we use in vitro expression profiling to prospectively identify
responders and non-responders. In this process, we establish clinical drug
response baselines by administering a drug of interest to patients in a small
clinical trial. Specimens such as peripheral blood mononuclear cells are
obtained to develop an in vitro model of response from these patients. The
specimens are challenged with or without drug, and gene expression profiles are
derived using gene-array technology. We then apply proprietary algorithms to
select a panel of differentially expressed genes that most accurately predicts
the clinical response to the drug under investigation. We are further able to
examine these genes for polymorphisms, such as SNPs, which correlate with
responsiveness to a given drug and which can thus be used to design a DNA-based
predictive test.

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

     As a proof of principle, we have developed an assay that can, by measuring
expression levels in a set of eight genes, predict responsiveness to
glucocorticoid treatments for asthma with an accuracy of approximately 90%.
Through our partnership with Affymetrix, we have developed accurate and
efficient assays for identifying responders and non-responders to several
popular brand-name drugs used in treating many common conditions.

INFORMATICS

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

     Our principal informatics product is the Clinical Genome Miner
Discovery(TM) system, which we are marketing in alliance with IBM. CGM
Discovery(TM) is a computer based application for sale to customers and which
can be used for isolating and analyzing genes and gene variations associated
with particular diseases. It includes the same interfaces, and statistical
analysis tools that we use in our gene discovery programs. The system enables
users to input their own data on disease, genotypes and genealogy and to mine
this data, in real time, for correlations. The results can then be analyzed in
the context of our annotated human and animal genome sequence data. The system
utilizes our proprietary Identity Protection System(TM), developed and employed
in Iceland through the Icelandic Data Protection Authority to securely and
automatically anonymize clinical and genetic data. We are adapting the CGM
Discovery(TM) to run on IBM servers, and plan to have the product ready to
deliver to customers in the middle of 2003.

SERVICES

     Through our service offerings, we aim to generate significant near-term
revenue from the same capabilities and assets that we are employing in the
development of drugs, diagnostics and pharmacogenomics. The following is a brief
description of our service businesses.

DRUG DISCOVERY AND DEVELOPMENT

     In March 2002 we acquired MediChem Life Sciences in a stock-for-stock
transaction. We did so in order to gain the advanced drug discovery and
development capabilities necessary to take our targets into proprietary
development, and thereby to maximize the value we are able to create from our
work in the genetics of common diseases. At the same time, the acquisition
provided us with MediChem's contract service business. The advantage of this for
deCODE is that it enables us to generate near-term revenue, helping to cover the
overhead cost of maintaining a substantial and integrated drug discovery
operation and thereby defraying some of the cost of pursuing our proprietary
projects.

                                        5
<PAGE>

     This business is built upon the demand by pharmaceutical and biotechnology
companies for contract chemistry services. Recent advances in genomics have
resulted in the rapid growth in the number of novel biological targets that can
be exploited for drug discovery. This has created a significant demand by
pharmaceutical and biotechnology companies for the synthesis of small molecule
drugs. Founded in 1987, MediChem, now our pharmaceuticals group, 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. The group is focused on chemistry-based drug
discovery and development ranging from early-stage lead discovery and
optimization to the identification of viable synthetic routes required to
manufacture cGMP materials in quantities for pre-clinical and clinical studies.
It provides us, our partners and our contract customers with 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.

     The customer base of our pharmaceuticals group includes large
pharmaceutical companies, biotechnology firms, and patient organizations
pursuing drug discovery for particular diseases.

PHARMACOGENOMICS AND CLINICAL TRIAL SERVICES

     In November 2000, we launched Encode as a wholly owned subsidiary for
pharmacogenomics and clinical trials. In addition to conducting pharmacogenomics
work for our proprietary programs, Encode conducts pharmacogenomic studies for
contract customers, as well as clinical trials on new and existing therapeutics
for pharmaceutical companies.

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

     In all of our pharmacogenomics alliances we negotiate for the right to
participate in potential sales of tests developed using our capabilities in this
field.

CLINICAL GENOME MINER(TM)

     Another of our service offerings is subscription to the Clinical Genome
Miner(TM) (CGM), a computer-based discovery system that allows users to perform
real-time analyses to study the association between variation in human genes and
human disease. The Clinical Genome Miner(TM) combines the statistical and
datamining tools of the Clinical Genome Miner Discovery(TM) system (described
above under Products: informatics) with the ability to conduct statistical
queries of deCODE's population data on genotypes, genealogy and disease. Users
can define a phenotype, conduct a genome-wide, population linkage scan using our
framework marker set, and focus on 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.

     We believe that subscriptions to the CGM are particularly valuable to
deCODE as an element in product development alliances with major pharmaceutical
companies, such as those we have with Merck and Roche Diagnostics. We believe
that the principal value of the service lies in the ability to complement other
companies' genomics-based target development efforts, for example to
characterize and prioritize large numbers of drug and diagnostic targets whose
links to human genetics and disease may not be well understood.

     CGM users' interactions with the system are confined to the query layer;
users do 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.

GENOTYPING

     We believe that our assets and expertise in genotyping present a
significant opportunity for contract services and give us important competitive
advantages. Our population research into the genetic factors that

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<PAGE>

contribute to common diseases involves, in the first stage, the gathering,
management and genotyping of thousands of biological samples. At our main
research facility in Reykjavik, we have one of the highest-throughput genotyping
laboratories in the world, capable of generating tens of millions of genotypes
per month. We have developed high density genetic maps which enable us to
accurately locate millions of microsatellite and SNP markers across the genome.
We also have in place efficient, automated systems for all stages of the
genotyping process, from DNA isolation to plate preparation and the generation,
storage and analysis of genotypic data.

     Given the high overhead costs involved in setting up a genotyping facility
and the continued growth of applied genetics, we believe that there will be
significant demand for these services from both the industrial and academic
sectors.

POPULATION APPROACH AND RESOURCES

POPULATION GENETICS AND COMMON DISEASES

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

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

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

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

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

THE ICELANDIC ADVANTAGE

     We believe that the scarce resource in genetics is a population with all
three sets of data -- genealogical, genetic, and phenotypic. In Iceland, we have
brought these resources together with advanced data mining tools to create what
we believe is the world's leading gene-discovery engine for common diseases.

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

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

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<PAGE>

     Relative Homogeneity.  We believe that in a small and historically isolated
population such as Iceland's, the variety of genetic factors involved in any
given disease is likely to be smaller than in larger and more diverse
populations. Iceland also presents many instances of "founder" effects, in which
the principal inherited factors in a disease affecting many present day patients
can be traced back to a single individual or "founder" ancestor. These factors
simplify the task of finding and subsequently understanding the disease genes
and mutations causing common diseases.

     Sufficient but Manageable Size.  The Icelandic population, which numbers
approximately 280,000, is small enough to make feasible population-wide studies
of the genetics of common diseases with a minimum of sampling bias. At the same
time, it is large enough to deliver meaningful results without an increased
incidence of recessive genetic conditions which can arise as a result of
intermarriage. The prevalence of the common diseases in Iceland is very similar
to that seen elsewhere in the industrialized world, and the genes we have
identified in Iceland have been shown to be key genes in the same conditions in
larger and more diverse populations.

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

     Well-Educated Population.  The level of public education is high in Iceland
and illiteracy is negligible. Historically, the Icelandic population has been
willing to participate in biomedical research in the Icelandic community.

OUR POPULATION RESOURCES

     deCODE has utilized these advantages to develop its gene discovery engine.
Our key resources include a computerized genealogy database that can in real
time draw the familial connections of any group of present-day Icelanders;
genotypic and detailed medical data from more than 90,000 volunteers in our
research in some 50 diseases; one of the world's highest-throughput genotyping
facilities; and statistical algorithms and software systems we have developed
for storing this data and mining it for correlations between genetic variation
and disease.

     The success of our gene research is due in large part to the participation
of tens of thousands of Icelanders in our research programs. We believe that
participation is encouraged by the fact that we have one of the most advanced
privacy and data protection systems anywhere in the world. All data on
individuals used in our research is made personally non-identifiable and held
under encrypted identifiers generated by the Icelandic government's Data
Protection Authority. All genetic and medical data being used in the company's
gene research has been obtained under the strictest standards of informed
consent. Approximately 95% of all those who are asked to take part in our
genetic studies agree to do so, as do over 99% of those asked to participate in
a second study.

OUR GENE DISCOVERY PROCESS

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

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database using the same key. We then run the list of patients through the
genealogy database, yielding very large extended families of patients,
frequently encompassing hundreds of individuals.

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

     We genotype all DNA samples with a framework set of approximately 1000
microsatellite markers -- polymorphic genetic signposts -- spread across the
entire genome. Using the genealogies and our datamining algorithms we can then
determine which small segments of the genome related patients share to a
statistically much higher degree than one would expect given their relatedness.
We are thus able to "map" to small segments of particular chromosomes the
genetic factors that correlate with the disease. Through detailed analysis of
these regions using denser sets of microsatellite and SNP markers, we are able
to efficiently isolate the key disease genes and disease-linked haplotypes and
mutations.

     We validate our findings by conducting association studies in other, more
heterogeneous populations. When we have carried out such studies, we have found
that the genes we have isolated in Iceland also play a critical role in the same
diseases in other populations, although the variety of mutations or haplotypes
we find is frequently greater. Understanding the range of mutations or
haplotypes contributing to disease is particularly vital for the development of
DNA-based diagnostic tests suitable for use around the world.

FROM GENES TO TARGETS

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

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

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

     Our 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, as these genes may also
be mutated in the same disease.

     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

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particular tissues or under particular conditions). We link the control region
of newly identified disease genes to a "reporter" gene and establish precisely
which region governs expression. DNA from this region is used to retrieve
specific binding proteins that are responsible for turning the disease gene
"on." Finally, we perform gene expression analysis using Affymetrix GeneChip(TM)
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 genes "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 the expression patterns
of which are altered by the differential expression of the disease gene under
study. Some of these genes may interact with the disease gene product in
disrupting normal biology and leading to disease.

COMPARISON TO OTHER APPROACHES

     We believe that our approach, because it enables us to home in directly on
the inherited components of human disease with a minimum of hypothetical bias,
provides us with targets that of a uniquely high quality for drug and diagnostic
development.

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

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

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

THE ICELANDIC HEALTH SECTOR DATABASE

     In January 2000, our wholly-owned Icelandic subsidiary Islensk
erfdagreining ehf., received from the Icelandic Ministry of Health a twelve-year
license to create and operate the Icelandic Health Sector Database (IHD). Now
under construction, the IHD will be a centralized database of personally
non-identifiable and encrypted copies of health information from medical records
in Iceland's national health system. The IHD will enable users to conduct
statistical, population-based analyses of longitudinal healthcare data and
trends. The system will assemble from medical records data on, for example,
clinical measurements, disease diagnoses, treatments and outcomes. Users who
will be able to query the IHD on a non fee-paying basis include the Health
Ministry, doctors in Iceland's national health system, and Icelandic scientists
engaged in non-commercial research. Potential fee-paying customers include
pharmaceutical and biotechnology firms as well as healthcare providers.

     We believe that the IHD will provide a valuable resource for better
understanding the environmental components that, along with genetic factors, lie
behind the onset of most common diseases. Using the Icelandic Data Protection
Authority's encryption protocols, we will be able to query the data in the IHD
for statistical correlations with our datasets on genotypes, genealogies, and
disease data from volunteer participants in our gene discovery programs. As the
data within the IHD is broader in scope and time frame than is the health data
that we have gathered in the course of our gene research, this may enable us to
gain novel

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insights into environmental influences on health, the nature of disease, disease
prevention strategies, responsiveness to treatment, and the ability of certain
people to resist illness. The ability to query our existing datasets in
conjunction with the IHD will constitute the deCODE Combined Data Processing
(DCDP) system. We believe that this system will be much like the CGM service
that we currently offer, complemented by the ability to query the data in the
IHD.

     In addition to the costs of developing the system, under the terms of the
license we pay the Icelandic government a fixed fee for operating the IHD of 70
million Icelandic Krona per year (approximately $913 USD as of March 2003), and
will pay an additional 6% per annum of any profits from its commercialization.

     We believe that the IHD will have the most comprehensive legally-mandated
data and privacy protection provisions of any such database anywhere in the
world. It will also be, we believe, one of the only such systems that will meet
the World Medical Association's recently published ethical and data protection
standards. In contrast to most medical research databases and epidemiological
research protocols in Iceland and elsewhere, individuals who wish not to have
their medical data included in the IHD have a legal right, under the 1998 law
authorizing its creation, at any time to request that information about them not
be entered into the IHD. Since 1998, some 20,000 people in Iceland have
requested that the Icelandic Director of Public Health exclude their data. We
believe that the IHD therefore provides a vanguard example of how to enable the
use of large data collections to advance medical research while safeguarding the
autonomy of individuals and providing the best available protection of
potentially sensitive information.

     As of March 2003, we are awaiting the conclusion of a government-mandated
review of the IHD's data encryption and protection protocols. We are unable at
present to predict the timing or outcome of this review, but believe that any
delay will not affect our ability to pursue our principal business objectives.

COLLABORATIONS

     Our business strategy is focused on turning our discoveries and assets into
to a broad range of products for the market, at the same time as we leverage our
capabilities to generate near-term service revenue. In some instances we are
pursuing product development on our own. In others, we have formed alliances
with pharmaceutical and biotechnology firms through which we can cover some of
the cost of conducting basic research and spread the risk and investment
involved in product development. Depending on the nature of each prospective
business opportunity, these alliances may include one or more of the following:
up-front equity investments; direct payments for research; payments upon the
achievement of scientific milestones; shared or exclusive rights to diagnostics
and therapeutics; and royalties on products that our collaborators may bring to
market. In some instances, we may negotiate for access to our collaborators
technologies, for example libraries of chemical compounds, to enhance our
operations.

     Our principal partners include:

     F. Hoffmann-La Roche.  In January 2002, we extended our alliance with Roche
through a three-year agreement focused on turning the achievements of our 1998
gene discovery collaboration into novel therapeutics ready for clinical trials.
Under our 1998 agreement, we identified key genetic factors involved in 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 two
most advanced programs are those in schizophrenia and stroke. Under this
alliance we will receive milestone payments for the development of compounds as
well as royalties on the sales of drugs that are developed. We retain
therapeutic development rights to those targets identified under the 1998
alliance and not carried over into the new alliance.

     Merck.  In September 2002, we entered into an alliance Merck & Co., Inc.
(Merck) aimed at developing new treatments for obesity. Under the alliance, we
are combining our research efforts in the genetics of obesity to identify,
validate and prioritize a series of drug targets to take into development. The
goal of the alliance is to accelerate the discovery of new drugs to fight
obesity, a condition that now represents one
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of the fastest-growing public health challenges in the industrialized world.
Under the terms of the three-year agreement, we will receive research funding,
technology access, license fees, milestone payments as compounds developed under
the alliance advance in the development process, and royalties on successfully
marketed alliance drugs.

     Roche Diagnostics.  In June 2001, we signed with Roche's diagnostics
division 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 achievements into products for the market. The alliance
brings together what we believe are important deCODE and Roche assets: our
comprehensive population genomics resources and bioinformatics expertise, and
Roche's prominence in the development and marketing of molecular diagnostics. 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.

     IBM.  In January 2003, we announced a three-year strategic alliance with
IBM under which we will jointly market and sell our Clinical Genome Miner (CGM)
Discovery(TM) system running on IBM hardware and software. CGM Discovery(TM) is
the same statistically-based application for isolating and analyzing genes and
gene variations associated with particular diseases that we have used in our
gene discovery programs. The alliance aims to take advantage of our expertise in
genetics and IBM's leadership in hardware and software systems to create
solutions for what we believe is a growing market for information-based
medicine. By understanding illnesses on the molecular level, including gene
variations linked to disease or drug response, doctors may be able to make more
precise diagnoses and tailor treatment decisions to better meet the needs of
individual patients. Also, drug makers may be able to develop more targeted
treatment therapies and identify potential clinical trial participants more
effectively. Our joint solution is expected to be available globally to
pharmaceutical biotechnology firms, government-sponsored research organizations,
research hospitals and medical care facilities beginning in mid-2003.

     Wyeth.  In November 2002, we entered into a pharmagenomics alliance with
Wyeth. Under the agreement, we are using our in vitro pharmacogenomics approach
to generate gene expression data for a drug candidate targeted to treatment of
certain respiratory diseases.

     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 are employing 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.

     Vertex Pharmaceuticals.  In January 2003 we announced an agreement with
Vertex Pharmaceuticals under which we will gather and analyze pharmacogenomic
data as part of clinical trials our subsidiary Encode conducts on Vertex
developmental compounds. The first project under the agreement is a Phase IIa
clinical trial for Vertex's VX-148 treatment for psoriasis. Our pharmacogenomics
capabilities will enable Vertex to gain an understanding, in conjunction with
clinical trial results, of genetic factors affecting the responses of
individuals to treatment. This information may be useful in designing subsequent
clinical strategies and pharmacogenomic tests. Based upon the results of work
under this agreement, we and Vertex may extend our collaboration to the
development and commercialization of pharmacogenomic tests.

     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.

     Academic, Hospital and Physician Collaborations.  We have ongoing
collaborations with a number of academic, healthcare and research organizations
in other countries, including Emory University (Atlanta),

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Partners HealthCare System (Boston), the University of Pennsylvania
(Philadelphia), the University of Aberdeen (Scotland), the National Cancer
Institute (Washington, DC), the Karolinska Institute (Stockholm), and the Center
for Clinical and Basic Research (Denmark). These collaborations enable us to
broaden our knowledge about the genetics discoveries we have made in Iceland in
other patient populations, and provide our partners with access to our tools and
expertise in human genetics. In all such collaborations we negotiate to retain
intellectual property and product development rights on results obtained using
our discoveries and expertise.

     We have entered into collaboration agreements and arrangements with the
Icelandic Heart Association and several groups of physicians in Iceland. 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. Our 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 parties 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. 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 27 Icelandic health institutions
as required by the Icelandic Health Sector Database Act and License in order to
have data transferred from those institutions to the IHD.

PATENTS AND PROPRIETARY RIGHTS

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

     Accordingly, we actively seek patent protection in the United States and
other jurisdictions to protect technology, inventions and improvements to
inventions that are commercially important to the development of our business.
These include, among other things, genes we discover; mutations of genes and
related processes and inventions; technologies which may be used to discover and
characterize genes; and therapeutic and diagnostic processes and other
inventions based on these genes. As of year-end 2002, we had 20 issued U.S.
patents and two issued patents in non-US jurisdictions. We also had 45 pending
patent applications in the US and 63 pending patent applications in non-US
jurisdictions. We claim priority under the Patent Cooperation Treay for those of
our U.S. applications that we consider to be of significant commercial value. We
also intend to seek patent protection or rely upon trade secret rights to
protect other technologies that may be used to develop databases and healthcare
informatics products and services.

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

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<PAGE>

or may obtain regulatory approvals of their drugs more rapidly than we or our
collaborators do. They may develop healthcare informatics and database products
before we do or which are technically superior to ours or prove to be more
useful to our potential customers.

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

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

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

GOVERNMENT REGULATION

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

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

     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.

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     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.

     Our creation and operation of the Icelandic Health Sector Database and the
deCODE Combined Data Processing system will involve oversight by the Icelandic
Ministry of Health, 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.

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 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.

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

EMPLOYEES

     At December 31, 2002, deCODE and all of its subsidiaries employed 530
full-time staff. Of the total number at the end of 2002, approximately 140 were
employed in the US, and 390 in Iceland. More than 100 held Ph.D or M.D. degrees
and approximately 370 held college degrees. Four hundred and forty-five
employees were engaged in, or directly supported, research and development
activities, of whom 350 worked within the laboratory facilities and 95 held
positions associated with the development and support of informatics. Forty-four
employees were engaged in various professional support functions such as
Finance, Business Development, Legal, Communications, Human Resources and
Clinical Collaborations, and some 41 are employed in administrative support,
facilities management, cleaning and security. In addition, we utilized part-time
employees and outside contractors and consultants as needed and plan to continue
to do so.

CERTAIN FINANCIAL INFORMATION

RESEARCH AND DEVELOPMENT EXPENSES

     Our research and development expenses were $86.6 million in the year ended
December 31, 2002, $71.0 million in 2001 and $45.7 million in 2000. Of these
amounts, we estimate that $30 million, $26 million and $23 million were spent on
customer-sponsored research and development activities in 2002, 2001 and 2000,
respectively. These estimates of customer-sponsored research and development are
approximated based upon the number of personnel performing research work, and
these estimates are not necessarily fully-burdened costs of revenue for the
respective years in accordance with generally accepted accounting principles.

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SIGNIFICANT CUSTOMERS

     Historically, a substantial portion of deCODE's revenue has been derived
from contracts with a limited number of significant customers. deCODE's largest
customer, Roche, accounted for approximately 96% of the company's consolidated
revenue in 2001 and Roche accounted for 41% of consolidated revenue in 2002.
Revenues under the joint development and commercialization agreement with ABG,
which was terminated in the fourth quarter of 2002, accounted for 15% of
consolidated revenue in the year ended December 31, 2002. The loss of any
significant customer may significantly lower deCODE's revenues and affect
deCODE's progression to profitability.

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

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

RISKS RELATED TO OUR BUSINESS

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

     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, treat or cure a particular disease.
Accordingly, even if deCODE is successful in identifying specific genes, its
discoveries may not lead to the development of commercial therapeutic or
diagnostic products.

     Any pharmaceutical or diagnostic products that 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;

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

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

     - can market them successfully.

     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.

     deCODE's Clinical Genome Miner 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 or the Clinical Genome Miner Discovery(TM) will lead to
additional collaborations with potential clients.

     The success of deCODE's informatics services and tools depends on its
ability to:

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

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<PAGE>

     - effectively use the information derived from the Clinical Genome
       Miner(TM) and other bioinformatics services and tools 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's determining and other informatic services will accept.

     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.

     These products may not meet the needs of potential customers. deCODE has
generated little revenues from sales or licenses of informatics products. deCODE
cannot assure you that it can successfully develop or commercialize, or that
there will be a market for, its informatics products.

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

     In March 2002, deCODE acquired MediChem Life Sciences Inc., or MediChem,
with the expectation that 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 would facilitate drug discovery
and development. The acquisition was also expected to provide deCODE with
revenue from MediChem's contract service businesses and to facilitate the
formation of drug discovery and development alliances with pharmaceutical
companies. Realization of these expectations and development and
commercialization of potential drug candidates will depend not only on deCODE's
successful integration of MediChem's business and 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, all
of which are beyond deCODE's control.

     deCODE may continue to incur consolidation and integration expenses which
it cannot accurately estimate fully at this time. Actual integration 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, deCODE's financial
results could be adversely affected, including increased losses.

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 $131.9 million for the year ended December
31, 2002, including $64.8 million of employee termination, impairment and other
costs, and has an accumulated deficit of $295.1 million at December 31, 2002.
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, Merck and other collaborations, and from contract services and
interest revenues. deCODE must continue to make substantial expenditures over
the next several years to develop its technologies and its internal research
programs and to prepare the Clinical Genome Miner(TM), the CGM Discovery(TM),
the Iceland Health Sector Database and other informatics. The integration of
MediChem has and will continue to impact deCODE's results of operations and
financial position. With MediChem, deCODE's revenues have increased but
operating expenses and, at least for the near term, likely net losses will also
increase. In addition, deCODE expects to continue to fund the working capital
needs and operating activities of MediChem in the near term. The extent to which
MediChem will ultimately impact deCODE's results of operations and financial
condition is largely dependent upon the extent to which MediChem's capacity is
brought to bear on deCODE's in-house programs and how much of their existing
contract services business is maintained and developed. As a result, deCODE
expects to incur net 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 losses is greater than deCODE currently anticipates,
deCODE may not be able to continue its operations.

                                        17
<PAGE>

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.

BECAUSE REVENUES ARE CONCENTRATED, THE LOSS OF A SIGNIFICANT CUSTOMER WOULD HARM
DECODE'S BUSINESS.

     Historically, a substantial portion of deCODE's revenue has been derived
from contracts with a limited number of significant customers. deCODE's largest
customer, Roche, accounted for approximately 96% of its consolidated revenue in
2001 and 41% of consolidated revenue in the year ended December 31, 2002.
Revenues under the joint development and commercialization agreement with ABG,
which was terminated in the fourth quarter of 2002, accounted for 15% of
consolidated revenue in the year ended December 31, 2002. The loss of any
significant customer may significantly lower deCODE's revenues and affect
deCODE's progression to profitability.

IF DECODE IS NOT ABLE TO OBTAIN SUFFICIENT ADDITIONAL FUNDING TO MEET ITS
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 continue to spend substantial amounts for
these activities over the next several years. deCODE expects to use cash to
collect, generate and analyze genotypic and disease data from volunteers in its
disease-gene research programs; to conduct drug discovery and development
activities; to continue to develop the Clinical Genome Miner and Clinical Genome
Miner Discovery; to develop healthcare informatics products; and to continue
other research and development 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, Merck 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.

     The Icelandic parliament has enacted legislation authorizing the Minister
of Finance to provide an Icelandic government guarantee of a convertible bond
offering of up to $200 million by deCODE for the purpose of financing new
activities of deCODE in the area of drug development. To become effective, this
legislation must be approved by the EFTA (i.e. the European Free Trade
Association) Surveillance Authority (ESA) for compatibility with the state aid
stipulations of the agreement on the European Economic Area (EEA), to which
Iceland is a signatory. As of the end of March 2003, the measure was still under
review by ESA. deCODE cannot be certain that ESA will approve the legislation,
that the Icelandic government will

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<PAGE>

make use of the authorization and offer the guarantee to deCODE for any or all
of the permitted amount, that such offer to deCODE by the Icelandic Government,
if effectuated, will be on terms acceptable to deCODE, or that even with such an
authorization deCODE will be able to find a market for such an offering of
convertible bonds.

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

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

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 European populations. However, the
populations of other nations may be genetically predisposed to certain diseases
because of mutations not present in the Icelandic population. As a result,
deCODE and its partners may be unable to develop diagnostic and therapeutic
products that are effective on all or a portion of people with such diseases.
Any difference between the Icelandic population and other populations may have
an effect on the usefulness of the Clinical Genome Miner and Icelandic Health
Sector Database 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.

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

     Under laws and regulations in force in Iceland, including applicable
European laws, directives and regulations, all information on individuals that
is used in deCODE's population research is anonymized under the protocols and
supervision of the Data Protection Authority of Iceland. To extent that any of
this data held or generated by the company were to become personally
identifiable deCODE would risk losing public support for participation in its
research, and could be liable to legal action. Any failure to comply fully with
all confidentiality requirements could lead to liability for damages incurred by
individuals whose privacy is violated, the loss of its customers and reputation
and the loss of the goodwill and cooperation of the Icelandic population,
including healthcare professionals. These eventualities could materially
adversely affect deCODE's work in Iceland.

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

DECODE'S CREATION AND OPERATION OF THE ICELANDIC HEALTH SECTOR DATABASE MAY BE
MORE EXPENSIVE AND TIME CONSUMING THAN DECODE ANTICIPATES, AND MAY LEAD TO
LITIGATION

     deCODE's development of the Icelandic Health Sector Database (IHD) involves
substantial government regulation and oversight, compliance with which can be
expensive and time-consuming and may delay, prevent or increase the cost of
development of the IHD. 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.

     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. In addition to the costs of developing the system,
under the terms of the license we pay the Icelandic government a fixed fee for
operating the IHD of 70 million Icelandic Krona per year (approximately $913 USD
as of March 2003), and will pay an additional 6% of any profits per annum from
its commercialization.

                                        19
<PAGE>

     Even if deCODE is able to successfully create and market the Icelandic
Health Sector Database, 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.

     The Icelandic parliament's passage of the Database Act and the Health
Ministry's granting of the Database License have encountered some opposition in
Iceland and internationally. Opponents of the IHD may initiate 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, certain Icelandic
opponents of the IHD 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 an unfavorable outcome could prevent deCODE from developing and
operating the Icelandic Health Sector Database.

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 wholly-owned 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,

deCODE could then be held be held liable for these eventualities by the drug
companies with whom it contracts or by study participants. deCODE maintains
insurance to cover ordinary risks, but such insurance may be inadequate and it
would not cover the risk of a customer deciding not to do business with 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 it or its collaborators will be able to obtain such
insurance or, if obtained, that sufficient

                                        20
<PAGE>

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.

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, Executive Vice President and Senior Business Officer,
and Dr. Jeffrey Gulcher, Vice President, Research and Development. deCODE
genetics, Inc. has not entered into agreements with any of the named persons
that bind them to a specific period of employment. 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.

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.

     Many of deCODE's contracts are terminable on short notice. Specifically,
MediChem's contracts are generally terminable upon 10 to 90 days' notice. This
means that deCODE's contracts could be terminated 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.

RISKS RELATED TO OUR COLLABORATORS

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.

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

     deCODE must form research collaborations and licensing arrangements with
several partners at the same time in order to execute its business strategy.
deCODE currently has only six substantial collaborative relationships, including
two with Roche. To succeed, deCODE will have to maintain or expand these
relationships and establish additional collaborations. There can be no assurance
that we will be able to maintain or expand our existing collaborations, enter
into future collaborations to develop applications based on existing or future
research agreements, sign additional subscribers to our database services, or
successfully expand our medicinal chemistry or pharamacogenetics businesses. 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 in the near term. It may be several years before product
revenues materialize, if they do at all.

     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

                                        21
<PAGE>

difficult to manage the various collaborations successfully and the potential
for conflicts among the collaborators as to rights and products generated under
work conducted with deCODE 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 DECODE 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.

RISKS RELATED TO OUR INDUSTRY

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/or deCODE may develop.

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 drug discovery and
development as well as database services and healthcare informatics, 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 and
Merck, may also compete with deCODE. Many of deCODE's competitors, either alone
or with collaborators, 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,

                                        22
<PAGE>

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

     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.

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

CHANGES IN OUTSOURCING TRENDS AND ECONOMIC CONDITIONS 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 to organizations like deCODE to conduct genetic research,
clinical research, sales and marketing projects and chemistry research and
development projects. If these industries reduce their present tendency to
outsource those projects, deCODE's operations, financial condition and growth
rate could be materially and adversely affected. These alliances and
arrangements are both time consuming and complex and we face substantial
competition in establishing these relationships. In addition, our ability to
generate new business could be impaired by general economic downturns in our
customers' industries.

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 it 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.

     Our success will depend, in part, on the development and marketing of
products based upon our research and development. Strict regulatory controls on
the clinical testing, manufacture, labeling, supply and

                                        23
<PAGE>

marketing of the products will influence our and our partners' ability to
successfully manufacture and market therapeutic or diagnostic products. Most
countries require a company to obtain and maintain regulatory approval for a
product from the relevant regulatory authority to enable the product to be
marketed. Obtaining regulatory approval and complying with appropriate statutes
and regulations is time-consuming and requires the expenditure of substantial
resources.

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

EFFORTS TO REDUCE HEALTHCARE COSTS MAY REDUCE MARKET ACCEPTANCE OF 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.

RISKS RELATED TO OUR INTELLECTUAL PROPERTY

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

     deCODE's success will depend in part 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 genetics, Inc. 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. If deCODE is unable to obtain patent protection for its technology or
discoveries, the value of its proprietary resources will be adversely affected.

     In addition, patent law relating to the scope of claims in the area of
genetics and gene discovery is still evolving. There is substantial uncertainty
regarding the patentability of genes or gene fragments without known functions.
The laws of some European countries provide that genes and gene fragments may
not be patented. The Commission of the EU has passed a directive that prevents
the patenting of genes in their natural state. The U.S. Patent and Trademark
Office initially rejected a patent application by the National Institutes of
Health on partial genes. Accordingly, the degree of future protection for
deCODE's proprietary

                                        24
<PAGE>

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 holding or 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.

     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.

ITEM 2.  PROPERTIES

     In January 2002, we moved our 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 including Encode's operation and
maintain a facility for approximately 7 genealogist located in Thverholt 14,
Reykjavik.

     Our principal executive offices and discovery laboratories in the United
States are located in Woodridge, Illinois, and encompass approximately 100,000
square feet with the capability to expand our offices and laboratories to
200,000 square feet. Additionally, we occupy approximately 50,000 square feet of
additional leased office and laboratory space in Lemont, Illinois, which lease
expires in October 2003, 15,000 square feet of additional laboratory space in
Des Plaines, Illinois, which lease ran through October 2002 at which point we
vacated the facility, and a 8,500 square foot leased facility located near
Seattle, Washington.

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

                                        25
<PAGE>

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 alleged that our genealogy database infringes their copyrights
and sought damages in the amount of approximately 616 million Icelandic kronas
and a declaratory judgment to prevent us from using the allegedly infringing
data. Subsequently, we acquired the copyrights at issue in the matter for 10
million Icelandic kronas (approximately $120). On December 20, 2002, the case
was dismissed without prejudice.

     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. The ultimate resolution of this matter cannot
yet be determined.

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

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

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

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

                                        26
<PAGE>

     We believe that the allegations against us and our officers are without
merit and we intend to contest them vigorously. Because the litigation is,
however, still in the preliminary stage, 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>
                                                               HIGH      LOW
                                                              ------    ------
<S>                                                           <C>       <C>
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
2002
----
First Quarter...............................................  $10.10    $ 5.52
Second Quarter..............................................  $ 6.30    $ 3.50
Third Quarter...............................................  $ 4.99    $ 1.55
Fourth Quarter..............................................  $ 2.79    $ 1.60
</Table>

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

     As of April 14, 2003, there were 5,706 holders of record of the Common
Stock.

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

                                        27
<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, 2002, 2001 and 2000 and the consolidated balance sheet data at December 31,
2002 and 2001 are derived from consolidated financial statements included
elsewhere in this Annual Report that have been audited by
PricewaterhouseCoopers, independent accountants. The consolidated statement of
operations data for the fiscal years ended December 31, 1999 and 1998 and the
consolidated balance sheet data at December 31, 2000, 1999 and 1998, are derived
from statements that have been audited by PricewaterhouseCoopers and are not
included in this Annual Report. Historical results are not necessarily
indicative of future results.

<Table>
<Caption>
                                                                     FOR THE YEAR-ENDED DECEMBER 31,
                                                    ------------------------------------------------------------------
                                                       2002          2001          2000          1999          1998
                                                    -----------   -----------   -----------   -----------   ----------
                                                            (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S>                                                 <C>           <C>           <C>           <C>           <C>
Revenue...........................................  $    41,065   $    26,099   $    21,545   $    16,591   $   12,705
Operating expenses
  Research and development, including cost of
    revenue ......................................       86,641        70,954        45,742        33,213       19,282
  Selling, general and administrative.............       21,656        12,402        15,373         8,221        4,893
  Impairment, employee termination and
    other charges(5)..............................       64,790             0             0             0            0
                                                    -----------   -----------   -----------   -----------   ----------
Total operating expenses..........................      173,087        83,356        61,115        41,434       24,175
                                                    -----------   -----------   -----------   -----------   ----------
Operating loss....................................     (132,022)      (57,257)      (39,570)      (24,843)     (11,470)
Interest income...................................        2,954         6,925         7,378         2,188          922
Interest expense..................................       (3,079)         (440)         (495)         (549)        (360)
Other non-operating income and (expense), net ....          (72)       (1,675)        1,568          (584)           0
                                                    -----------   -----------   -----------   -----------   ----------
Net loss before cumulative effect of change in
  accounting principle............................     (132,219)      (52,447)      (31,119)      (23,788)     (10,908)
Cumulative effect of change in milestone revenue
  recognition method..............................          333             0             0             0            0
                                                    -----------   -----------   -----------   -----------   ----------
Net loss..........................................     (131,886)      (52,447)      (31,119)      (23,788)     (10,908)
                                                    -----------   -----------   -----------   -----------   ----------
Accrued dividends and amortized discount on
  preferred stock(2)..............................            0             0        (7,541)       (7,543)      (2,572)
Premium on repurchase of preferred stock .........            0             0             0       (30,887)           0
                                                    -----------   -----------   -----------   -----------   ----------
Net loss available to common stockholders(2)......  $  (131,886)  $   (52,447)  $   (38,660)  $   (62,218)  $  (13,480)
                                                    ===========   ===========   ===========   ===========   ==========
Basic and diluted net loss per share:
  Net loss before cumulative effect of change in
    accounting principle..........................  $     (2.69)  $     (1.26)  $     (1.81)  $    (12.34)  $    (3.39)
  Cumulative effect of change in milestone revenue
    recognition method............................         0.01          0.00          0.00          0.00         0.00
                                                    -----------   -----------   -----------   -----------   ----------
  Net loss........................................  $     (2.68)  $     (1.26)  $     (1.81)  $    (12.34)  $    (3.39)
                                                    ===========   ===========   ===========   ===========   ==========
Shares used in computing basic and diluted net
  loss per share(1)(2)............................   49,098,254    41,634,009    21,381,256     5,042,844    3,974,825
Pro forma amounts assuming new milestone revenue
  recognition method is applied retroactively:
  Revenue.........................................                $    23,182   $    22,670
  Net Loss........................................                    (55,364)      (29,994)
  Basic and diluted net loss per share............                      (1.33)        (1.40)
Other non-GAAP Financial Data:
  Pro forma basic and diluted net loss per
    share(3)......................................                              $     (0.91)  $     (0.91)
  Shares used in computing pro forma basic and
    diluted net loss per share(3).................                               34,228,300    26,156,154
</Table>

                                        28
<PAGE>

<Table>
<Caption>
                                                                               AS OF DECEMBER 31,
                                                              ----------------------------------------------------
                                                                2002       2001       2000       1999       1998
                                                              --------   --------   --------   --------   --------
                                                                                 (IN THOUSANDS)
<S>                                                           <C>        <C>        <C>        <C>        <C>
Cash and cash equivalents...................................  $ 87,244   $153,061   $194,145   $ 29,846   $ 25,076
Total assets(4)(5)..........................................   213,417    249,900    248,901     80,527     38,540
Total long-term liabilities.................................    56,533     44,428      3,519      5,471      6,946
Redeemable, convertible preferred stock(2)..................         0          0          0    121,589     43,158
Total stockholders' equity (deficit)(2)(4)(5)...............   125,246    170,733    216,269    (72,772)   (18,222)
</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.

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

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

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS UNLESS
         OTHERWISE NOTED)

     This Management's Discussion and Analysis of Financial Condition and
Results of Operations as of December 31, 2002 and for the years ended December
31, 2002 and 2001 should be read in conjunction with the audited consolidated
financial statements and notes thereto set forth elsewhere in this report.

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

     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.

OVERVIEW

     We are a population genetics company developing drugs and DNA-based
diagnostics based upon our discoveries in the inherited causes of common
diseases. Our population approach and resources have enabled

                                        29
<PAGE>

us to isolate genes and targets directly involved in the development of many of
the most common diseases. We are focused on turning these findings into a
growing pipeline of products and services which we believe will be able to
combat the causes of disease, not just the signs and symptoms. Our approach to
the discovery of healthcare knowledge brings together three key types of
non-personally identifiable data derived from our population research in
Iceland. Genotypic and disease data from more than 90,000 volunteer participants
in some 50 disease gene research programs, and genealogical data linking
together the entire present-day population of Iceland and going back to the
settlement of the country in the ninth century.

     Our business strategy is to leverage our capabilities and assets to create
product-driven value streams from the near through to the longer term. Our
business is divided into two components: products and services. Our primary
product focus is on the discovery and commercialization of novel therapeutics
designed against targets identified in our population-based gene discovery work.
Through the acquisition in March 2002 of MediChem Life Sciences and its
subsidiary Emerald Biostructures, now our pharmaceuticals and biostructures
groups, we have integrated capabilities for applying genetic findings to the
development of drugs both through our own programs and in alliance with our
corporate partners. Our product development activities also encompass the
creation of new DNA-based diagnostics and pharmacogenomics tests, as we apply
the links we have identified between genetic variation and disease, and genetic
variation and drug response. We believe such tests will become a standard part
of healthcare, making it possible to gauge individual predisposition to a
particular disease and to design effective preventive strategies; to complement
traditional clinical diagnoses; and to identify patients who are likely to
respond or not respond to particular drugs. We are also marketing bioinformatics
software systems developed in the course of our gene and drug target research
for making correlations between genetic variation and disease and drug response.

     Our services include pharmacogenetics and clinical trial services offered
through our wholly-owned subsidiary Encode; contract services in structural
biology, medicinal chemistry and scale up into the clinic conducted by our
pharmaceuticals group based in Chicago; database services, through subscriptions
to our Clinical Genome Miner system, integrating anonymized population data with
data on disease, genotypes and genealogy; and genotyping services through our
laboratory in Reykjavik.

     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, 2002 we had an accumulated deficit of $295.1
million. On the basis of our current range of activities, and following the
implementation in September 2002 of a plan to reduce costs and maximize the use
of automation in our core genetics operations, we anticipate that we will be
able to achieve positive cash flow from operations by the end of 2003. At the
same time, we believe that the initiation of substantial new activities within
this timeframe would require additional expenditures that could delay for some
time our achievement of positive cash flow from operations. For example, in our
target discovery work on our findings in myocardial infarction and hypertension,
we believe we may be able to bypass much of the drug discovery process and enter
directly into phase II clinical trails as early as mid-2003. We anticipate
incurring additional net losses at least through the next two years, due to,
among other factors, depreciation and amortization, as well as stock-based
compensation and other non-cash charges. We expect that our revenues and losses
will fluctuate from quarter to quarter and that such fluctuations may be
substantial, especially because progress in our scientific work and milestone
payments that are related to progress can fluctuate between quarters. We do not
believe that comparisons of our quarter-to-quarter performance are a good
indication of future performance.

     We believe that current conditions in the global financial markets and in
the pharmaceutical industry pose significant near-term challenges to
biotechnology companies such as ourselves, as well as important opportunities.
The principal challenge to us posed by the downturn in the market valuations of
biotechnology companies and of the equity markets more generally is that it
restricts our present ability to raise additional capital on favorable terms. In
a very broad sense, it appears that the equity markets are currently more risk-
averse than they have been in the recent past. The markets are therefore less
willing to ascribe value to companies such as ourselves which, although
developing new technologies that may have the potential for generating
successful products, are still considered early-stage and are not yet
profitable. This is a general trend affecting not only the biotechnology
industry but all industries involved in developing new technologies

                                        30
<PAGE>

and products that are unproven in the marketplace. Moreover, it is not certain
how long this sentiment in the equity markets will last.

     In order to mitigate the risk to our product development programs posed by
the current conditions in the financial markets, we have implemented measures
aimed at preserving our cash resources. We have implemented a plan to reduce
costs to a level that the we anticipate will make it possible to achieve
positive cashflow from operations by the end of 2003. We believe that we have
sufficient cash resources to continue to fund our current research and
operations for several years, and we are also investigating the possibility of
alternative avenues of financing for our product development programs.

     At the same time, the pharmaceutical industry, which is the principal
customer base for our gene-discovery and contract chemistry businesses, is
experiencing difficulties in maintaining historical rates of growth. This
presents near-term challenges and significant longer-term opportunities. One of
the main challenges facing the pharmaceutical industry is developing pipelines
of effective new drugs to treat major indications. As many leading brand-name
drugs come off patent and face generic competition, developing successful new
medicines will become critical for filling the gap. In the short term, the
financial pressures on pharmaceutical companies may be reflected in their
research and development spending, making it more difficult for us to sign
corporate alliances with significant upfront funding, or lengthening the time
required to negotiate such deals. This will likely also lead to pressure on
budgets for the outsourcing of chemistry services, which are an important source
of revenue for us. We believe that in the medium to longer term, however,
companies such as ours may be well positioned to play an important role in
filling the gap in the pipeline of new drugs, either on their own or as partners
of pharmaceutical companies. Our gene discovery programs are aimed at
identifying novel drug targets that are involved in the basic biology of common
diseases and we are focused on discovering new drugs against these targets, both
on our own and with major pharmaceutical partners. Our partnerships with Roche
and Merck demonstrate that the industry is already investing in the development
of new therapeutics based on our approach. Similarly, it is possible that the
pharmaceutical industry, in the interest of reducing internal overhead, may opt
to increase its outsourcing of contract chemistry services.

COLLABORATIONS AND ALLIANCES

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

     We have entered into research, development and commercialization alliances
and collaborations with major pharmaceutical and biotechnology companies across
our business model. These alliances provide us with varied combinations of fixed
funding for research, technology access fees, royalties and milestones. Our
partners include Merck, Wyeth, Roche, Roche Diagnostics and Pharmacia. These
agreements are generally established for a set term, usually three to five
years. (Please refer to Item 1 for a summary of our significant collaborations.)

ACQUISITIONS

     As part of our business strategy, we continue to consider joint development
programs and merger and acquisition opportunities that may provide us with
products in late-stage development, intellectual property or financial
resources, or with capabilities that will help accelerate our downstream drug
discovery efforts.

                                        31
<PAGE>

MEDICHEM

     On March 18, 2002, we acquired MediChem Life Sciences, Inc. in a
stock-for-stock exchange accounted for as a purchase transaction. The
acquisition of MediChem is a central element in our strategy to transform deCODE
from a company focused on gene discovery into a biopharmaceutical company
capable of creating and capturing the greatest possible value from its discovery
capabilities. The acquisition has benefited us in three ways: enabling us to
advance our in-house programs in drug discovery; enabling us to negotiate much
more favorable terms in our alliances with pharmaceutical companies, in which we
take our discoveries much further down the drug development process and receive
a more significant share of revenues from sales of products that are developed;
and providing us with a service business generating revenue in the short term
and maintaining the infrastructure for conducting drug discovery work on several
programs at once. Through the acquisition we added approximately 160 new
employees and facilities in Illinois and Washington.

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

     We have recorded the transaction as a purchase for accounting purposes and
have allocated the purchase price, based upon independent valuations, to the
assets purchased and liabilities assumed based upon their respective estimated
fair values. Identifiable intangible assets include developed technology,
patents, customer and other contracts and agreements that have estimated useful
lives ranging from three to ten years. In the first quarter 2002 we recorded a
charge to earnings for acquired in-process research and development amounting
$480. In addition, amortization charges for other identifiable intangibles
recorded in the MediChem acquisition will amount to approximately $1.2 million
annually. Under SFAS No. 142, resulting goodwill ($62.3 million) will not be
amortized but is subject to annual impairment testing (refer below).

     Our consolidated financial statements include the cash flows and results of
MediChem from March 18, 2002. The integration of MediChem has impacted and will
continue to impact our results of operations and our financial position. With
MediChem, our revenues have increased and will increase but our operating
expenses have increased and will further increase and, at least for the near
term, likely our net losses will increase. In addition, we expect to continue 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 much of
Medichem's existing contract services business is maintained and developed and
the extent that MediChem's capacity is used in proprietary programs we are
working on with partners or alone.

     Our statements of operations include the results of MediChem from March 18,
2002, the date of acquisition. The following unaudited pro forma financial
information presents our consolidated results as if the acquisition of MediChem
occurred at the beginning of 2001. Nonrecurring charges, such as the acquired
in-process research and development charge of $480 is not reflected in the
following pro forma financial information but MediChem's restructuring and
impairment charges totaling $45,535 in 2001 are included. This pro forma
information is not intended to be indicative of future operating results.

<Table>
<Caption>
                                                                  FOR THE YEAR
                                                               ENDED DECEMBER 31,
                                                              ---------------------
                                                                2002        2001
                                                              ---------   ---------
                                                              (IN THOUSANDS, EXCEPT
                                                               PER SHARE AMOUNTS)
<S>                                                           <C>         <C>
Total revenues..............................................  $  45,153   $  46,750
Net loss....................................................   (136,318)   (102,995)
Basic and diluted net loss per share........................      (2.68)      (2.06)
</Table>

TERMINATION OF AGREEMENTS WITH APPLIED BIOSYSTEMS GROUP

     In the fourth quarter of 2002, we terminated and entered into a related
settlement agreement regarding two agreements with Applied Biosystems Group
(ABG) that have been in place since July 2001. Our

                                        32
<PAGE>

accounting policy for the Joint Development and Commercialization Agreement (the
Agreement) with ABG to develop genotypic analysis products provides for revenue
related to ABG's payment obligation and our development costs associated with
the Agreement to be deferred until the development efforts are completed or the
Agreement is terminated, if earlier, as was the case. As a result, deferred
revenue and costs of $6.3 million and $0.8 million at September 30, 2002,
respectively, were recognized in the fourth quarter of 2002 when the parties
reached agreement as to termination.

     At the same time, we reached agreement with ABG as to the termination of
its Reagent Supply Agreement which required us to make certain minimum purchases
on a quarterly basis. Settlement of the Reagent's Supply Agreement had no impact
on our consolidated financial results.

CRITICAL ACCOUNTING POLICIES

     The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.

     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. Milestone revenue is recognized upon the
achievement of milestones. Revenue associated with non-refundable up-front fees
is generally recognized as contract research costs are incurred. "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

                                        33
<PAGE>

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.

     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
commercialization 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 continue to invest in proprietary
research and we will incur the costs of such research. In the near term, this
will require us to continue to make investments in our in-house capabilities for
downstream development which we believe will better position us to capture the
most value to us in our discoveries. As we identify promising discoveries for
further development, we may choose to continue the development ourselves into
and through clinical trials, regulatory clearances and manufacture, distribution
and marketing. In other cases we are or will be working to varying degrees with
partners.

     Moving 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 an amount of revenue guaranteed for
the short-term -- i.e., research funding -- that would go to support these
activities. We will make these decisions with the view of increasing our stake
in the long-term value of our discoveries while at the same time carefully
managing utilization of our cash resources.

     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.

     - Long-lived assets.  We periodically review property and equipment for
       potential impairments and to assess whether their service lives have been
       affected by continued technological change and development. In September
       of 2002, we implemented a cost reduction program aimed at achieving
       positive operating cashflow from existing operations by the end of 2003.
       In this regard, we reduced total worldwide headcount by approximately 200
       employees during 2002, focusing in particular on utilizing ongoing
       process automation and increased productivity in the core genetics
       operations in Reykjavik. Stemming from this initiative and together with
       our consideration of significant and pervasive declines in the market
       environment for pharmaceutical and biotech industries, we determined that
       impairment tests of the carrying value of our goodwill and other
       long-lived assets, including the long-lived assets acquired through the
       MediChem acquisition, should be performed. We have completed these tests
       and recorded impairments and write-downs of long-term assets amounting to
       $60,874 for the year-ended December 31, 2002. Should we determine that
       there has been further impairment of our fixed assets, goodwill or other
       intangible assets we would again suffer an increase to our net loss or a
       reduction of our net income in the period such a determination is made.
       In 2001, we reduced the service lives of our gene sequencing machines
       from five years to four years to better reflect our estimate of the
       service lives of these machines resulting in an increase to depreciation
       expense of $1.4 million in that year. Should we determine that the pace
       of technological change or other matters dictate that we change the
       estimated service lives of other of our assets, there will be an impact
       on depreciation expense from the date of the change.

     - Materials and supplies.  We value our materials and supplies at the lower
       of cost or market, cost being determined on the first-in, first-out
       method. We apply judgment in determining necessary provisions for slow
       moving, excess and obsolete materials and supplies based on historical
       experience and anticipated usage, giving effect to general market
       conditions. Any rapid technological changes or future business
       developments could result in an increase in the amount of obsolete
       materials and supplies on hand. Furthermore, if our estimates of our
       needs for materials and supplies prove to be inaccurate, additional
       provision may be required for incremental excess and obsolete items.

                                        34
<PAGE>

     - Foreign exchange transactions.  Our functional currency is the U.S.
       dollar. However, in light of the significance of our operations outside
       the United States, an important element of our cost base is or will be
       denominated in Icelandic krona, including much of our payroll and other
       operating expenses and some of our long-term borrowings. To manage our
       exposure to fluctuations in exchange rates, we have entered into and will
       likely continue to enter into derivative instruments to hedge our
       exposure to such fluctuations. We have entered into interest rate and
       foreign currency risk arising from long-term debt obligations denominated
       in Icelandic krona. These interest rate and cross-currency swaps are
       designated as economic hedges of fixed rate foreign currency debt, but do
       not qualify for hedge accounting under SFAS 133. At each reporting date,
       the estimated fair value of these instruments is recorded on our balance
       sheet and the resulting unrealized gain or loss is included as an other
       non-operating income or expense in our Statements of Operations. We
       estimate the fair value of these instruments using information that is
       available at the time of such determination; however, the financial
       markets for these instruments are immature and, as a result, there is
       significant judgment inherent in the estimating process. Consequently,
       subsequent changes in the market for such instruments and/or our views
       with respect to such and the estimate of the fair value of these
       instruments could materially affect our results of operations for any
       particular quarterly or annual period.

     - 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 primarily to our history of
       operating losses and the expectation that such losses will continue into
       the foreseeable future, we have concluded that currently 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 unfavorable 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 FROM THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

     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 (now our pharmaceuticals and biostructures groups)
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

                                        35
<PAGE>

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, 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.

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

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

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

                                        36
<PAGE>

     The following is a summary of deferred revenue:

<Table>
<Caption>
                                                     FOR THE YEAR ENDED DECEMBER 31,
                                                     --------------------------------
                                                       2002        2001        2000
                                                     --------    --------    --------
                                                              (IN THOUSANDS)
<S>                                                  <C>         <C>         <C>
Revenue recorded during the year...................  $ 43,437    $ 32,991    $ 23,712
Revenue recognized during the year.................   (41,065)    (26,099)    (21,545)
Deferred revenue recorded on acquisition of
  MediChem.........................................       827           0           0
Cumulative effect of change in milestone revenue
  recognition policy...............................      (333)          0           0
                                                     --------    --------    --------
                                                        2,866       6,892       2,167
Deferred revenue at beginning of year..............    11,297       4,405       2,238
                                                     --------    --------    --------
Deferred revenue at end of year....................  $ 14,163    $ 11,297    $  4,405
                                                     ========    ========    ========
</Table>

     Our revenues increased to $41,065 for the year-ended December 31, 2002 as
compared to $26,099 and $21,545 for the years ended December 31, 2001 and 2000,
respectively. The increase in 2002 is attributable to the addition of research
funding under the collaboration with Merck, and to the addition of deCODE's
recently acquired pharmaceuticals and biostructures groups, offset by the
recognition of revenue from milestone achievements under the 1998 research
collaboration with Roche during 2001 that did not recur in 2002. The $4,554 or
21% increase in total revenues from 2000 to 2001 principally resulted 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. We expect that our revenues will fluctuate from quarter to quarter and
that such fluctuations may be substantial especially because progress in our
scientific work, including milestone payments that are related to progress, can
fluctuate between quarters.

     At December 31, 2002, the total amount of deferred research revenue that
will be recognized in future periods aggregated $14,163. Revenues recorded
increased to $43,437 for the year-ended December 31, 2002 as compared to $32,991
and $23,712 for the years ended December 31, 2001 and 2000, respectively. We
recorded significant revenues in 2001 principally as a result of the then new
diagnostics collaboration with Roche and also milestone achievements under our
1998 research collaboration with Roche. Revenue recorded in 2002 includes access
fees and research funding under the alliance with Merck, as well as access fees
and research funding under the therapeutics and diagnostics collaborations with
Roche and the revenues recorded by our recently acquired pharmaceuticals and
biostructures groups. The $9,279 or 39% increase in recorded revenues from 2000
to 2001 is principally attributable to our then new diagnostics collaboration
with Roche and other collaborations, but also results from greater milestone
achievements under our 1998 research collaboration with Roche.

     Research and Development, including Cost of Revenue.  Our research and
development expenses increased to $86,641 for the year-ended December 31, 2002
as compared to $70,954 and $45,742 for the years ended December 31, 2001 and
2000, respectively. The increase in 2002 as compared to 2001 reflects spending
related to the range of our disease-gene research programs and the initiation of
downstream work on targets already identified as well as the addition of our
newly-acquired pharmaceutical and biostructures groups from March 2002. The
$25,212 or 55% increase in research and development expenses from 2000 to 2001
is primarily attributable to depreciation on the expanded asset base and
increased usage 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.

     Selling, General and Administrative Expenses.  Our selling, general and
administrative expenses were $21,656 for the year-ended December 31, 2002 as
compared to $12,402 and $15,373 for the years ended December 31, 2000 and 1999,
respectively. The increase in 2002 as compared to 2001 results from expanded
sales efforts across our businesses and from the addition of selling, general
and administrative costs of our pharmaceutical and biostructures groups from
March 2002 offset somewhat by a one-time, non-cash litigation settlement in
2001. Without regard to the litigation settlement charge in 2001, $3.2 million
of stock-based contributions in 2000, and stock-based compensation and
remuneration charges both periods, general and

                                        37
<PAGE>

administrative expense increased approximately $2.2 million or 28% from 2000 to
2001 as a result of added salaries, contractor services and other general and
administrative expenses in the expansion of our operations.

     Stock-Based Compensation and Remuneration Expense.  Stock-based
compensation and remuneration expense decreased to $3,048 for the year-ended
December 31, 2002 as compared to $4,651 and $8,687 for the years ended December
31, 2001 and 2000, respectively. With little compensation expense being
attributed to our more recent stock option grants, stock-based compensation and
remuneration expense has been decreasing as grants made to employees in earlier
years become fully vested. Historical stock-based compensation and remuneration
is not necessarily representative of the effects on reported income or loss for
future years due to, among other things, the vesting period of the stock
options, the value of stock options that have been granted in recent times and
the value of additional options that may be granted in future years.

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

<Table>
<Caption>
                                                              (IN THOUSANDS)
<S>                                                           <C>
Employee termination benefits...............................     $ 2,158
Impairment of goodwill......................................      53,400
Impairment of property and intangible asset.................       2,715
Write-down of assets held for sale..........................       2,706
Write-down of equipment.....................................       2,053
Obsolete and excess materials and supplies..................       1,758
                                                                 -------
                                                                 $64,790
                                                                 =======
</Table>

     Charges related to termination benefits are for 132 employees. Of the
$2,158 provided, $1,284 was paid in the fourth-quarter 2002 and $874 remains
accrued and unpaid as of December 31, 2002. These remaining benefits are
expected to be settled in cash over the first-quarter 2003.

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

     In September 2002, we committed to a plan to sell our Woodridge Discovery
Center and an agent was engaged and has initiated an active marketing program to
locate a buyer/investor in a sale and leaseback transaction. Efforts to enter
into a sale and leaseback transaction continue with a view to having a
re-financing being completed by mid-2003. Taking into account the estimated
selling price of the building, we recorded an

                                        38
<PAGE>

impairment charge in the year-ended December 31, 2002 amounting to $2,065. In
addition, certain intangible assets amounting to $650 were determined to be
impaired utilizing a discounted cashflow methodology to estimate fair value.

     In September 2002, we committed to a plan to sell our former headquarters
facility that had been vacated in connection with the move to our new
headquarters facility in Reykjavik's University district earlier in the year. In
October 2002, an agent for the sale was engaged and an active marketing program
to locate a buyer was initiated. In November 2002, terms of sale were agreed and
executed with a buyer in the amount of $2,853. Taking into account the selling
price of the building less costs to sell, we wrote-down the property in
September 2002 amounting to $2,706.

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

     Ongoing process automation and increased productivity in the core genetics
operations in Reykjavik and changes in some of our target research programs have
affected planned volume and timing of usage of materials and supplies. In this
connection, we recorded a writedown for excess and obsolete materials and
supplies during September 2002.

     Interest Income.  Our interest income was $2,954 for the year-ended
December 31, 2002 as compared to $6,925 and $7,378 for the years ended December
31, 2001 and 2000, respectively. In general, the decreased returns are
attributable to the decline of prevailing interest rates but also from an
overall decrease in our cash balance as we utilize the proceeds of our initial
public offering for operations.

     Interest Expense.  Our interest expense was $3,079 for the year-ended
December 31, 2002 as compared to $440 and $495 for the years ended December 31,
2001 and 2000, respectively. The increase in interest expense for 2002 reflects
the cost of financings put into place during the late part of 2001 and early
part of 2002.

     Other non-operating income and expense, net.  Our other non-operating
income and (expense), net decreased to a net expense of $72 for the year-ended
December 31, 2002 as compared to a net expense of $1,675 and a net income of
$1,568 for the years ended December 31, 2001 and 2000, respectively. Our other
non-operating income and (expense), net is principally comprised of our share in
the earnings (losses) of eMR, foreign exchange differences and unrealized swap
gains and losses. The weakening of the U.S. dollar compared to the Icelandic
krona during 2002 has been significant and these currency fluctuations may
continue to adversely affect our financial results.

     Income Taxes.  As of December 31, 2002, we had an accumulated deficit of
$295,087 and did not owe any Icelandic or U.S. federal income taxes nor did we
pay any in the years ended December 31, 2002, 2001 or 2000. Realization of
deferred tax assets is dependent on future earnings, if any. As of December 31,
2002, we had net operating losses able to be carried forward for U.S. federal
income tax purposes of approximately $32,204 to offset future taxable income in
the United States that expire at various dates through 2021. Also, as of
December 31, 2002 our foreign subsidiaries had net operating loss carryforwards
of approximately $107,370 that expire in varying amounts beginning in 2006.

     Net Loss and Basic and Diluted Net Loss Per Share.  Net loss and basic and
diluted net loss per share were $131,886 and $2.68, respectively, for the
year-ended December 31, 2002 as compared to $52,447 and $1.26, respectively, for
the year-ended December 31, 2001 and $31,119 and $1.81, respectively, for the
year-ended December 31, 2000. This is an increase of 151% in net loss and an
increase of 113% in basic and diluted net loss per share from 2001 to 2002 and
an increase of 69% in net loss and a decrease of 30% in basic and diluted net
loss per share from 2000 to 2001. The increases in net loss and basic and
diluted net loss per share in 2002 are primarily attributable to the impairment,
employee termination benefits and other charges recorded offset in part by the
higher average number of shares outstanding for the 2002 periods. The difference
in the average number of shares outstanding is the result of our acquisition of
MediChem in March 2002.

     Pro Forma Net Loss and Basic and Diluted Net Loss Per Share.  Net loss and
basic and diluted net loss per share were $131,886 and $2.68, respectively, for
the year-ended December 31, 2002 as compared to pro

                                        39
<PAGE>

forma net loss and basic and diluted net loss per share calculated assuming our
new milestone revenue recognition method is applied retroactively of $55,364 and
$1.33, respectively, for the year-ended December 31, 2001 and of $29,994 and
$1.40, respectively, for the year-ended December 31, 2000.

LIQUIDITY AND CAPITAL RESOURCES

     We have financed our operations primarily through funding from
collaborative agreements and the issuance of equity securities and debt
instruments. From the beginning of 1999 to-date, we have received cash of
approximately $98.4 million from collaborative research agreements, $183 million
from the issuance of common stock, $79 million from the issuance of preferred
stock and warrants, and $64 million from privately placed bonds, bank loans and
equipment financing. To date we have received approximately $82.5 million in
research and development funding from Roche. As of December 31, 2002 future
funding under terms of our existing agreements is approximately $46.3 million
excluding milestone payments and royalties that we may earn under such
collaborations.

     Cash and Cash Equivalents.  As of December 31, 2002, we had $93,244 in cash
and cash equivalents, which includes $6.0 million in connection with various of
our financings that is restricted as to its use. Available cash is invested in
accordance with our investment policy's primary objectives of liquidity, safety
of principal and diversity of investments. Our cash is deposited only with
financial institutions in Iceland, the United Kingdom and the United States
having a high credit standing. This cash is largely invested in U.S. dollar
denominated money market and checking accounts and also in Icelandic krona
denominated accounts.

     Operating Activities.  Working capital needs resulted in the net use of
$3,228 of funds in the year-ended December 31, 2002 as compared to $10,717 that
was provided by working capital sources in the year-ended December 31, 2001. On
account of this and significant non-cash impairment and other charges in 2002,
although net loss increased $79,439 in 2002 as compared to 2001, net cash used
in operating activities increased $31,691 in 2002 as compared to 2001. Notably,
in 2002 we made significant payments to our vendors and particularly to ABG for
reagents, other supplies and DNA analyzers. In addition, and as more fully
discussed above, we have particularly continued to make significant investments
in our disease-gene research programs and have taken on the costs of downstream
work on targets already identified as well as have expanded our sales efforts
across our businesses. On the basis of our current range of activities, and
following the implementation of a plan to reduce headcount and maximize the use
of automation in our core genetics operations, we anticipate that we will be
able to achieve positive cashflow from operations by the end of 2003. At the
same time, we believe that the initiation of possible substantial new activities
within this timeframe, such as clinical trials of a drug against one of our
proprietary targets, would require additional expenditures that could delay for
some time our achievement of positive cashflow from operations.

     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, 2002 were $15,637 as
compared to $47,681 and $15,470 in the years-ended December 31, 2001 and 2000,
respectively, primarily due to the expansion of our facilities and operations.
Notably, in 2002 we expended $5.7 million in respect of the new building to
house our operations in the University District of Reykjavik and purchased new
DNA analyzers under our supply agreement with ABG in the total amount of $2.8
million. During 2001, we expended $23.7 million in respect of our new
headquarters building and we paid $13.1 million for DNA analyzers acquired late
in 2000. Cash acquired in the purchase of MediChem was $3.3 million and we paid
$3.9 million of transaction costs, resulting in a net cash outlay for 2002 in
connection with the acquisition of $571. 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 $699 was provided in financing
activities in the year-ended December 31, 2002 as compared to $28,077 and
$196,865 provided in financing activities in the years-ended December 31, 2001
and 2000, respectively. $14 million of cash that was restricted as of December
31, 2001 was provided in 2002 in the final financing (Tiers C and D) of our new
headquarters facility. In addition, we repaid the existing mortgage on our
Woodridge, IL discovery center ($11.9 million) and re-financed the

                                        40
<PAGE>

property in June 2002, resulting in proceeds of $5.8 million. Net cash provided
by financing activities in 2001 was principally due to the financing of certain
equipment and of our new headquarters facility and, as a result, installment
payments on capital lease obligations have increased in 2002. We expect to
continue to finance future property and equipment purchases through similar such
leasing arrangements. 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.

     In December 2001, we established a $27.5 million bridge loan with an
Icelandic financial institution to finance the construction of our new
headquarters facility. We repaid the borrowings under the bridge loan in January
and March 2002 with the proceeds from our Tier A $13.5 million bond offering,
Tier C $7.3 million offering of privately placed bonds and Tier D $6.7 million
bank loan. In December 2001, we also entered into a $4,000 bank loan (Tier B)
for the construction of our new headquarters facility. The Tier B bank loan is
denominated in U.S. dollars and the principal amount is payable quarterly
beginning March 2002. The Tier B bank loan 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 are denominated in Icelandic krona and are linked to the
Icelandic Consumer Price Index. The principal amount is payable annually and
began in December 2002. The Tier A bonds bear annual interest of 8.5% that is
payable annually and also began in December 2002. The Tier C bonds are
denominated in Icelandic krona and are linked to the Icelandic Consumer Price
Index. The principal amount is payable in March 2007. The Tier C bonds bear
annual interest of 12.0% that is payable beginning March 2003. The Tier D bank
loan is denominated in U.S. dollars. The principal amount is payable in March
2007. The Tier D bank loan bears annual interest of three-month LIBOR plus 6.0%
that is payable quarterly and began in 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.

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

     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 into 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.

     In April 2002, we repaid the existing loan that had been assumed in the
acquisition of MediChem ($11,880). In June 2002, we executed a mortgage for
$11,800 with a financial institution for our Woodridge, IL discovery center. The
debt carries an interest rate of three-month LIBOR + 1.75%, is payable in
monthly installments of $49 for five years with a final payment of $8,800 due in
2007. The mortgage is collateralized by restricted cash reserves totaling $6.0
million.

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

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

     In the ordinary course of business, we are contingently liable for
performance under a standby letter of credit totaling $1,286 at December 31,
2002.

                                        41
<PAGE>

     Contractual Commitments.  Our major outstanding contractual commitments
relate to the privately placed bonds and bank loans, equipment lease financings
and our license for the Icelandic health sector database. Our contractual
commitments as of December 31, 2002 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..........................  $49,204    $ 4,243     $10,133     $31,715      $3,113
Capital lease obligations, including
  interest..............................    9,875      4,655       4,982         200          38
Operating leases........................    3,542      1,478       1,808         256           0
Icelandic health sector database
  license...............................    8,670        867       1,734       1,734       4,335
                                          -------    -------     -------     -------      ------
                                          $71,291    $11,243     $18,657     $33,905      $7,486
                                          =======    =======     =======     =======      ======
</Table>

     General.  Following the implementation in September 2002 of a plan to
reduce headcount and maximize the use of automation in our core genetics
operations and based upon current plans, 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; to obtain and maintain contract service
agreements in our chemistry services and clinical research trials groups;
expenditures in connection with alliances, license agreements and acquisitions
of and investments in complementary technologies and businesses; competing
technological and market developments; the cost of filing, prosecuting,
defending and enforcing patent claims and other intellectual property rights;
the purchase of additional capital equipment, including capital equipment
necessary to ensure that our sequencing and genotyping operations remain
competitive; and capital expenditures required to expand our facilities. Changes
in our research and development plans, the entry into clinical trials of a drug
based on our discoveries, or other changes affecting our operating expenses may
result in changes in the timing and amount of expenditures of our capital
resources.

     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 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 April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 rescinds FASB Statement No. 4 (FAS 4), "Reporting
Gains and Losses from Extinguishment of Debt", the amendment to FAS 4, FASB
Statement No. 64 (FAS 64), "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements", and FASB Statement No. 44, "Accounting for Intangible Assets of
Motor Carriers". In addition, SFAS No. 145 amends paragraph 14(a) of FASB
Statement No. 13, Accounting for Leases, to eliminate an inconsistency between
the accounting for sale-leaseback transactions and certain lease modifications
that have economic effects that are similar to sale-leaseback transactions and
makes several other technical corrections to existing pronouncements. We are
required to adopt FAS 145 for fiscal year 2003 and do not believe its adoption
will have a significant impact on our financial position or results of
operations.

                                        42
<PAGE>

     In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). This statement
addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies EITF Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)" ("EITF 94-3"). SFAS 146
requires that a liability for a cost associated with an exit cost liability to
be recognized at the date of an entity's commitment to an exit plan. SFAS 146
also requires that liabilities recorded in connection with exit plans be
initially measured at fair value. We are required to adopt SFAS No. 146 for exit
or disposal activities that are initiated from fiscal year 2003 and do not
believe its adoption will have a significant impact on our financial position or
results of operations.

     In December 2002, the FASB SFAS No. 148 "Accounting for Stock-Based
Compensation -- Transition and Disclosure" (FAS 148) amending FASB SFAS No. 123
"Accounting for Stock-Based Compensation". FAS 148 provides two additional
alternative transition methods for recognizing an entity's voluntary decision to
change its method of accounting for stock-based employee compensation to the
fair-value method. In addition, FAS 148 amends the disclosure requirements of
FAS 123 so that entities will have to (1) make more-prominent disclosures
regarding the pro forma effects of using the fair-value method of accounting for
stock-based compensation, (2) present those disclosures in a more accessible
format in the footnotes to the annual financial statements, and (3) include
those disclosures in interim financial statements. FAS 148's transition guidance
and provisions for annual disclosures are effective for our fiscal year-ended
December 31, 2002. The provisions for interim-period disclosures are effective
for financial reports that contain financial statements for interim periods
beginning after January 1, 2003.

     In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). FIN 45 elaborates on the
disclosures we must make about obligations under certain guarantees that we may
issue. FIN 45 also requires us to recognize, at the inception of a guarantee, a
liability for the fair value of the obligations undertaken in issuing the
guarantee. The initial recognition and initial measurement provisions are to be
applied only to guarantees issued or modified after December 31, 2002. We have
adopted the disclosure provisions as required by FIN 45 and are still evaluating
the potential impact of FIN 45 on our financial position and results of
operations.

     In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. We do not expect FIN 46 to have
a material effect on our consolidated financial statements.

     In November 2002, the Emerging Issues Task Force reached a consensus on
Issue No. 00-21 ("EITF 00-21"), "Revenue Arrangements with Multiple
Deliverables." EITF 00-21 provides guidance on how to account for arrangements
that involve the delivery or performance of multiple products, services and/or
rights to use assets. The provisions of EITF 00-21 will apply to revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. We
are still evaluating the potential impact of EITF 00-21 on our financial
position and 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

                                        43
<PAGE>

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, 2002, 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 purchased instruments to hedge these general risks through the use
of derivative financial instruments.

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

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

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

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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 2003 Annual Meeting of Stockholders, which information is incorporated
herein by reference.

                                        44
<PAGE>

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
2003 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 2003 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 2003 Annual Meeting of Stockholders, which information
is incorporated herein by reference.

ITEM 14.  CONTROLS AND PROCEDURES

     (a) Evaluation of Disclosure Controls and Procedures.  Within the 90 days
prior to the date of this Annual Report on Form 10-K, our Chief Executive
Officer and our Chief Financial Officer evaluated the effectiveness of deCODE's
disclosure controls and procedures as defined in Rule 13a-14(c) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based upon
that evaluation, the Chief Executive Officer and the Chief Financial Officer
have concluded that, except as described below, deCODE's current disclosure
controls and procedures are adequate and effective to ensure that information
required to be disclosed in the reports deCODE files under the Exchange Act is
recorded, processed, summarized and reported on a timely basis.

     The Company's receipt of a letter from Applied Biosystems Group (ABG) to
the Company containing notice of ABG's termination of the Joint Development and
Collaboration Agreement between it and the Company was not communicated to
deCODE's management in a timely fashion. We have determined that this resulted
from the fact that management inadvertently modified the notice provision of the
Agreement in a manner that resulted in the delivery of the notice of termination
to a non-executive officer, who failed to recognize its significance. We are
implementing changes to our disclosure controls and procedures as they relate to
(1) notice provisions in, and waivers and amendments of, our contracts and (2)
identification of, and communication by, non-executive personnel of deCODE of
any material information that they may receive.

     During the fiscal 2002 financial reporting process, management identified a
deficiency in our accounting for two cross-currency swaps in estimating and
recording the estimated fair value of swaps according to our stated accounting
policy. This deficiency in internal controls was considered a reportable
condition under standards established by the American Institute of Certified
Public Accountants and was reported to the Company's Audit Committee by its
independent accountants in April 2003. We are implementing changes to our
financial closing procedures, including timely supervisory review of our
accounting for the two cross-currency swaps.

     (b) Changes in Internal Controls.  There have been no significant changes
in the Company's internal controls or in other factors that could significantly
affect internal controls subsequent to the date of their evaluation by the Chief
Executive Officer and the Chief Financial Officer.

                                        45
<PAGE>

                                    PART IV

ITEM 16. 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>
Reports of Independent Accountants..........................    F-2, F-3
Consolidated Statements of Operations.......................         F-4
Consolidated Balance Sheets.................................         F-5
Consolidated Statements of Changes in Stockholders' Equity
  (Deficit).................................................         F-6
Consolidated Statements of Cash Flows.......................         F-8
Notes to Consolidated Financial Statements..................         F-9
</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).
  3.3     Certificate of Amendment to Amended and Restated Certificate
          of Incorporation dated August 30, 2002 (Incorporated by
          reference to Exhibit 3.2 to the Company's Quarterly Report
          on Form 10-Q filed on November 14, 2002).
  4.1     Specimen Common Stock Certificate (Incorporated by reference
          to Exhibit 4.1 to the Company's Registration Statement on
          Form S-1 (Registration No. 333-31984) which became effective
          on July 17, 2000).
  4.2     Form of Warrant to Purchase Series A Preferred Stock
          (Incorporated by reference to Exhibit 4.2 to the Company's
          Registration Statement on Form S-1 (Registration No.
          333-31984) which became effective on July 17, 2000).
  4.3     Form of Warrant to Purchase Series C Preferred Stock
          (Incorporated by reference to Exhibit 4.3 to the Company's
          Registration Statement on Form S-1 (Registration No.
          333-31984) which became effective on July 17, 2000).
  4.4     Warrant Certificate, dated May 6, 2002 issued to
          Islandsbanki-FBA hf. (Incorporated by reference to Exhibit
          4.1 to the Company's Quarterly Report on Form 10-Q filed on
          May 15, 2002).
  4.5     Form of Indexed Bond (Tier A) (Incorporated by reference to
          Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q
          filed on May 15, 2002).
  4.6     Form of Indexed Bond (Tier C) (Incorporated by reference to
          Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q
          filed on May 15, 2002).
</Table>

                                        46
<PAGE>

<Table>
<Caption>
EXHIBIT
NUMBER                            DESCRIPTION
-------                           -----------
<C>       <S>
 10.1     Form of License from The Icelandic Data Protection
          Commission (now, The Icelandic Data Protection Authority) to
          Islensk erfdagreining ehf. and its Clinical Collaborators to
          Use and Access Patient Records and Other Clinical Data
          Relating to Individuals (Incorporated by reference to
          Exhibit 10.1 to the Company's Registration Statement on Form
          S-1 (Registration No. 333-31984) which became effective on
          July 17, 2000).
 10.2*    1996 Equity Incentive Plan, as amended (Incorporated by
          reference to Exhibit 10.1 to the Company's Registration
          Statement on Form S-8 (Registration No. 333-56996) filed on
          March 14, 2001).
 10.3*    Form of Non-Statutory Stock Option Agreement, as executed by
          employees and officers of deCODE genetics, Inc. who received
          non-statutory stock options
 10.4*    Form of Employee Proprietary Information and Inventions
          Agreement (Incorporated by reference to Exhibit 10.4 to the
          Company's Registration Statement on Form S-1 (Registration
          No. 333-31984) which became effective on July 17, 2000).
 10.5     Agreement on the Collaboration of Fridrik Skulason (FS) and
          Islensk erfdagreining ehf. (IE) on the Creation of a
          Database of Icelandic Genealogy, dated April 15, 1997
          (Incorporated by reference to Exhibit 10.5 to the Company's
          Registration Statement on Form S-1 (Registration No.
          333-31984) which became effective on July 17, 2000).
 10.6*    Consultancy Contract between deCODE genetics, Inc. and Vane
          Associates, dated August 30, 2002.
 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     Amended and Restated Investor rights Agreement of deCODE
          genetics, Inc., dated as of February 2, 1998, as further
          amended and restated (Incorporated by reference to Exhibit
          10.12 to the Company's Registration Statement on Form S-1
          (Registration No. 333-31984) which became effective on July
          17, 2000).
 10.10    Co-operation Agreement between Reykjavik Hospital and
          Islensk erfdagreining ehf., dated November 4, 1998
          (Incorporated by reference to Exhibit 10.22 to the Company's
          Registration Statement on Form S-1 (Registration No.
          333-31984) which became effective on July 17, 2000).
 10.11    Co-operation Agreement between the Iceland State Hospital
          and Islensk erfdagreining ehf., dated December 15, 1998
          (Incorporated by reference to Exhibit 10.24 to the Company's
          Registration Statement on Form S-1 (Registration No.
          333-31984) which became effective on July 17, 2000).
 10.12*   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).
 10.13    Agreement between The Minister for Health and Social
          Security and Islensk erfdagreining 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>

                                        47
<PAGE>

<Table>
<Caption>
EXHIBIT
NUMBER                            DESCRIPTION
-------                           -----------
<C>       <S>
 10.14    Operating License issued to Islensk erfdagreining 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).
 10.15*   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).
 10.16    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).
 10.17*   Employment Agreement between Islensk erfdagreining ehf. and
          Hakon Gudbjartson, dated May 5, 1999 (Incorporated by
          reference to Exhibit 10.52 to the Company's Annual Report on
          Form 10K filed March 23, 2001).
 10.18    Form of Contract on the Processing of Clinical Data and
          their Transfer to a Health Sector Database between several
          Health Institutions and Islensk erfdagreining ehf.
          (Incorporated by reference to Exhibit 10.58 to the Company's
          Annual Report on Form 10-K filed March 23, 2001).
 10.19*   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).
 10.20*   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).
 10.21*   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).
 10.22*   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).
 10.23+   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).
 10.24    Contract on Financial Leasing between Lysing hf, and Islensk
          erfdagreining ehf., dated as of December 13, 2001.
          (Incorporated by reference to Exhibit 10.36 to the Company's
          Annual Report on Form 10-K filed March 27, 2002).
 10.25    Land Lease Agreement between the City of Reykjavik and
          Islensk erfdagreining ehf., dated as of December 21, 2001.
          (Incorporated by reference to Exhibit 10.37 to the Company's
          Annual Report on Form 10-K filed March 27, 2002).
 10.26    Agreement on the Details of the Arrangement of Encumbrances
          in the Site Agreement between the University of Iceland and
          Islensk erfdagreining ehf., dated as of December 21, 2001.
          (Incorporated by reference to Exhibit 10.38 to the Company's
          Annual Report on Form 10-K filed March 27, 2002).
</Table>

                                        48
<PAGE>

<Table>
<Caption>
EXHIBIT
NUMBER                            DESCRIPTION
-------                           -----------
<C>       <S>
 10.27    Annex to the Agreement on the Details of the Arrangement of
          Encumbrances in the Site Agreement between the University of
          Iceland and Islensk erfdagreining ehf., dated as of January
          4, 2002. (Incorporated by reference to Exhibit 10.39 to the
          Company's Annual Report on Form 10-K filed March 27, 2002).
 10.28#   Loan Agreement between Sturlugata 8 ehf. (now named
          Vetrargardurinn ehf.) and Islandsbanki-FBA hf., dated as of
          December 21, 2001. (Incorporated by reference to Exhibit
          10.40 to the Company's Annual Report on Form 10-K filed
          March 27, 2002).
 10.29    Currency Exchange Agreement between Sturlugata 8 ehf. (now
          named Vetrargardurinn ehf.) and Islandsbanki-FBA hf., dated
          as of December 21, 2001. (Incorporated by reference to
          Exhibit 10.42 to the Company's Annual Report on Form 10-K
          filed March 27, 2002).
 10.30    General Bond with Consumer Price Index between
          Islandsbanki-FBA, hf. and Sturlugata 8 ehf., (now named
          Vetrargardurinn ehf.) dated as of December 21, 2001.
          (Incorporated by reference to Exhibit 10.44 to the Company's
          Annual Report on Form 10-K filed March 27, 2002).
 10.31    General Bond with Consumer Price Index between
          Islandsbanki-FBA hf. and Sturlugata 8 ehf., (now named
          Vetrargardurinn ehf.) dated as of December 21, 2001.
          (Incorporated by reference to Exhibit 10.45 to the Company's
          Annual Report on Form 10-K filed March 27, 2002).
 10.32#   Research Collaboration and Cross-License Agreement among
          F.Hoffman-La Roche Ltd and Hoffman-La Roche Inc. and deCODE
          genetics, ehf. (Islensk erfdagreining), effective as of
          February 1, 2002. (Incorporated by reference to Exhibit
          10.46 to the Company's Annual Report on Form 10-K filed
          March 27, 2002).
 10.33    Currency Exchange Agreement between Vetrargardurinn ehf. and
          Islandsbanki-FBA hf., dated as of March 13, 2002
          (Incorporated by reference to Exhibit 10.3 to the Company's
          Quarterly Report on Form 10-Q filed on May 15, 2002).
 10.34    General Bond with Consumer Price Index between
          Islandsbanki-FBA hf. and Vetrargardurinn ehf., dated as of
          February 8, 2002 (Incorporated by reference to Exhibit 10.4
          to the Company's Quarterly Report on Form 10-Q filed on May
          15, 2002).
 10.35+   Loan Agreement between Islandsbanki-FBA hf. and
          Vetrargardurinn ehf., dated as of March 13, 2002
          (Incorporated by reference to Exhibit 10.5 to the Company's
          Quarterly Report on Form 10-Q filed on May 15, 2002).
 10.36*   Promissory Note, dated May 27, 2002 from Hakon Gudbjartsson
          to the Company (Incorporated by reference to Exhibit 10.1 to
          the Company's Quarterly Report on Form 10-Q filed on August
          14, 2002).
 10.37*   Amended and Restated Promissory Note dated January 29, 1998
          from Hakon Gudbjartsson to the Company.
 10.38+   Research Collaboration and License Agreement, dated
          September 26, 2002, between deCODE genetics, Inc., deCODE
          genetics, ehf., and Merck & Co., Inc. (Incorporated by
          reference to Exhibit 10.1 to the Company's Quarterly Report
          on Form 10-Q filed on November 14, 2002).
 10.39    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).
 10.40*   2002 Equity Incentive Plan
 21.1     Subsidiaries of deCODE genetics, Inc.
 23.1     Consent of PricewaterhouseCoopers LLP, independent
          accountants.
 23.2     Consent of PricewaterhouseCoopers ehf, independent
          accountants.
</Table>

                                        49
<PAGE>

<Table>
<Caption>
EXHIBIT
NUMBER                            DESCRIPTION
-------                           -----------
<C>       <S>
 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).
 99.3     Certifications pursuant to Section 906 of the Sarbanes-Oxley
          Act of 2002.
</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.

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

(b) REPORTS ON FORM 8-K

     We did not file any reports on Form 8-K during the quarter ended December
31, 2002.

                                        50
<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/
                                            KARI STEFANSSON   APRIL 15, 2003
                                            ------------------------------------
                                             Dr. Kari Stefansson, President and
                                                  Chief Executive Officer

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

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

              /s/ DR. KARI STEFANSSON                  Chairman, President, Chief          April 15, 2003
---------------------------------------------------      Executive Officer and Director
                Dr. Kari Stefansson                      (principal executive officer)




                /s/ LANCE THIBAULT                     Chief Financial Officer and         April 15, 2003
---------------------------------------------------      Treasurer (principal financial
                  Lance Thibault                         officer)




             /s/ JEAN-FRANCOIS FORMELA                 Director                            April 15, 2003
---------------------------------------------------
               Jean-Francois Formela




               /s/ TERRANCE MCGUIRE                    Director                            April 15, 2003
---------------------------------------------------
                 Terrance McGuire




                 /s/ SIR JOHN VANE                     Director                            April 15, 2003
---------------------------------------------------
                   Sir John Vane

                 /s/ ANDRE LAMOTTE                     Director                            April 15, 2003
---------------------------------------------------
                   Andre LaMotte
</Table>

                                        51
<PAGE>

I, Dr. Kari Stefansson, Chief Executive Officer, certify that:

     1. I have reviewed this annual report on Form 10-K of deCODE genetics,
Inc.;

     2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

     3. Based on my knowledge, the financial statements and other financial
information included in this annual report fairly present, in all material
respects, the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

     4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

          a) designed such disclosure controls and procedures to ensure that
     material information relating to the registrant, including its consolidated
     subsidiaries, is made known to us by others within those entities,
     particularly during the period in which this annual report is being
     prepared;

          b) evaluated the effectiveness of the registrant's disclosure controls
     and procedures as of a date within 90 days prior to the filing date of this
     annual report (the "Evaluation Date"); and

          c) presented in this annual report our conclusions about the
     effectiveness of the disclosure controls and procedures based on our
     evaluation as of the Evaluation Date;

     5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):

          a) all significant deficiencies in the design or operation of internal
     controls which could adversely affect the registrant's ability to record,
     process, summarize and report financial data and have identified for the
     registrant's auditors any material weaknesses in internal controls; and

          b) any fraud, whether or not material, that involves management or
     other employees who have a significant role in the registrant's internal
     controls; and

     6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

                                                  /s/ KARI STEFANSSON
                                          --------------------------------------
                                                   Dr. Kari Stefansson
                                                 Chief Executive Officer

Dated: April 15, 2003
<PAGE>

I, Lance E. Thibault, Chief Financial Officer, certify that:

     1. I have reviewed this annual report on Form 10-K of deCODE genetics,
Inc.;

     2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

     3. Based on my knowledge, the financial statements and other financial
information included in this annual report fairly present, in all material
respects, the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

     4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

          a) designed such disclosure controls and procedures to ensure that
     material information relating to the registrant, including its consolidated
     subsidiaries, is made known to us by others within those entities,
     particularly during the period in which this annual report is being
     prepared;

          b) evaluated the effectiveness of the registrant's disclosure controls
     and procedures as of a date within 90 days prior to the filing date of this
     annual report (the "Evaluation Date"); and

          c) presented in this annual report our conclusions about the
     effectiveness of the disclosure controls and procedures based on our
     evaluation as of the Evaluation Date;

     5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):

          a) all significant deficiencies in the design or operation of internal
     controls which could adversely affect the registrant's ability to record,
     process, summarize and report financial data and have identified for the
     registrant's auditors any material weaknesses in internal controls; and

          b) any fraud, whether or not material, that involves management or
     other employees who have a significant role in the registrant's internal
     controls; and

     6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

                                                 /s/ LANCE E. THIBAULT
                                          --------------------------------------
                                                    Lance E. Thibault
                                                 Chief Financial Officer

Dated: April 15, 2003
<PAGE>

                             deCODE GENETICS, INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<Table>
<Caption>
                                                                PAGE
                                                              --------
<S>                                                           <C>
Report of Independent Accountants...........................  F-2, F-3
Consolidated Statements of Operations.......................       F-4
Consolidated Balance Sheets.................................       F-5
Consolidated Statements of Changes in Stockholders' Equity         F-6
  (Deficit).................................................
Consolidated Statements of Cash Flows.......................       F-8
Notes to Consolidated Financial Statements..................       F-9
</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 statement of operations, changes in stockholders' equity
(deficit) and cash flows present fairly, in all material respects, the financial
position of deCODE genetics, Inc. and its subsidiaries December 31, 2002 and the
results of their operations and their cash flows for the year ended December 31,
2002 in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.

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

/s/ PricewaterhouseCoopers LLP
    Boston, Massachusetts
    April 2, 2003

                                       F-2
<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 financial
position of deCODE genetics, Inc. and its subsidiaries at December 31, 2001 and
2000 and the results of their operations and their cash flows for each of the
two years in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

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

                                       F-3
<PAGE>

                             DECODE GENETICS, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<Table>
<Caption>
                                                               FOR THE YEARS ENDED DECEMBER 31,
                                                      --------------------------------------------------
                                                           2002              2001              2000
                                                      --------------    --------------    --------------
                                                      (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S>                                                   <C>               <C>               <C>
Revenue.............................................   $    41,065       $    26,099       $    21,545
Operating expenses
  Research and development, including cost of
     revenue........................................        86,641            70,954            45,742
  Selling, general and administrative...............        21,656            12,402            15,373
  Impairment, employee termination benefits and
     other charges..................................        64,790                 0                 0
                                                       -----------       -----------       -----------
          Total operating expenses..................       173,087            83,356            61,115
                                                       -----------       -----------       -----------
Operating loss......................................      (132,022)          (57,257)          (39,570)
Interest income.....................................         2,954             6,925             7,378
Interest expense....................................        (3,079)             (440)             (495)
Other non-operating income and (expense), net.......           (72)           (1,675)            1,568
                                                       -----------       -----------       -----------
Net loss before cumulative effect of change
  In accounting principle...........................      (132,219)          (52,447)          (31,119)
Cumulative effect of change in milestone revenue
  recognition method................................           333                 0                 0
                                                       -----------       -----------       -----------
Net loss............................................      (131,886)          (52,447)          (31,119)
Accrued dividends and amortized discount on
  preferred stock...................................             0                 0            (7,541)
                                                       -----------       -----------       -----------
Net loss available to common stockholders...........   $  (131,886)      $   (52,447)      $   (38,660)
                                                       ===========       ===========       ===========
Basic and diluted net loss per share:
  Net loss before cumulative effect of change in
     accounting principle...........................   $     (2.69)      $     (1.26)      $     (1.81)
  Cumulative effect of change in milestone revenue
     recognition method.............................          0.01              0.00              0.00
  Net loss..........................................         (2.68)            (1.26)            (1.81)
Shares used in computing basic and diluted net loss
  per share.........................................    49,098,254        41,634,009        21,381,256
Pro forma amounts assuming new milestone revenue
  recognition method is applied retroactively:
     Revenue........................................                     $    23,182       $    22,670
     Net loss.......................................                         (55,364)          (29,994)
     Basic and diluted net loss per share...........                           (1.33)            (1.40)
</Table>

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

                             deCODE genetics, INC.

                          CONSOLIDATED BALANCE SHEETS

<Table>
<Caption>
                                                                   DECEMBER 31,
                                                              ----------------------
                                                                2002         2001
                                                              ---------    ---------
                                                              (IN THOUSANDS, EXCEPT
                                                                  SHARE AMOUNTS)
<S>                                                           <C>          <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................  $  87,244    $ 153,061
  Restricted cash...........................................          0       14,000
  Receivables...............................................      5,417        9,525
  Other current assets......................................      9,437        9,748
                                                              ---------    ---------
          Total current assets..............................    102,098      186,334
Restricted cash.............................................      6,000            0
Property and equipment, net.................................     83,499       61,208
Goodwill....................................................      8,863            0
Other long-term assets and deferred charges.................     12,957        2,358
                                                              ---------    ---------
          Total assets......................................  $ 213,417    $ 249,900
                                                              =========    =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued expenses.....................  $  15,478    $  21,165
  Current portion of capital lease obligations..............      4,311        4,855
  Current portion of long-term debt.........................      4,243        2,572
  Deferred research revenue.................................      7,606        6,147
                                                              ---------    ---------
          Total current liabilities.........................     31,638       34,739
Capital lease obligations, net of current portion...........      5,008        9,922
Long-term debt, net of current portion......................     44,961       28,929
Deferred research revenue...................................      6,557        5,150
Other long-term liabilities.................................          7          427
Commitments and contingencies
Stockholders' equity:
  Preferred stock, $0.001 par value;
     Authorized: 6,716,666 shares;
     Issued and outstanding: none...........................          0            0
  Common stock, $0.001 par value;
     Authorized: 100,000,000 shares;
     Issued and outstanding: 53,695,869 and 53,545,234,
     respectively, at December 31, 2002; and 45,328,227 and
     45,257,386, respectively, at December 31, 2001.........         54           45
  Additional paid-in capital................................    431,494      351,960
  Notes receivable..........................................     (7,607)     (10,788)
  Deferred compensation.....................................     (2,642)      (6,174)
  Accumulated deficit.......................................   (295,087)    (163,201)
  Accumulated other comprehensive income (loss).............         (1)          53
  Treasury stock, 150,635 and 70,841 shares stated at cost
     at December 31, 2002 and 2001, respectively............       (965)      (1,162)
                                                              ---------    ---------
          Total stockholders' equity........................    125,246      170,733
                                                              ---------    ---------
          Total liabilities and stockholders' equity........  $ 213,417    $ 249,900
                                                              =========    =========
</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)
<Table>
<Caption>
                                                                                             DIVIDENDS
                                                                                             ACCRETED
                                                                                                ON
                                    SHARES                                                  REDEEMABLE,
                              ------------------   ADDITIONAL                               CONVERTIBLE
                                COMMON      PAR     PAID-IN       NOTES        DEFERRED      PREFERRED    ACCUMULATED
                                STOCK      VALUE    CAPITAL     RECEIVABLE   COMPENSATION      STOCK        DEFICIT
                              ----------   -----   ----------   ----------   ------------   -----------   -----------
                                                       (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S>                           <C>          <C>     <C>          <C>          <C>            <C>           <C>
BALANCE AT DECEMBER 31,
 1999.......................   9,604,012    $10     $ 35,072     $ (9,598)     $(12,550)      $(8,385)     $ (77,324)
Common stock issued upon
 initial public offering,
 net of issuance cost.......  11,040,000     11      181,941
Issuance of common stock
 upon exercise of
 warrants...................     306,943      0           (0)
Other issuances of common
 stock......................     165,910      0        3,670                       (666)
Redeemable, convertible
 preferred stock converted
 to common stock............  23,737,081     24      118,735                                   13,615
Beneficial conversion
 feature of issuance of
 Series C preferred stock...                           2,041
Accretion of dividends and
 amortization of discount on
 preferred stock............                                                                   (5,230)        (2,311)
Forfeiture of unvested
 common stock issued upon
 early exercise of stock
 options....................     (26,977)                             109           186
Issuance of common stock
 upon exercise of stock
 options....................     215,000      0        2,130       (2,362)
Deferred compensation
 arising from stock
 options....................                           6,810                     (6,810)
Amortization of deferred
 compensation...............                                                      8,271
Comprehensive income (loss):
Net loss for the period.....                                                                                 (31,119)
Other comprehensive income
 (loss):
Foreign currency
 translation................
Total comprehensive income
 (loss):....................
                              ----------    ---     --------     --------      --------       -------      ---------
BALANCE AT DECEMBER 31,
 2000.......................  45,041,969    $45     $350,399     $(11,851)     $(11,569)      $     0      $(110,754)
                              ----------    ---     --------     --------      --------       -------      ---------

<Caption>

                               ACCUMULATED
                                  OTHER                       TOTAL
                              COMPREHENSIVE               STOCKHOLDERS'
                                 INCOME       TREASURY        EQUITY
                                 (LOSS)        STOCK        (DEFICIT)
                              -------------   --------   ----------------
                                 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S>                           <C>             <C>        <C>
BALANCE AT DECEMBER 31,
 1999.......................       $ 3         $   0         $(72,772)
Common stock issued upon
 initial public offering,
 net of issuance cost.......                                  181,952
Issuance of common stock
 upon exercise of
 warrants...................                                        0
Other issuances of common
 stock......................                                    3,004
Redeemable, convertible
 preferred stock converted
 to common stock............                                  132,374
Beneficial conversion
 feature of issuance of
 Series C preferred stock...                                    2,041
Accretion of dividends and
 amortization of discount on
 preferred stock............                                   (7,541)
Forfeiture of unvested
 common stock issued upon
 early exercise of stock
 options....................                    (295)              (0)
Issuance of common stock
 upon exercise of stock
 options....................                     295               63
Deferred compensation
 arising from stock
 options....................                                        0
Amortization of deferred
 compensation...............                                    8,271
Comprehensive income (loss):
Net loss for the period.....                                  (31,119)
Other comprehensive income
 (loss):
Foreign currency
 translation................        (4)                            (4)
                                                             --------
Total comprehensive income
 (loss):....................                                  (31,123)
                                   ---         -----         --------
BALANCE AT DECEMBER 31,
 2000.......................       $(1)        $   0         $216,269
                                   ---         -----         --------
</Table>

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

                             DECODE GENETICS, INC.

      CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<Table>
<Caption>
                                                                                               DIVIDENDS
                                                                                               ACCRETED
                                                                                                  ON
                                      SHARES                                                  REDEEMABLE,
                                ------------------   ADDITIONAL                               CONVERTIBLE
                                  COMMON      PAR     PAID-IN       NOTES        DEFERRED      PREFERRED    ACCUMULATED
                                  STOCK      VALUE    CAPITAL     RECEIVABLE   COMPENSATION      STOCK        DEFICIT
                                ----------   -----   ----------   ----------   ------------   -----------   -----------
                                                         (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S>                             <C>          <C>     <C>          <C>          <C>            <C>           <C>
BALANCE AT DECEMBER 31,
 2000.........................  45,041,969    $45     $350,399     $(11,851)     $(11,569)      $     0      $(110,754)
Issuance of common stock upon
 exercise of warrants.........      94,444      0           (0)
Other issuances of common
 stock........................     191,814      0        1,555
Forfeiture of unvested common
 stock issued upon early
 exercise of stock options....     (70,841)                             410           750
Payment of notes..............                                          653
Deferred compensation arising
 from stock options...........                               6                         (6)
Amortization of deferred
 compensation.................                                                      4,651
Comprehensive income (loss):
Net loss for the period.......                                                                                 (52,447)
Other comprehensive income
 (loss):
Foreign currency
 translation..................
Total comprehensive income
 (loss):......................
                                ----------    ---     --------     --------      --------       -------      ---------
BALANCE AT DECEMBER 31,
 2001.........................  45,257,386     45      351,960      (10,788)       (6,174)            0       (163,201)
Issuance of common stock on
 acquisition of MediChem......   8,362,893      9       78,955
Issuance of common stock upon
 exercise of warrants.........     141,665      0           (0)
Issuance of common stock upon
 exercise of stock options....      38,813      0           48
Other issuances of common
 stock........................      20,508      0          131
Issuance of warrants in
 connection with financing....                             696
Forfeitures and cancellations
 of common stock issued upon
 early exercise of stock
 options......................    (276,031)                           2,947           188
Forfeiture of options.........                            (296)                       296
Payment of notes..............                                          234
Amortization of deferred
 compensation.................                                                      3,048
Comprehensive income (loss):
Net loss for the period.......                                                                                (131,886)
Other comprehensive income
 (loss):
Foreign currency
 translation..................
Total comprehensive income
 (loss):......................
                                ----------    ---     --------     --------      --------       -------      ---------
BALANCE AT DECEMBER 31,
 2002.........................  53,545,234    $54     $431,494     $ (7,607)     $ (2,642)      $     0      $(295,087)
                                ==========    ===     ========     ========      ========       =======      =========

<Caption>

                                 ACCUMULATED
                                    OTHER                      TOTAL
                                COMPREHENSIVE              STOCKHOLDERS'
                                   INCOME       TREASURY      EQUITY
                                   (LOSS)        STOCK       (DEFICIT)
                                -------------   --------   -------------
                                  (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S>                             <C>             <C>        <C>
BALANCE AT DECEMBER 31,
 2000.........................       $(1)       $     0      $ 216,269
Issuance of common stock upon
 exercise of warrants.........                                       0
Other issuances of common
 stock........................                                   1,555
Forfeiture of unvested common
 stock issued upon early
 exercise of stock options....                   (1,162)            (2)
Payment of notes..............                                     653
Deferred compensation arising
 from stock options...........                                       0
Amortization of deferred
 compensation.................                                   4,651
Comprehensive income (loss):
Net loss for the period.......                                 (52,447)
Other comprehensive income
 (loss):
Foreign currency
 translation..................        54                            54
                                                             ---------
Total comprehensive income
 (loss):......................                                 (52,393)
                                     ---        -------      ---------
BALANCE AT DECEMBER 31,
 2001.........................        53         (1,162)       170,733
Issuance of common stock on
 acquisition of MediChem......                    3,332         82,296
Issuance of common stock upon
 exercise of warrants.........                                       0
Issuance of common stock upon
 exercise of stock options....                                      48
Other issuances of common
 stock........................                                     131
Issuance of warrants in
 connection with financing....                                     696
Forfeitures and cancellations
 of common stock issued upon
 early exercise of stock
 options......................                   (3,135)             0
Forfeiture of options.........                                       0
Payment of notes..............                                     234
Amortization of deferred
 compensation.................                                   3,048
Comprehensive income (loss):
Net loss for the period.......                                (131,886)
Other comprehensive income
 (loss):
Foreign currency
 translation..................       (54)                          (54)
                                                             ---------
Total comprehensive income
 (loss):......................                                (131,940)
                                     ---        -------      ---------
BALANCE AT DECEMBER 31,
 2002.........................       $(1)       $  (965)     $ 125,246
                                     ===        =======      =========
</Table>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                       F-7
<PAGE>

                             deCODE GENETICS, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<Table>
<Caption>
                                                               FOR THE YEARS ENDED DECEMBER 31,
                                                              ----------------------------------
                                                                 2002        2001        2000
                                                              ----------   ---------   ---------
                                                                        (IN THOUSANDS)
<S>                                                           <C>          <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................................  $(131,886)   $(52,447)   $(31,119)
Adjustments to reconcile net loss to net cash used in
  operating activities:
  Depreciation and amortization.............................     13,753      10,028       5,204
  Purchased in-process research and development.............        480           0           0
  Equity in net loss of affiliate...........................        563         462         738
  Amortization of deferred stock compensation...............      3,048       4,651       8,271
  Other stock-based remuneration and stock contributions....          0          53       3,610
  Loss on disposal of equipment.............................        475         787           0
  Impairment of property, equipment and intangibles.........      7,474           0           0
  Impairment of goodwill....................................     53,400           0           0
  Charges for write-down of obsolete and excess materials
    and supplies............................................      3,352       2,961           0
  Litigation settlement.....................................          0       1,293           0
  Unrealized (gain) loss on derivative financial
    instruments.............................................     (1,116)        223           0
  Accrued interest on receivable from share issuance........          0           0         894
  Other.....................................................        524          25        (794)
Changes in operating assets and liabilities net of effect of
  acquisitions:
  Receivables...............................................      9,402      (4,259)     (7,205)
  Other current assets......................................        137      (2,672)     (4,466)
  Accounts payable and accrued expenses.....................    (10,258)     11,357       6,316
  Deferred research revenue.................................     (2,962)      6,892       2,166
  Other.....................................................        453        (824)        260
                                                              ---------    --------    --------
    Net cash used in operating activities...................    (53,161)    (21,470)    (16,125)
                                                              ---------    --------    --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment........................    (15,637)    (47,681)    (15,470)
  Investment in affiliated company, net.....................          0           0        (446)
  Acquisitions and investments, net.........................       (571)          0        (350)
  Proceeds from sale of property and equipment..............      2,853           0           0
  Other.....................................................          0         (10)       (175)
                                                              ---------    --------    --------
    Net cash used in investing activities...................    (13,355)    (47,691)    (16,441)
                                                              ---------    --------    --------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Issuance of preferred stock and warrants..................          0           0      34,534
  Issuance of common stock, net of offering costs...........         48           0     182,015
  Repurchase of preferred stock.............................          0           0     (17,467)
  Repayment of notes receivable for common stock............        234         653           0
  Forfeiture of common stock................................          0          (2)          0
  Proceeds from facility financings.........................     12,895      31,200           0
  Changes in restricted cash................................      8,000     (14,000)          0
  Proceeds from equipment sale-leaseback financing..........        459      12,000           0
  Repayment of mortgage.....................................    (11,880)          0           0
  Re-payments of debt and capital lease obligations.........     (9,057)     (1,774)     (2,217)
                                                              ---------    --------    --------
    Net cash provided by financing activities...............        699      28,077     196,865
                                                              ---------    --------    --------
Net increase (decrease) in cash.............................    (65,817)    (41,084)    164,299
Cash and cash equivalents at beginning of period............    153,061     194,145      29,846
                                                              ---------    --------    --------
Cash and cash equivalents at end of period..................  $  87,244    $153,061    $194,145
                                                              =========    ========    ========
Supplemental cash flow information:
  Cash paid for interest....................................  $   3,397    $    388    $    495
Supplemental schedule of non-cash transactions:
  Common stock issued for acquisitions and investments......     82,296         210       2,395
  Payable for laboratory equipment..........................          0           0      13,150
</Table>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                       F-8
<PAGE>

                             DECODE GENETICS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS UNLESS OTHERWISE NOTED)

THE COMPANY

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

     Based in Reykjavik, Iceland, deCODE is a population genetics company
developing drugs and DNA-based diagnostics based upon its discoveries in the
inherited causes of common diseases. deCODE's population approach and resources
have enabled it to isolate gene and targets directly involved in the development
of many diseases posing significant challenges to public health and deCODE is
focused on turning these findings into a pipeline of products. deCODE's
customers include major pharmaceutical companies, biotechnology firms,
pharmacogenomics companies, universities and other research institutions.
deCODE's business is global, with its principal markets in the United States and
in Europe.

     deCODE's historical operations have been in a single business segment, been
primarily focused on developing products and services for the healthcare
industry from its population-based gene discovery work in Iceland. Broadening
that discovery work to development of products, deCODE is organized according to
product development offerings and services. deCODE's product development
activities encompass the discovery and commercialization of novel therapeutics
designed against targets identified in deCODE's gene discovery work, as well as
the creation of DNA-based diagnostic and pharmacogenomic tests and the
development of software systems for making correlations between genetic
variation and disease and drug response. deCODE's service offerings include
contract service businesses in drug discovery and medicinal chemistry through
its Chicago-based pharmaceuticals group, three-dimensional protein
crystallography products and contract services through its Seattle-based
biostructures group, pharmacogenomics and clinical trials services through its
wholly-owned subsidiary Encode, genotyping services carried-out in Reykjavik,
Iceland and bioinformatics services and tools developed in the course of
deCODE's gene and drug target research.

     In March 2002, deCODE completed the acquisition of MediChem Life Sciences,
Inc. (MediChem) in a stock-for-stock exchange accounted for as a purchase
transaction. The acquisition gives deCODE capabilities in chemistry and
structural proteomics that 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 both through its own programs and in
alliance with collaborators. Originally founded in 1987, MediChem provides
contract chemistry research services specializing in chemical synthesis for new
drug discovery and development for the global pharmaceutical, biotechnology,
agricultural, chemical and personal care industries.

BASIS OF PRESENTATION

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

PRINCIPLES OF CONSOLIDATION

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

                                       F-9
<PAGE>
                             DECODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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. 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. Actual results could differ from those
estimates.

UNCERTAINTIES

     deCODE is subject to risks common to companies in the biotechnology
industry including, but not limited to, development by deCODE or its competitors
of new technological innovations, ability to market products or services,
dependence on key personnel, dependence on key suppliers and notably a single
supplier for important laboratory equipment and many of deCODE's materials and
supplies, 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.

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

CASH EQUIVALENTS

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

                                       F-10
<PAGE>
                             DECODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 OTHER THAN GOODWILL

     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.

     Long-lived assets located in the United States and Iceland were $36,089 and
$75,320, respectively, at December 31, 2002. All long-lived assets were located
in Iceland in 2001 and 2000.

CAPITAL LEASES

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

FINANCE COSTS RELATED TO LONG-TERM DEBT

     Costs associated with obtaining long-term debt are deferred and classified
as other long-term assets and amortized as interest expense over the term of the
debt. Deferred financing costs are included in other long-term assets and total
$1,016 and $275 at December 31, 2002 and 2001, respectively.

DERIVATIVE FINANCIAL INSTRUMENTS

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

                                       F-11
<PAGE>
                             DECODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     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 during 2002 or 2001.

REVENUE

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

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

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

     In general, prerequisites for billings are established by contractual terms
including predetermined payment schedules, the achievement of contract
milestones, or submission of appropriate billing detail. Revenue recorded
represents amounts billed in accordance with contract terms. Unbilled costs and
fees arise

                                       F-12
<PAGE>
                             DECODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

when revenue has been recognized but customers have not been billed. The
following is a summary of deferred revenue:

<Table>
<Caption>
                                                        FOR THE YEAR ENDED DECEMBER 31,
                                                       ---------------------------------
                                                         2002        2001        2000
                                                       ---------   ---------   ---------
                                                                (IN THOUSANDS)
<S>                                                    <C>         <C>         <C>
Revenue recorded during the year.....................  $ 43,437    $ 32,991    $ 23,712
Revenue recognized during the year...................   (41,065)    (26,099)    (21,545)
Deferred revenue recorded on acquisition of
  MediChem...........................................       827           0           0
Cumulative effect of change in milestone revenue
  recognition policy.................................      (333)          0           0
                                                       --------    --------    --------
                                                          2,866       6,892       2,167
Deferred revenue at beginning of year................    11,297       4,405       2,238
                                                       --------    --------    --------
Deferred revenue at end of year......................  $ 14,163    $ 11,297    $  4,405
                                                       ========    ========    ========
</Table>

     To-date, deCODE's revenues have been largely derived from services
provided, including product development service activities. Revenues attributed
to the United States and to Iceland were $14,485 and $26,580, respectively, for
2002 and were all attributed to Iceland in 2001 and 2000. Roche accounted for
41%, 96% and 96% of consolidated revenue in years ended December 31, 2002, 2001
and 2000, respectively.

     In the fourth quarter of 2002, deCODE terminated and entered into a related
settlement agreement regarding two agreements with Applied Biosystems Group
(ABG) that had been in place since July 2001 (See Selected Quarterly Data).
deCODE's accounting policy for the Joint Development and Commercialization
Agreement (the Agreement) with ABG to develop genotypic analysis products
provides for revenue related to ABG's payment obligation and deCODE's
development costs associated with the Agreement to be deferred until the
development efforts are completed or the Agreement is terminated, if earlier, as
was the case. As a result, deferred revenue and costs of $6.3 million and $0.8
million, respectively, were recognized in the fourth quarter of 2002 when the
parties reached agreement as to termination. ABG accounted for 15% of the
consolidated revenue in the year ended December 31, 2002.

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.

     Had compensation cost for all stock options been determined based on the
fair value at the grant date for awards consistent with the provisions of SFAS
No. 123, as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure -- an amendment of FASB Statement No.
123"

                                       F-13
<PAGE>
                             DECODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

("SFAS 148"), deCODE's net loss and basic and diluted net loss per share would
have been changed to the pro forma amounts indicated below:

<Table>
<Caption>
                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                      ----------------------------------------
                                                          2002          2001          2000
                                                      ------------   -----------   -----------
                                                      (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                   <C>            <C>           <C>
Net loss attributable to common stockholders -- as
  reported..........................................    $(131,886)     $(52,447)     $(38,660)
  Add: Stock-based employee compensation expense
     included in reported net loss..................        3,048         4,598         8,246
  Deduct: Total stock-based employee compensation
     expense determined under fair value method for
     all awards.....................................       (7,415)       (6,577)       (5,448)
                                                        ---------      --------      --------
Net loss attributable to common
  stockholders -- proforma..........................    $(136,253)     $(54,426)     $(35,862)
                                                        =========      ========      ========
Basic and diluted net loss per share as
  reported -- as reported...........................         2.68          1.26          1.81
Basic and diluted net loss per share -- proforma....         2.77          1.31          1.68
</Table>

     Pro forma net loss and net loss per share for the year ended December 31,
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 this year resulted in
significant stock-based compensation expense being recognized in the statements
of operations 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 things, the
vesting period of the stock options and the fair value of additional stock
options that may be granted in future years.

FOREIGN CURRENCY TRANSLATION

     deCODE's functional currency is the U.S. dollar. Islensk erfdagreining also
consolidates its subsidiaries, 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. For certain consolidated
entities the books and records are not maintained in its functional currency.
For these entities, translation gains and losses recorded upon remeasurement are
included in the statement of operations.

     Foreign currency transaction gains and losses are reported according to the
exchange rates prevailing on the transaction date and are included in the
consolidated statements of operations classified as other non-operating income
and expense. Net transaction and translation gains (losses) were $(731),
$(1,264) and $1,489 in 2002, 2001 and 2000, 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-14
<PAGE>
                             DECODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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,
                                                         -------------------------------
                                                           2002        2001       2000
                                                         ---------   --------   --------
                                                                 (IN THOUSANDS)
<S>                                                      <C>         <C>        <C>
Net loss...............................................  $131,886    $52,447    $31,119
Accrued dividends on Series A, Series B and Series C
  preferred stock......................................         0          0      5,230
Amortized discount on Series A and Series C preferred
  stock................................................         0          0      2,311
                                                         --------    -------    -------
Accrued dividends and amortized discount on preferred
  stock................................................         0          0      7,541
                                                         --------    -------    -------
Net loss available to common stockholders..............  $131,886    $52,447    $38,660
                                                         ========    =======    =======
</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 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,
                                                      ---------------------------------
                                                        2002        2001        2000
                                                      ---------   ---------   ---------
                                                      (SHARES)    (SHARES)    (SHARES)
<S>                                                   <C>         <C>         <C>
Warrants to purchase shares of common stock.........  1,851,300   1,067,500   1,167,500
Options to purchase shares of common stock..........  2,281,119   1,918,333     821,000
Restricted shares with an associated outstanding
  non-recourse promissory note......................  2,467,196   3,060,289   3,889,190
</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.

RECENT ACCOUNTING PRONOUNCEMENTS

     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 April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 rescinds FASB Statement No. 4 (FAS 4), "Reporting
Gains and Losses from Extinguishment of Debt", the amendment to

                                       F-15
<PAGE>
                             DECODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

FAS 4, FASB Statement No. 64 (FAS 64), "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements", and FASB Statement No. 44, "Accounting for
Intangible Assets of Motor Carriers". In addition, SFAS No. 145 amends paragraph
14(a) of FASB Statement No. 13, Accounting for Leases, to eliminate an
inconsistency between the accounting for sale-leaseback transactions and certain
lease modifications that have economic effects that are similar to
sale-leaseback transactions and makes several other technical corrections to
existing pronouncements. deCODE is required to adopt FAS 145 for fiscal year
2003 and does not believe its adoption will have a significant impact on its
financial position or results of operations.

     In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). This statement
addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies EITF Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)" ("EITF 94-3"). SFAS 146
requires that a liability for a cost associated with an exit cost liability to
be recognized at the date of an entity's commitment to an exit plan. SFAS 146
also requires that liabilities recorded in connection with exit plans be
initially measured at fair value. deCODE is required to adopt SFAS No. 146 for
exit or disposal activities that are initiated from fiscal year 2003 and does
not believe its adoption will have a significant impact on its financial
position or results of operations.

     In December 2002, the FASB SFAS No. 148 "Accounting for Stock-Based
Compensation -- Transition and Disclosure" (FAS 148) amending FASB SFAS No. 123
"Accounting for Stock-Based Compensation". FAS 148 provides two additional
alternative transition methods for recognizing an entity's voluntary decision to
change its method of accounting for stock-based employee compensation to the
fair-value method. In addition, FAS 148 amends the disclosure requirements of
FAS 123 so that entities will have to (1) make more-prominent disclosures
regarding the pro forma effects of using the fair-value method of accounting for
stock-based compensation, (2) present those disclosures in a more accessible
format in the footnotes to the annual financial statements, and (3) include
those disclosures in interim financial statements. FAS 148's transition guidance
and provisions for annual disclosures are effective for our fiscal year-ended
December 31, 2002. The provisions for interim-period disclosures are effective
for financial reports that contain financial statements for interim periods
beginning after January 1, 2003.

     In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). FIN 45 elaborates on the
disclosures deCODE must make about obligations under certain guarantees that
deCODE may issue. FIN 45 also requires deCODE to recognize, at the inception of
a guarantee, a liability for the fair value of the obligations undertaken in
issuing the guarantee. The initial recognition and initial measurement
provisions are to be applied only to guarantees issued or modified after
December 31, 2002. deCODE has adopted the disclosure provisions as required by
FIN 45 and are still evaluating the potential impact of FIN 45 on its financial
position and results of operations.

     In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. deCODE does not expect FIN 46 to
have a material effect on its consolidated financial statements.

     In November 2002, the Emerging Issues Task Force reached a consensus on
Issue No. 00-21 ("EITF 00-21"), "Revenue Arrangements with Multiple
Deliverables." EITF 00-21 provides guidance on how to account for arrangements
that involve the delivery or performance of multiple products, services
                                       F-16
<PAGE>
                             DECODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

and/or rights to use assets. The provisions of EITF 00-21 will apply to revenue
arrangements entered into in fiscal periods beginning after June 15, 2003.
deCODE is still evaluating the potential impact of EITF 00-21 on its financial
position and results of operations.

RECEIVABLES

     Receivables consist of the following:

<Table>
<Caption>
                                                               DECEMBER 31,
                                                              ---------------
                                                               2002     2001
                                                              ------   ------
                                                              (IN THOUSANDS)
<S>                                                           <C>      <C>
Receivables.................................................  $4,987   $9,145
Receivables, related party..................................     102      380
Unbilled costs and fees.....................................     328        0
                                                              ------   ------
  Total.....................................................  $5,417   $9,525
                                                              ======   ======
</Table>

     Roche accounted for 43% and 34% of consolidated receivables as of December
31, 2002 and 2001, respectively, and ABG accounted for 17% of consolidated
receivables as of December 31, 2001.

OTHER CURRENT ASSETS

     Other current assets consist of the following:

<Table>
<Caption>
                                                               DECEMBER 31,
                                                              ---------------
                                                               2002     2001
                                                              ------   ------
                                                              (IN THOUSANDS)
<S>                                                           <C>      <C>
Materials and supplies......................................  $4,867   $6,556
Value added taxes...........................................   1,796    1,448
Other current assets........................................   2,774    1,744
                                                              ------   ------
  Total.....................................................  $9,437   $9,748
                                                              ======   ======
</Table>

INVESTMENTS AND OTHER

EMR HF.

     deCODE's investment in the common shares of eMR (32.5%) is accounted for
under the equity method and is included in other long-term assets, amounting to
nil and $458 at December 31, 2002 and 2001, respectively. Equity in net loss of
affiliate in the years ended December 31, 2002, 2001 and 2000 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.

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 $787. 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 and $699, respectively. Two
of deCODE's executive officers own an aggregate 37.5% of the share capital and
are board members of Prokaria.

                                       F-17
<PAGE>
                             DECODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     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
       $541.

     - deCODE sold certain intellectual property rights to certain research,
       including a patent application, to Prokaria in exchange for: $509 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 $509 has been recognized and is included in revenue in the
       year ended December 31, 2000.

     - deCODE agreed to provide certain sequencing and advisory services in
       exchange for appropriate fees. deCODE recognized $102, $322 and $32 in
       revenue in respect of such sequencing services provided during 2002, 2001
       and the period October to December 2000, respectfully.

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

PROPERTY AND EQUIPMENT

     Property and equipment consist of the following:

<Table>
<Caption>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                2002       2001
                                                              --------   --------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
Land........................................................  $  2,303   $      0
Building construction-in-progress...........................         0     27,264
Buildings...................................................    50,479     10,763
Laboratory equipment........................................    41,238     29,706
Furniture and fixtures......................................     5,503      2,813
Other equipment.............................................     4,731      1,004
                                                              --------   --------
                                                               104,254     71,550
Less: accumulated depreciation and amortization.............   (20,755)   (10,342)
                                                              --------   --------
  Total.....................................................  $ 83,499   $ 61,208
                                                              ========   ========
</Table>

     The total depreciation and amortization expense of property and equipment
for the years ended December 31, 2002, 2001 and 2000 was $12,112, $8,870 and
$4,724, respectively.

     In January 1998, deCODE purchased the building then housing its research
operations and corporate headquarters for total consideration amounting to
$2,376, comprised of cash and 74,670 shares of Series B preferred stock. In June
1998, deCODE sold the building for $2,404 of cash proceeds and leased it back
from the counter-party (an Icelandic bank). As ownership of the property was to
transfer to deCODE at the end of the lease without any further payment, the
transaction was recorded as a financing and no immediate gain was recognized.
(See Impairment, Employee Termination Benefits and Other Charges)

     During 2000, deCODE paid $1,423 to the City of Reykjavik and was granted
permission to construct a building of approximately 15,000 square meters in the
University District which now 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. The building was placed
into service during January 2002 at which time depreciation of the capitalized
costs commenced.

                                       F-18
<PAGE>
                             DECODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In September 2000, deCODE acquired fifty new gene sequencing machines in
exchange for $13,150 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. The $13,150 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 the pace of technological change,
effective from April 1, 2001 deCODE changed the estimated useful life of
sequencing instruments for purposes of depreciation from 5 years to 4 years.
This change in estimate had the effect of increasing depreciation expense and
basic and diluted net loss per share by $1,400 and $0.03 per share,
respectively, in the year ended December 31, 2001.

     In December 2001, deCODE sold certain laboratory equipment for $12,000 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 must maintain an amount
equal to 75% of the remaining lease payments on deposit with an Icelandic bank
as a compensating balance totaling $6,144 at December 31, 2002.

     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 $12,415 and $4,934,
respectively, as of December 31, 2002 and $16,488 and $1,521, 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.

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 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 ($2,395) has been allocated to Cyclops' assets and
liabilities based on their estimated fair values on the date of acquisition. The
amounts acquired included the estimated fair value of 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 $390 and $1,200 as of December 31, 2002 and 2001,
respectively.

     In addition, compensation in respect of the 30,000 shares of deCODE common
stock issued to the selling shareholder of Cyclops ($666) is not part of the
purchase price but was recorded as deferred compensation, a component of
stockholders' equity, and is being recognized as expense over the four year
vesting period from the date of the acquisition.
                                       F-19
<PAGE>
                             DECODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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) 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.

MEDICHEM LIFE SCIENCES, INC.

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

     The total consideration for the acquisition was $85,845, which consists of
deCODE common stock issued in exchange for outstanding MediChem common stock
($79,699), MediChem employee stock options assumed ($2,297) and deCODE
transaction costs ($3,849). deCODE's common stock issued in the exchange has
been valued using an average price for the period from three days before to
three days after the date 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's direct transaction costs consist primarily of financial
advisory, legal and accounting fees.

     Under the purchase method of accounting for business combinations as
defined by Statement of Financial Accounting Standard No. 141, "Business
Combinations", deCODE has allocated the purchase price to the tangible and
identifiable intangible assets acquired and liabilities assumed on the basis of
their estimated fair values on the acquisition date. Based upon independent
valuations of the tangible and intangible assets acquired, deCODE has allocated
the total cost of the acquisition to the net assets of MediChem as follows:

<Table>
<Caption>
                                                              (IN THOUSANDS)
<S>                                                           <C>
Net tangible assets acquired................................     $16,962
In-process research and development.........................         480
Identifiable intangible assets..............................       6,140
Goodwill....................................................      62,263
                                                                 -------
                                                                 $85,845
                                                                 =======
</Table>

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

                                       F-20
<PAGE>
                             DECODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The in-process research and development has been charged to operations as a
research and development expense in the year-ended December 31, 2002. Goodwill
will not be amortized but is subject to annual impairment testing. Goodwill is
also not tax-deductible. Identified intangible assets consist of the following
as of December 31, 2002:

<Table>
<S>                                                           <C>
Developed technology, 5 year life...........................  $4,560
Patents, 5-7 year life......................................     380
Royalty-free licenses, 10 year life.........................     230
Standard operating procedures, 5 year life..................     320
                                                              ------
                                                               5,490
Less: accumulated amortization..............................    (829)
                                                              ------
  Total.....................................................  $4,661
                                                              ======
</Table>

     deCODE's statements of operations include the results of MediChem from
March 18, 2002, the date of acquisition. The following unaudited pro forma
financial information presents the consolidated results of deCODE as if the
acquisition of MediChem occurred at the beginning of 2001. Nonrecurring charges,
such as the acquired in-process research and development charge is not reflected
in the following pro forma financial information but MediChem's restructuring
and impairment charges totaling $45,535 in 2001 are included. This pro forma
information is not intended to be indicative of future operating results.

<Table>
<Caption>
                                                                    FOR THE YEAR
                                                                 ENDED DECEMBER 31,
                                                              -------------------------
                                                                 2002          2001
                                                              -----------   -----------
                                                              (IN THOUSANDS, EXCEPT PER
                                                                   SHARE AMOUNTS)
<S>                                                           <C>           <C>
Total revenues..............................................   $  45,153     $  46,750
Net loss....................................................    (136,318)     (102,995)
Basic and diluted net loss per share........................       (2.68)        (2.06)
</Table>

IMPAIRMENT, EMPLOYEE TERMINATION BENEFITS AND OTHER CHARGES

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

<Table>
<Caption>
                                                              (IN THOUSANDS)
<S>                                                           <C>
Employee termination benefits...............................     $ 2,158
Impairment of goodwill......................................      53,400
Impairment of property and intangible asset.................       2,715
Write-down of assets held for sale..........................       2,706
Write-down of equipment.....................................       2,053
Obsolete and excess materials and supplies write-down.......       1,758
                                                                 -------
                                                                 $64,790
                                                                 =======
</Table>

                                       F-21
<PAGE>
                             DECODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Charges related to termination benefits are for 132 employees. Of the
$2,158 provided, $1,284 was paid in 2002 and $874 remains accrued and unpaid as
of December 31, 2002. These remaining benefits are expected to be settled in
cash over the first half of 2003.

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

     In September 2002, deCODE committed to a plan to sell its Woodridge
Discovery Center and an agent was engaged and has initiated an active marketing
program to locate a buyer/investor in a sale and leaseback transaction. Efforts
to enter into a sale and leaseback transaction continue with a view to having a
re-financing being completed by mid-2003. Taking into account the estimated
selling price of the building, deCODE recorded an impairment charge in the
year-ended December 31, 2002 amounting to $2,065. In addition, certain
intangible assets amounting to $650 were determined to be impaired utilizing a
discounted cashflow methodology to estimate fair value.

     In September 2002, deCODE committed to a plan to sell its former
headquarters facility that had been vacated in connection with the move to its
new headquarters facility in Reykjavik's University district earlier in the
year. In October 2002, an agent for the sale was engaged and an active marketing
program to locate a buyer was initiated. In November 2002, terms of sale were
agreed and executed with a buyer in the amount of $2,853. Taking into account
the selling price of the building less costs to sell, deCODE wrote-down the
property in September 2002 and recorded a loss amounting to $2,706.

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

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

                                       F-22
<PAGE>
                             DECODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

ACCOUNTS PAYABLE AND ACCRUED EXPENSES

     Accounts payable and accrued expenses consist of the following:

<Table>
<Caption>
                                                                DECEMBER 31,
                                                              -----------------
                                                               2002      2001
                                                              -------   -------
                                                               (IN THOUSANDS)
<S>                                                           <C>       <C>
Accounts payable............................................  $ 4,865   $11,809
Salaries and other employee benefits........................    4,257     4,285
Database license fee........................................    2,600     1,357
Building construction.......................................        0     2,415
Other current liabilities...................................    3,756     1,299
                                                              -------   -------
  Total.....................................................  $15,478   $21,165
                                                              =======   =======
</Table>

DEBT

     In December 2001, deCODE established a $27,500 bridge loan with an
Icelandic financial institution to finance the construction of its new
headquarters facility. The borrowings under the bridge loan were repaid in
January and March 2002 with the proceeds from deCODE's Tier A $13,500 bond
offering, Tier C $7,300 offering of privately placed bonds and Tier D $6,700
bank loan. In December 2001, deCODE also entered into a $4,000 bank loan (Tier
B) for the construction of it's new headquarters facility. The Tier B bank loan
is denominated in U.S. dollars and the principal amount is payable quarterly
beginning March 2002. The Tier B bank loan bears annual interest of three-month
LIBOR plus 3.0% (4.42% at December 31, 2002)that is payable quarterly beginning
March 2002. The lender may demand prepayment of the Tier B bank loan in certain
circumstances.

     The Tier A bonds are denominated in Icelandic krona and are linked to the
Icelandic Consumer Price Index. The principal amount is payable annually
beginning December 2002. The Tier A bonds bear annual interest of 8.5% that is
payable annually beginning December 2002. The Tier C bonds are denominated in
Icelandic krona and are linked to the Icelandic Consumer Price Index. The
principal amount is payable in March 2007. The Tier C bonds bear annual interest
of 12.0% that is payable beginning March 2003. The principal amount is payable
in March 2007. The Tier D bank loan bears annual interest of three-month LIBOR
plus 6.0% (7.42% at December 31, 2002) 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.

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

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

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

                                       F-23
<PAGE>
                             DECODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In April 2002, deCODE repaid the existing loan that had been assumed in the
acquisition of MediChem ($11,880). In June 2002, deCODE executed a mortgage for
$11,800 with a financial institution for its Woodridge, IL discovery center. The
debt carries an interest rate of three-month LIBOR + 1.75% (3.57% at December
31, 2002), payable in monthly installments of $49 for five years and a final
payment of $8,800 due in 2007. The mortgage is collateralized by restricted cash
totaling $6,000.

     In November 2002, deCODE established a $2,200 mortgage loan with an
Icelandic financial institution. The bank loan is denominated in U.S. dollars
and bears interest at a rate of 6 month LIBOR plus 1.95% (3.33% at December 31,
2002) that is payable in semi-annual installments of $73 beginning June 2003
with a final payment of $1,835 due in 2005.

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

     In the ordinary course of business, deCODE is contingently liable for
performance under a standby letters of credit totaling $1,286 as of December 31,
2002.

     Debt consists of the following:

<Table>
<Caption>
                                                                DECEMBER 31,
                                                              -----------------
                                                               2002      2001
                                                              -------   -------
                                                               (IN THOUSANDS)
<S>                                                           <C>       <C>
Bridge loan; interest at short-term LIBOR plus 0.5%.........  $     0   $27,500
Mortgage bonds; fixed interest of 8.5% - 12.0%..............   24,316         0
Mortgage loans; interest at LIBOR plus 1.75% - 6.0%.........   23,186     4,001
Equipment notes; fixed interest of 8.52% - 9.57%............    1,702         0
                                                              -------   -------
Total.......................................................  $49,204   $31,501
                                                              =======   =======
</Table>

     As of December 31, 2002 principal payments on long-term debt are as
follows:

<Table>
<S>                                                           <C>
2003........................................................  $ 4,243
2004........................................................    4,289
2005........................................................    5,844
2006........................................................    3,719
2007........................................................   27,996
2008 and thereafter.........................................    3,113
                                                              -------
                                                              $49,204
                                                              =======
</Table>

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, 2002, deCODE had entered into two cross-currency swaps for purposes
of managing certain of these risks.

                                       F-24
<PAGE>
                             DECODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     deCODE seeks to maintain a desired level of floating-rate debt with respect
to its overall debt portfolio denominated in U.S. Dollars. To this end, deCODE
uses interest rate and cross-currency swaps to manage interest rate and foreign
currency risk arising from long-term debt obligations denominated in Icelandic
krona. These interest rate and cross-currency swaps with a combined notional
amount of 2,100 million Icelandic krona are designated as economic hedges of
fixed rate foreign currency debt (Tier A and Tier C bonds), but do not qualify
for hedge accounting under SFAS 133. The estimated fair value of these
instruments is included in other long-term liabilities ($223) as of December 31,
2001 and in other long-term assets ($6,361) as of December 31, 2002. The
resulting unrealized loss for the year-ended December 31, 2001 ($223) and
unrealized gain for the year-ended December 31, 2002 ($1,116) are included in
other non-operating income and (expense), net in the Consolidated Statements of
Operations.

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

LEASE COMMITMENTS

     deCODE leases certain property, laboratory equipment and other assets under
obligations that expire at varying dates through 2008. At December 31, 2002,
future minimum lease payments under all non-cancelable leases with terms in
excess of one-year are as follows:

<Table>
<Caption>
                                                              OPERATING   CAPITAL
                                                              ---------   -------
                                                                (IN THOUSANDS)
<S>                                                           <C>         <C>
2003........................................................   $1,478     $ 4,647
2004........................................................    1,120       4,622
2005........................................................      688         342
2006........................................................      256         143
2007........................................................        0          40
2008........................................................        0          30
                                                               ------     -------
Total minimum lease payments................................   $3,542       9,824
                                                               ======
Less amount representing interest...........................                 (505)
                                                                          -------
Present value of future minimum lease payments..............                9,319
Less: current portion.......................................               (4,311)
                                                                          -------
Long-term portion...........................................              $ 5,008
                                                                          =======
</Table>

     Rental expense for operating leases was $1,491, $872 and $247 in the years
ended December 31, 2002, 2001 and 2000, respectively. Included in operating and
capital lease commitments are leases on facilities that deCODE has vacated
during 2002 as a result of the move to the new headquarters facility. Total
remaining minimum lease payments on these facilities are $1,046 as of December
31, 2002. Management has assessed its alternatives in respect of these leased
facilities, including sub-leasing, and has recorded a provision amounting to
$903 in the year ended December 31, 2002 with respect to the remaining
commitments. The remaining provision at December 31, 2002 ($839) is net of
sub-lease payments deCODE will receive and is classified together with other
current liabilities.

GUARANTEES

     In November 2002, the FASB issued FIN No. 45 "Guarantor's Accounting and
Disclosure Requirements for Guarantees, including Indirect Guarantees of
Indebtedness of Others -- an interpretation of FASB Statements
                                       F-25
<PAGE>
                             DECODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

No. 5, 57 and 107 and rescission of FIN 34." deCODE has applied the disclosure
provisions of this FIN 45 as of December 31, 2002. The following is a summary of
deCODE's agreements that it has determined are within the scope of FIN 45.

     Under its bylaws, deCODE has agreed to indemnify its officers and directors
for certain events or occurrences while the officer or director is, or was
serving, at its request in such capacity. The term of the indemnification period
is for the officer's or director's lifetime. deCODE has a separate
indemnification agreement with one of its directors that requires it, subject to
certain exceptions, to indemnify him to the fullest extent authorized or
permitted by its bylaws and the Delaware General Corporation Law. The maximum
potential amount of future payments deCODE could be required to make under these
indemnification agreements is unlimited; however, deCODE has a directors and
officer liability insurance policy that limits its exposure and enables it to
recover a portion of any future amounts paid. As a result of its insurance
policy coverage, deCODE believes the estimated fair value of these
indemnification agreements is minimal. deCODE has no liabilities recorded for
these agreements as of December 31, 2002.

     When as part of an acquisition deCODE acquires all of the stock or all of
the assets and liabilities of a company, it assumes the liability for certain
events or occurrences that took place prior to the date of acquisition. The
maximum potential amount of future payments it could be required to make for
such obligations is undeterminable at this time. deCODE has no liabilities
recorded for these liabilities as of December 31, 2002.

     deCODE enters into indemnification provisions under (i) its agreements with
other companies in its ordinary course of business, typically with business
partners, contractors, clinical sites and customers and (ii) its agreements with
investors. Under these provisions deCODE generally indemnifies and hold harmless
the indemnified party for losses suffered or incurred by the indemnified party
as a result of deCODE's activities or, in some cases, as a result of the
indemnified party's activities under the agreement. These indemnification
provisions generally survive termination of the underlying agreement. In
addition, in some cases, deCODE has agreed to reimburse employees for certain
expenses and to provide salary continuation during short term disability. The
maximum potential amount of future payments deCODE could be required to make
under these indemnification provisions is unlimited. deCODE has not incurred
material costs to defend lawsuits or settle claims related to these
indemnification agreements. As a result, the estimated fair value of these
agreements is minimal. Accordingly, deCODE has no liabilities recorded for these
agreements as of December 31, 2002.

SETTLEMENT AGREEMENT

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

     Under the terms of the Agreement, deCODE is obligated to pay license fees
and other payments upon the achievement of established milestones leading to the
discovery of defined products. deCODE is also required to pay royalties to Beth
Israel on certain royalty bearing products which may result from the licensed
technology. Such royalties are to be paid for a period up to and potentially
exceeding 15 years.

                                       F-26
<PAGE>
                             DECODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

SIGNIFICANT COLLABORATIVE PARTIES

     deCODE's principal partners include:

     F. Hoffman-La Roche.  In January 2002, deCODE and Roche entered into a new
three year Collaboration and Cross-License Agreement. 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 may
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 may
pay Roche royalties should deCODE develop and market drugs for certain common
diseases.

     Merck.  In September 2002, deCODE and Merck & Co., Inc. (Merck) entered
into an alliance aimed at developing new treatments for obesity. Under the
alliance, deCODE and Merck will combine their research efforts in the genetics
of obesity to identify, validate and prioritize a series of drug targets to take
into development. Under the terms of the three-year agreement, deCODE will
receive research funding, technology access, license fees, milestone payments as
compounds developed under the alliance advance in the development process, and
royalties on successfully marketed alliance drugs.

     F. Hoffman-La Roche.  In June 2001, deCODE entered into a collaboration and
cross-license agreement with Roche establishing a five-year alliance to develop
and market DNA-based diagnostics for major diseases, Under the terms of this new
agreement, deCODE is collaborating with Roche to identify 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.

     IBM.  In January 2003, deCODE announced a three-year strategic alliance
with IBM under which deCODE and IBM will jointly market and sell deCODE's
Clinical Genome Miner (CGM) Discovery(TM) system running on IBM hardware and
software. CGM Discovery(TM) is the same statistically-based application for
isolating and analyzing genes and gene variations associated with particular
diseases that deCODE has used its gene discovery programs. The alliance aims to
take advantage of deCODE's expertise in genetics and IBM's leadership in
hardware and software systems to create solutions for what deCODE and IBM
believe is a growing market for information-based medicine.

     Wyeth.  In November 2002, deCODE entered into a pharmagenomic alliance with
Wyeth. Under the agreement, deCODE will use its in vitro pharmacogenomics
expertise to generate gene expression data for a drug candidate targeted to
treatment of certain respiratory diseases.

     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 amended and restated
agreement, deCODE will receive contract fees in exchange for employing 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.

     Vertex Pharmaceuticals.  In January 2003 deCODE entered into an agreement
with Vertex Pharmaceuticals under which we will gather and analyze
pharmacogenomic data as part of clinical trials our subsidiary

                                       F-27
<PAGE>
                             DECODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Encode conducts on Vertex developmental compounds. The first project under the
agreement is a phase IIa clinical trial for Vertex's VX-148 treatment for
psoriasis. Our pharmacogenomics capabilities will enable Vertex to gain an
understanding, in conjunction with clinical trial results, of genetic factors
affecting the responses of individuals to treatment. This information may be
useful in designing subsequent clinical strategies and pharmacogenomic tests.
Based upon the results of work under this agreement, we and Vertex may extend
our collaboration to the development and commercialization of pharmacogenomic
tests.

     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.

     Genmab and Medarex.  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.

     Academic, Hospital and Physician Collaborations.  deCODE has ongoing
collaborations with a number of academic, healthcare and research organizations
in other countries, including Emory University (Atlanta), Partners HealthCare
System (Boston), the University of Pennsylvania (Philadelphia), the University
of Aberdeen (Scotland), the National Cancer Institute (Washington, DC), the
Karolinska Institute (Stockholm), and the Center for Clinical and Basic Research
(Denmark). These collaborations enable deCODE to broaden its knowledge about the
genetics discoveries made in Iceland in other patient populations, and provide
its partners with access to our tools and expertise in human genetics. In all
such collaborations deCODE negotiates to retain intellectual property and
product development rights on results obtained using its discoveries and
expertise.

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 (approximately $913
as of March 2003) 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, 2002, $2,600 in
respect of these annual fees has been provided and is included in 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
                                       F-28
<PAGE>
                             DECODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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. As of March 2003, deCODE is awaiting
the conclusion of a government-mandated review of the Icelandic Health Sector
Database's data encryption and protection protocols.

     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 us in the District Court of Reykjavik
in Iceland. They alleged that deCODE's genealogy database infringes their
copyrights and sought damages in the amount of approximately 616 million
Icelandic kronas and a declaratory judgment to prevent
                                       F-29
<PAGE>
                             DECODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

deCODE from using the allegedly infringing data. Subsequently, deCODE acquired
the copyrights at issue in the matter for 10 million Icelandic kronas
(approximately $120). On December 20, 2002, the case was dismissed without
prejudice.

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

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

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

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

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

                                       F-30
<PAGE>
                             DECODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     deCODE believes that the allegations against deCODE and deCODE's officers
are without merit and deCODE intends to contest them vigorously. Because the
litigation is, however, still in the preliminary stage, 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 deCODE's officers. If deCODE is required
to pay significant monetary damages as a result of such litigation, deCODE's
business could be significantly harmed. Even if such suit or suits conclude in
deCODE's 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
deCODE's financial statements.

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.

COMMON STOCK

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

     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 $182,000, net
of an underwriting discount of $13,900 and offering expenses of $2,900.

     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, 2002.

                                       F-31
<PAGE>
                             DECODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     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.

     Forfeited unvested Founder Stock and unvested common stock issued upon
early exercise of stock options totaling 70,841 and 26,977 in 2001 and 2000,
respectively, were held in treasury and subsequently re-issued during those same
years. At December 31, 2002, forfeited unvested common stock issued upon early
exercise of stock options totaling 150,635 shares were held in treasury. At
December 31, 2002, 89,042 shares of common stock that were issued upon
early-exercise of stock options remained unvested.

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

WARRANTS

     Upon the closing of deCODE's public offering in July 2000, warrants to
purchase 1,075,833 shares of Series A preferred stock and warrants and options
to purchase 416,667 shares of Series C preferred stock automatically converted
into warrants and options to purchase the same number of shares of common stock.
Of these warrants, 325,000 were exercised during the period from the public
offering and December 31, 2000, 100,000 were exercised in the year ended
December 31, 2001 and 150,000 were exercised in the year ended December 31,
2002. Holders of such warrants and options have the right to require deCODE to
file a registration statement under the Securities Act covering the registration
of their shares at any time after 180 days from the effective date of an initial
registration statement if the holders of 50% of such shares demand registration.
Such registration rights are subject to conditions and limitations, including
the right of the underwriters of an offering to limit the number of shares of
common stock which security holders may include in a registration. Further,
deCODE may defer a registration for a period of 90 days if deCODE furnishes to
the holders requesting registration a certificate signed by the chairman of the
board stating that in the good faith judgment of the Board of Directors it would
be seriously detrimental to deCODE and its stockholders for the requested
registration to be effected at that time. deCODE is generally required to bear
all of the expenses of such registrations, except underwriting discounts and
selling commissions. Registration of any of the shares of common stock held by
security holders with registration rights would result in such shares becoming
freely tradable without restriction under the Securities Act immediately upon
effectiveness of such registration.

     Warrant activity is summarized as follows:

<Table>
<Caption>
                                                      FOR THE YEARS ENDED DECEMBER 31,
                                                      ---------------------------------
                                                        2002        2001        2000
                                                      ---------   ---------   ---------
<S>                                                   <C>         <C>         <C>
Outstanding at beginning of year....................  1,067,500   1,167,500   1,492,500
Issued..............................................    933,800           0           0
Exercised...........................................   (150,000)   (100,000)   (325,000)
                                                      ---------   ---------   ---------
Outstanding at end of year..........................  1,851,300   1,067,500   1,167,500
                                                      =========   =========   =========
</Table>

     In May 2002, deCODE issued warrants to purchase 933,800 shares of common
stock at an exercise price of $15.00 per share in conjunction with the issuance
of the Tier C bonds and Tier D bank loan. Exercise prices on deCODE's remaining
outstanding warrants range from $1.00-$4.00 per share.

                                       F-32
<PAGE>
                             DECODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

STOCK OPTION PLAN

     In August 1996, deCODE adopted the deCODE genetics, Inc. 1996 Equity
Incentive Plan (the "1996 Plan"). A total of 7,000,000 options are reserved for
grants under the terms of the Plan. The Plan provides for grants of stock
options to employees, members of the Board of Directors, consultants and other
advisors who are not employees. Options granted to date generally vest over a
period of four years, generally have a maximum term of 10 years, and may contain
early-exercise provisions allowing for company-provided financing of the
exercise price. As of December 31, 2002, 531,276 shares were available for grant
under the 1996 Plan.

     In June 2002, deCODE adopted the deCODE genetics, Inc. 2002 Equity
Incentive Plan (the "2002 Plan"). A total of 3,000,000 shares of common stock
are reserved for grants under the terms of the 2002 Plan. The 2002 Plan provides
for grants of stock options to employees, members of the Board of Directors, and
consultants who are not employees. There were no options granted in 2002 under
the 2002 Plan. As of December 31, 2002, 3,000,000 shares were available for
grant under the 2002 Plan.

     Options transactions pursuant to the 1996 Plan are summarized as follows:

<Table>
<Caption>
                            EXERCISE PRICE           EXERCISE PRICE         EXERCISE PRICE
                       GREATER THAN GRANT DATE     EQUALS GRANT DATE     LESS THAN GRANT DATE
                           STOCK FAIR VALUE         STOCK FAIR VALUE       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, 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       (51,667)    12.05           0       0.00      (51,667)    12.05
                         -------       ------     ---------    ------     -------     ------    ---------    ------
Outstanding at
  December 31, 2001..    105,000         7.92     1,437,833     10.11     375,500       9.97    1,918,333      9.97
Granted..............          0         0.00       869,653      7.80           0       0.00      869,653      7.80
Exercised............          0         0.00       (38,813)     1.24           0       0.00      (38,813)     1.24
Cancelled............          0         0.00      (383,262)     9.57     (65,000)      5.70     (448,262)     9.01
                         -------       ------     ---------    ------     -------     ------    ---------    ------
Outstanding at
  December 31, 2002..    105,000       $ 7.92     1,885,411    $ 9.34     310,500     $10.86    2,300,911    $ 9.48
                         =======       ======     =========    ======     =======     ======    =========    ======
</Table>

     In March 2002, deCODE granted options to purchase 673,417 shares of common
stock to employees under the 1996 Plan, including options to purchase 577,917
shares of common stock to employees in connection with the acquisition of
MediChem. In July 2002, deCODE granted additional options to purchase 136,352
shares of common stock to employees in connection with the acquisition of
MediChem. In August 2002, deCODE granted options to purchase 60,000 shares of
common stock to a member of the Board of Directors.

                                       F-33
<PAGE>
                             DECODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<Table>
<Caption>
                                              OUTSTANDING
                                   ----------------------------------
                                                           WEIGHTED     VESTED AND EXERCISABLE
                                                            AVERAGE     ----------------------
                                               WEIGHTED    REMAINING                 WEIGHTED
                                               AVERAGE    CONTRACTUAL                 AVERAGE
                                   NUMBER OF   EXERCISE      LIFE       NUMBER OF    EXERCISE
EXERCISE PRICE                      SHARES      PRICE     (IN YEARS)      SHARES       PRICE
--------------                     ---------   --------   -----------   ----------   ---------
<S>                                <C>         <C>        <C>           <C>          <C>
$1.00 to $6.55...................    541,464    $ 3.78       8.44         288,928     $ 3.10
$7.42 to $8.13...................    822,978      7.92       8.16         459,783       7.87
$8.65 to $13.56..................    567,595     11.09       8.00         315,150      11.22
$14.94 to $24.56.................    368,874     18.88       7.57         301,013      19.07
                                   ---------    ------       ----       ---------     ------
$1.00 to $24.56..................  2,300,911    $ 9.48       8.09       1,364,874     $10.11
                                   =========    ======       ====       =========     ======
</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 $3,048, $4,598 and $8,246 was recognized in the statements of
operations during the years ended December 31, 2002, 2001 and 2000 for employee
stock options, and stock-based remuneration expense of $0, $53 and $24 was
recognized in the statements of operations during the years ended December 31,
2002, 2001 and 2000 for non-employee stock options.

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

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

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

<Table>
<Caption>
                                                               FOR THE YEARS ENDED
                                                                   DECEMBER 31,
                                                              ----------------------
                                                              2002    2001     2000
                                                              -----   -----   ------
<S>                                                           <C>     <C>     <C>
Exercise price greater than grant date stock fair value.....  $  --   $7.42   $   --
Exercise price equals grant date stock fair value...........   5.91    8.23     9.82
Exercise price less than grant date stock fair value........     --      --    17.65
</Table>

     The fair values of the options granted during 2002, 2001 and 2000 are
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions: no dividends, expected volatility of
100%, 100% and 80%, respectively; expected terms of 5.0 years for all periods;
and risk-free interest rates of 4.49%, 4.39% and 5.42%, respectively.

                                       F-34
<PAGE>
                             DECODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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,
                                                             ------------------------
                                                              2002     2001     2000
                                                             ------   ------   ------
                                                                  (IN THOUSANDS)
<S>                                                          <C>      <C>      <C>
Research and development expense...........................  $2,004   $3,314   $4,073
General and administrative expense.........................   1,044    1,337    4,614
                                                             ------   ------   ------
  Total....................................................  $3,048   $4,651   $8,687
                                                             ======   ======   ======
</Table>

     Included in the above is $131 that was paid in the form of shares 20,508 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 2000, deCODE issued 20,000 shares of common stock to collaborators
amounting to $416 in exchange for services provided. This remuneration amount
was charged to expense in the statement of operations in the year ended December
31, 2000.

     In addition, general and administrative expenses in the year ended December
31, 2001 include a charitable contribution of 5,000 shares of deCODE common
stock amounting to $53 and 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 $3,000 and of 8,000 shares of deCODE common stock
amounting to $194.

DEFINED CONTRIBUTION BENEFITS

     deCODE contributes to relevant pension organizations for personnel in
Iceland. Certain other discretionary contributions may be made. Contributions
are based on employee salaries paid and deCODE has no further liability in
connection with these plans. Total contributions were $1,928, $1,434 and $979
for the years ended December 31, 2002, 2001 and 2000, 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 $31 and $1 in the years ended December 31, 2002 and 2001 to this plan.
Additionally, MediChem sponsors a contribution savings and investment 401(k)
plan in which employees meeting minimum service requirements are eligible to
participate. Participants may contribute up to 15% of their compensation. In
2002 and since the date of acquisition, deCODE contributed an amount equal to
50% of participant contributions on the first 6% of compensation totaling $198.

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-35
<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,
                                                              -------------------
                                                                2002       2001
                                                              --------   --------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
Loss carryforwards..........................................  $ 32,050   $  5,490
Capitalized research and development costs..................     8,031      5,064
Deferred revenue............................................     2,149      1,860
Fixed asset depreciation....................................       (51)       793
Intangible assets/patents...................................    (1,427)      (355)
Other deferred tax assets...................................      (159)       447
                                                              --------   --------
  Total deferred tax asset, net.............................    40,593     13,299
Valuation allowance.........................................   (40,593)   (13,299)
                                                              --------   --------
                                                              $      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,
                                                              -------------
                                                              2002    2001
                                                              -----   -----
<S>                                                           <C>     <C>
Income taxes at federal statutory rates.....................  (34.0)% (34.0)%
State income taxes, net of federal benefit..................   (0.6)   (0.5)
Non-deductible equity compensation..........................    0.4     3.5
Non-deductible goodwill amortization........................   13.8     2.2
Foreign rate differential...................................    8.0     3.6
Foreign deferred tax asset adjustment.......................    0.0    14.7
Foreign inflation adjustment................................    0.0    (8.1)
Foreign currency adjustment.................................   (5.1)   17.0
Other.......................................................   (0.1)    0.0
Net change in valuation allowance...........................   17.6     1.6
                                                              -----   -----
                                                                0.0%    0.0%
                                                              =====   =====
</Table>

     Pre-tax U.S. losses were $65,825 and $5,087 and pre-tax Icelandic losses
were $66,061 and $47,360 in 2002 and 2001, respectively. As of December 31,
2002, deCODE had U.S. federal net operating loss ("NOL") carryforwards of
approximately $32,204 that may be available to offset future U.S. federal income
tax liabilities and expire at various dates through 2022. Also as of December
31, 2002, deCODE's Icelandic subsidiaries had NOL carryforwards of approximately
$107,370 that begin to expire in 2006. Management has evaluated the positive and
negative evidence bearing upon the realizability of its deferred tax assets and
has established a full valuation allowance for such assets, which are comprised
principally of net operating loss carryforwards and capitalized research and
experimentation costs.

     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

                                       F-36
<PAGE>
                             DECODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

assets at December 31, 2001 were re-computed at the 18% rate, resulting in a
decrease in deCODE's deferred tax assets and liabilities which was offset by a
reduction in the tax valuation allowance of $7,700. For Icelandic tax purposes,
the Income Tax and Capital Tax Act of 1981, as amended, contains provisions that
stipulate that an inflation adjustment be taken into account in the annual
reporting of taxable income. For the years ended December 31, 2001 and 2002, the
adjustment to taxable income was a benefit of approximately $14,100 and $0,
respectively. For periods beginning on or after January 1, 2002, the Income Tax
and Capital Tax Act was amended to remove these provisions. In the year-ended
December 31, 2002 there was a foreign currency adjustment caused by
strengthening of the Icelandic krona against the U.S. dollar, resulting in an
increase in deferred tax assets and liabilities that was offset by a reduction
in the tax valuation allowance of $37,100. In the year-ended December 31, 2001
there was a foreign currency adjustment caused by the devaluation of the
Icelandic krona against the U.S. dollar, resulting in a decrease in deferred tax
assets and liabilities which was offset by a reduction in the tax valuation
allowance of $30,100.

SELECTED QUARTERLY DATA (UNAUDITED)

     deCODE has restated previously reported quarterly financial results for
years ended December 31, 2002 and December 31, 2001 for certain revenue matters,
results per share and other items. The effect of this restatement on the
Statement of Operations is summarized as follows:

<Table>
<Caption>
                                                         FOR THE THREE MONTHS ENDED
                        ---------------------------------------------------------------------------------------------
                              MARCH 31,               JUNE 30,              SEPTEMBER 30,           DECEMBER 31,
                        ---------------------   ---------------------   ---------------------   ---------------------
                            AS                      AS                      AS                      AS
                        PREVIOUSLY      AS      PREVIOUSLY      AS      PREVIOUSLY      AS      PREVIOUSLY      AS
                         REPORTED    RESTATED    REPORTED    RESTATED    REPORTED    RESTATED    REPORTED    RESTATED
                        ----------   --------   ----------   --------   ----------   --------   ----------   --------
<S>                     <C>          <C>        <C>          <C>        <C>          <C>        <C>          <C>
FISCAL 2002
  Revenue.............   $ 9,486     $ 5,258     $13,410     $ 9,442     $ 8,982     $ 8,982     $17,383     $17,383
  Operating loss......    11,959      16,886      15,725      19,674      85,200      85,417      10,045      10,045
  Net loss............    11,194      15,867      16,832      19,708      85,694      85,439      10,872      10,872
  Basic and diluted
     net loss per
     share............      0.24        0.36        0.32        0.39        1.61        1.68        0.21        0.21

FISCAL 2001
  Revenue.............     5,033       5,033       6,198       6,198       9,721       8,146      10,599       6,722
  Operating loss......    18,186      14,752      13,862      14,120       9,947      11,811      10,655      16,574
  Net loss............    16,088      12,654      12,291      12,549       8,867      10,732      10,592      16,512
  Basic and diluted
     net loss per
     share............      0.37        0.31        0.28        0.30        0.20        0.26        0.24        0.39
</Table>

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

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

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

     Restatement Items.

     Revenue Matters.  In the fourth quarter of 2002, deCODE terminated and
entered into a related settlement agreement with Applied Biosystems Group (ABG)
in connection with two agreements between the parties that been in place since
July 2001. In connection with this termination, deCODE reassessed its

                                       F-37
<PAGE>
                             DECODE GENETICS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

previously reported accounting for its the Joint Development and
Commercialization Agreement (the Agreement) with ABG to develop genotypic
analysis products and has determined that revenue related to ABG's payment
obligation and deCODE's development costs associated with the Agreement should
be deferred until the development efforts are completed or the Agreement is
terminated, if earlier. This resulted in a reduction of revenues of $5.4 million
and $8.2 million and costs of $0.3 and $0.5 million previously reported in 2001
and through the first three quarters of 2002, respectively. The resulting
deferred revenue and costs of $6.3 million and $0.8 million at September 30,
2002, respectively, were recognized in the fourth quarter of 2002 when the
parties reached agreement as to termination. deCODE's previous accounting for
the Agreement was to record revenue according to a percentage of completion
model, where revenues were recognized on the basis of the estimated percentage
of work completed in a given reporting period as compared to the total estimated
work required under the Agreement. Contract costs were previously expensed as
incurred.

     At the same time, deCODE reached agreement with ABG as to the termination
of its Reagent Supply Agreement which required deCODE to make certain minimum
purchases on a quarterly basis. Settlement of the Reagent Supply Agreement had
no impact on deCODE's consolidated financial results.

     Results Per Share.  deCODE has restated its basic and diluted net loss per
share to correct its treatment of restricted shares that have an associated
outstanding non-recourse promissory note. These shares were previously included
in the determination of weighted shares outstanding for purposes of calculating
basic and diluted loss per share to the extent they were vested. To the extent a
promissory note received upon issuance of restricted shares is outstanding, the
shares are excluded from weighted average shares outstanding. The impact of
excluding all relevant restricted shares reduces the number of weighted shares
outstanding and therefore increases the loss per share.

     Other.  deCODE has corrected its accounting for swaps and certain other
minor items, the impact of which is a decrease of $0.5 million and $0.4 million
in net loss for the full-year 2001 and nine-month period ended September 30,
2002, respectively. Notably, the quarterly financial results for 2001 have been
impacted by the restatement in deCODE's accounting for materials and supplies.

                                       F-38
<PAGE>

                                 EXHIBIT INDEX

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

<Table>
<Caption>
EXHIBIT
NUMBER                            DESCRIPTION
-------                           -----------
<C>       <S>
 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     Amended and Restated Investor rights Agreement of deCODE
          genetics, Inc., dated as of February 2, 1998, as further
          amended and restated (Incorporated by reference to Exhibit
          10.12 to the Company's Registration Statement on Form S-1
          (Registration No. 333-31984) which became effective on July
          17, 2000).
 10.10    Co-operation Agreement between Reykjavik Hospital and
          Islensk erfdagreining ehf., dated November 4, 1998
          (Incorporated by reference to Exhibit 10.22 to the Company's
          Registration Statement on Form S-1 (Registration No.
          333-31984) which became effective on July 17, 2000).
 10.11    Co-operation Agreement between the Iceland State Hospital
          and Islensk erfdagreining ehf., dated December 15, 1998
          (Incorporated by reference to Exhibit 10.24 to the Company's
          Registration Statement on Form S-1 (Registration No.
          333-31984) which became effective on July 17, 2000).
 10.12*   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).
 10.13    Agreement between The Minister for Health and Social
          Security and Islensk erfdagreining 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).
 10.14    Operating License issued to Islensk erfdagreining 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).
 10.15*   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).
 10.16    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).
 10.17*   Employment Agreement between Islensk erfdagreining ehf. and
          Hakon Gudbjartson, dated May 5, 1999 (Incorporated by
          reference to Exhibit 10.52 to the Company's Annual Report on
          Form 10K filed March 23, 2001).
 10.18    Form of Contract on the Processing of Clinical Data and
          their Transfer to a Health Sector Database between several
          Health Institutions and Islensk erfdagreining ehf.
          (Incorporated by reference to Exhibit 10.58 to the Company's
          Annual Report on Form 10-K filed March 23, 2001).
 10.19*   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>
<PAGE>

<Table>
<Caption>
EXHIBIT
NUMBER                            DESCRIPTION
-------                           -----------
<C>       <S>
 10.20*   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).
 10.21*   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).
 10.22*   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).
 10.23+   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).
 10.24    Contract on Financial Leasing between Lysing hf, and Islensk
          erfdagreining ehf., dated as of December 13, 2001.
          (Incorporated by reference to Exhibit 10.36 to the Company's
          Annual Report on Form 10-K filed March 27, 2002).
 10.25    Land Lease Agreement between the City of Reykjavik and
          Islensk erfdagreining ehf., dated as of December 21, 2001.
          (Incorporated by reference to Exhibit 10.37 to the Company's
          Annual Report on Form 10-K filed March 27, 2002).
 10.26    Agreement on the Details of the Arrangement of Encumbrances
          in the Site Agreement between the University of Iceland and
          Islensk erfdagreining ehf., dated as of December 21, 2001.
          (Incorporated by reference to Exhibit 10.38 to the Company's
          Annual Report on Form 10-K filed March 27, 2002).
 10.27    Annex to the Agreement on the Details of the Arrangement of
          Encumbrances in the Site Agreement between the University of
          Iceland and Islensk erfdagreining ehf., dated as of January
          4, 2002. (Incorporated by reference to Exhibit 10.39 to the
          Company's Annual Report on Form 10-K filed March 27, 2002).
 10.28#   Loan Agreement between Sturlugata 8, ehf. (now named
          Vetrargardurinn ehf.) and Islandsbanki-FBA hf., dated as of
          December 21, 2001. (Incorporated by reference to Exhibit
          10.40 to the Company's Annual Report on Form 10-K filed
          March 27, 2002).
 10.29    Currency Exchange Agreement between Sturlugata 8 ehf. (now
          named Vetrargardurinn ehf.) and Islandsbanki-FBA hf., dated
          as of December 21, 2001. (Incorporated by reference to
          Exhibit 10.42 to the Company's Annual Report on Form 10-K
          filed March 27, 2002).
 10.30    General Bond with Consumer Price Index between
          Islandsbanki-FBA hf. and Sturlugata 8 ehf., (now named
          Vetrargardurinn ehf.) dated as of December 21, 2001.
          (Incorporated by reference to Exhibit 10.44 to the Company's
          Annual Report on Form 10-K filed March 27, 2002).
 10.31    General Bond with Consumer Price Index between
          Islandsbanki-FBA hf. and Sturlugata 8 ehf., (now named
          Vetrargardurinn ehf.) dated as of December 21, 2001.
          (Incorporated by reference to Exhibit 10.45 to the Company's
          Annual Report on Form 10-K filed March 27, 2002).
 10.32#   Research Collaboration and Cross-License Agreement among
          F.Hoffman-La Roche Ltd and Hoffman-La Roche Inc. and deCODE
          genetics, ehf. (Islensk erfdagreining), effective as of
          February 1, 2002. (Incorporated by reference to Exhibit
          10.46 to the Company's Annual Report on Form 10-K filed
          March 27, 2002).
 10.33    Currency Exchange Agreement between Vetrargardurinn ehf. and
          Islandsbanki-FBA hf., dated as of March 13, 2002
          (Incorporated by reference to Exhibit 10.3 to the Company's
          Quarterly Report on Form 10-Q filed on May 15, 2002).
</Table>
<PAGE>

<Table>
<Caption>
EXHIBIT
NUMBER                            DESCRIPTION
-------                           -----------
<C>       <S>
 10.34    General Bond with Consumer Price Index between
          Islandsbanki-FBA hf. and Vetrargardurinn ehf., dated as of
          February 8, 2002 (Incorporated by reference to Exhibit 10.4
          to the Company's Quarterly Report on Form 10-Q filed on May
          15, 2002).
 10.35+   Loan Agreement between Islandsbanki-FBA hf. and
          Vetrargardurinn ehf., dated as of March 13, 2002
          (Incorporated by reference to Exhibit 10.5 to the Company's
          Quarterly Report on Form 10-Q filed on May 15, 2002).
 10.36*   Promissory Note, dated May 27, 2002 from Hakon Gudbjartsson
          to the Company (Incorporated by reference to Exhibit 10.1 to
          the Company's Quarterly Report on Form 10-Q filed on August
          14, 2002).
 10.37*   Amended and Restated Promissory Note dated January 29, 1998
          From Hakon Godbjaetsson to the Company.
 10.38+   Research Collaboration and License Agreement, dated
          September 26, 2002, between deCODE genetics, Inc., deCODE
          genetics, ehf., and Merck & Co., Inc. (Incorporated by
          reference to Exhibit 10.1 to the Company's Quarterly Report
          on Form 10-Q filed on November 14, 2002).
 10.39    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).
 10.40*   2002 Equity Incentive Plan
 21.1     Subsidiaries of deCODE genetics, Inc.
 23.1     Consent of PricewaterhouseCoopers LLP, independent
          accountants.
 23.2     Consent of PricewaterhouseCoopers ehf, independent
          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).
 99.3     Certifications pursuant to Section 906 of the Sarbanes-Oxley
          Act of 2002.
</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.

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