<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q



(Mark One)


[X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934.

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001

                                       OR

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE EXCHANGE ACT


FOR THE TRANSITION PERIOD FROM                 TO
                               ---------------    ---------------



                        COMMISSION FILE NUMBER 000-30469



                              deCODE genetics, Inc.
             (Exact Name of Registrant as Specified in Its Charter)



            Delaware                                    04-3326704
(State or Other Jurisdiction of            (I.R.S. Employer Identification No.)
 Incorporation or Organization)



                         Lynghals 1, Reykjavik, Iceland
                    (Address of Principal Executive Offices)



                                011-354-570-1900
              (Registrant's Telephone Number, Including Area Code)



Indicate by check whether the registrant: (1) 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 such shorter period that the registrant is required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes  X    No
                  -----    ------


The aggregate number of shares of the registrant's common stock outstanding on
October 31, 2001 was 45,173,463.

<PAGE>

                              deCODE genetics, Inc.

                                      INDEX

<TABLE>
<CAPTION>
                                                                        Page Number
<S>                                                                     <C>
PART I. FINANCIAL INFORMATION ........................................       3

Item 1. Financial Statements .........................................       3

        Condensed Consolidated Statements of Operations for the
          three and nine month periods ended September 30, 2001
          and 2000 (unaudited)........................................       3

        Condensed Consolidated Balance Sheets as of September 30, 2001
          (unaudited) and December 31, 2000 ..........................       4

        Condensed Consolidated Statements of Cash Flows for the nine
          month periods ended September 30, 2001 and 2000 (unaudited).       5

        Notes to Condensed Consolidated Financial Statements .........       6

Item 2. Management's Discussion and Analysis of Financial Condition
        and Results of Operations ....................................      14

Item 3. Quantitative and Qualitative Disclosures about Market Risk ...      20


PART II. OTHER INFORMATION ...........................................      20

Item 2. Changes in Securities and Use of Proceeds ....................      20

        (d) Use of Proceeds ..........................................      20

Item 5. Other Information.............................................      21

        Risk Factors .................................................      21

Item 6. Exhibits and Reports on Form 8-K .............................      31

        (a) Exhibits .................................................      31

        (b) Reports on Form 8-K ......................................      31

Signatures ...........................................................      32

Index to Exhibits   ..................................................      33
</TABLE>

                                       2
<PAGE>

PART I   FINANCIAL INFORMATION


ITEM 1.  FINANCIAL STATEMENTS


                              deCODE genetics, Inc.

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS



<TABLE>
<CAPTION>
                                                          FOR THE THREE MONTHS                   FOR THE NINE MONTHS
                                                           ENDED SEPTEMBER 30,                   ENDED SEPTEMBER 30,
                                                     ------------------------------        -------------------------------
                                                         2001               2000               2001               2000
                                                     ------------       ------------       ------------       ------------
                                                      (UNAUDITED)        (UNAUDITED)        (UNAUDITED)        (UNAUDITED)

<S>                                                  <C>                <C>                <C>                <C>
Revenue .......................................      $  9,720,955       $  5,576,112       $ 20,951,848       $ 14,023,025

OPERATING EXPENSES
  Research and development ....................        16,836,656         11,716,720         53,384,144         30,922,315
  General and administrative ..................         2,830,965          4,419,621          9,561,812         12,160,829
                                                     ------------       ------------       ------------       ------------
         Total operating expenses .............        19,667,621         16,136,341         62,945,956         43,083,144
                                                     ------------       ------------       ------------       ------------

Operating loss ................................        (9,946,666)       (10,560,229)       (41,994,108)       (29,060,119)

Interest income ...............................         1,514,099          3,274,629          6,037,700          4,692,430
Other non-operating income
   and (expense), net .........................          (434,856)          (289,766)        (1,289,282)          (497,264)
Taxes .........................................                 0                  0                  0                  0
                                                     ------------       ------------       ------------       ------------
Net loss ......................................        (8,867,423)        (7,575,366)       (37,245,690)       (24,864,953)

Accrued dividends and amortized
   Discount on preferred stock ................                 0           (558,784)                 0         (7,540,879)
                                                     ------------       ------------       ------------       ------------
Net loss available to
   common stockholders ........................      $ (8,867,423)      $ (8,134,150)      $(37,245,690)      $(32,405,832)
                                                     ============       ============       ============       ============

Basic and diluted net loss
   per share ..................................      $      (0.20)      $      (0.23)      $      (0.84)      $      (1.90)

Shares used in computing basic and
   diluted net loss per share .................        44,493,608         35,645,739         44,183,756         17,025,758
</TABLE>


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



                                       3
<PAGE>


                              deCODE genetics, Inc.

                      CONDENSED CONSOLIDATED BALANCE SHEETS



<TABLE>
<CAPTION>
                                                            SEPTEMBER 30,        DECEMBER 31,
                                                                2001                2000
                                                            -------------       -------------
                                                             (UNAUDITED)
<S>                                                         <C>                 <C>
ASSETS
Current assets:
  Cash and cash equivalents ..........................      $ 143,843,183       $ 194,144,688
  Receivables and other current assets ...............         16,290,261          14,482,336
                                                            -------------       -------------
          Total current assets .......................        160,133,444         208,627,024
Property and equipment, net ..........................         53,146,655          37,100,690
Other long-term assets ...............................          2,158,453           3,172,853
                                                            -------------       -------------
          Total assets ...............................      $ 215,438,552       $ 248,900,567
                                                            =============       =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued expenses ..............      $  13,683,782       $  22,957,481
  Current portion of capital lease obligations .......          1,429,120           1,749,807
  Deferred research revenue ..........................          6,335,340           4,404,999
                                                            -------------       -------------
          Total current liabilities ..................         21,448,242          29,112,287
Capital lease obligations, net of current portion ....          1,819,035           2,801,853
Deferred research revenue.............................          7,500,000                   0
Other long-term liabilities ..........................            205,289             717,261

Commitments and contingencies

Stockholders' equity:
  Preferred stock, $0.001 par value;
     Authorized: 6,716,666 shares
     Issued and outstanding: none ....................                  0                   0
  Common stock, $0.001 par value;
     Authorized: 60,000,000 shares
     Issued:  45,233,783 and 45,041,969 shares
     at September 30, 2001 and December 31, 2000,
     respectively
     Outstanding: 45,173,463 and 45,041,969 shares
     at September 30, 2001 and December 31, 2000,
     respectively ....................................             45,174              45,042
  Additional paid-in capital .........................        350,980,285         350,398,909
  Notes receivable ...................................        (11,158,395)        (11,850,953)
  Deferred compensation ..............................         (7,440,674)        (11,568,776)
  Accumulated deficit ................................       (147,999,390)       (110,753,700)
  Accumulated other comprehensive income (loss) ......             38,986              (1,356)
                                                            -------------       -------------
          Total stockholders' equity .................        184,465,986         216,269,166
                                                            -------------       -------------
          Total liabilities, and
             stockholders' equity ....................      $ 215,438,552       $ 248,900,567
                                                            =============       =============
</TABLE>


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



                                       4
<PAGE>


                              deCODE genetics, Inc.

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                             FOR THE NINE MONTHS ENDED SEPTEMBER 30,
                                                             ---------------------------------------
                                                                    2001                2000
                                                               -------------       -------------
                                                                (UNAUDITED)         (UNAUDITED)
<S>                                                            <C>                 <C>
Net loss ................................................      $ (37,245,690)      $ (24,864,953)
Adjustments to reconcile net loss to net cash
   used in operating activities:
   Depreciation and amortization ........................          7,325,947           2,785,483
   Amortization of deferred stock compensation ..........          3,515,302           6,817,994
   Other stock-based remuneration and
      Stock contributions ...............................             52,500           3,415,930
   Loss on disposal of equipment ........................          1,607,583                   0
   Litigation settlement ................................          1,292,642                   0
   Equity in net loss of affiliate ......................            294,551             159,531
   Accrued interest on receivable from share
      issuance ..........................................                  0             893,836
   Other ................................................                  0            (280,261)
Changes in operating assets and liabilities:
  Receivables and other current assets ..................          3,192,026          (1,623,140)
  Accounts payable and accrued expenses .................          3,876,467           3,485,913
  Deferred research revenue .............................          9,430,341            (416,667)
  Unbilled research revenue .............................         (5,000,000)                  0
  Other long-term liabilities ...........................           (511,972)            100,000
                                                               -------------       -------------
     Net cash used in operating activities ..............        (12,170,303)         (9,526,334)
                                                               -------------       -------------

Cash flows from investing activities:
   Purchase of property and equipment ...................        (37,159,254)         (6,806,582)
   Investment in affiliated company, net ................                  0            (518,851)
                                                               -------------       -------------
     Net cash used in investing activities ..............        (37,159,254)         (7,325,433)
                                                               -------------       -------------

Cash flows from financing activities:
  Issuance of preferred stock and warrants ..............                  0          34,534,276
  Issuance of common stock ..............................                  0         181,991,369
  Repurchase of preferred stock .........................                  0         (17,467,077)
  Forfeiture of common stock ............................                (60)                (27)
  Repayment of notes receivable for common stock ........            331,617                   0
  Installment payments on capital lease obligations .....         (1,303,505)         (1,648,675)
                                                               -------------       -------------
     Net cash provided by (used in)
     financing activities ...............................           (971,948)        197,409,866
                                                               -------------       -------------

Net increase (decrease) in cash .........................        (50,301,505)        180,558,099
Cash and cash equivalents at beginning of period ........        194,144,688          29,845,664
                                                               -------------       -------------
Cash and cash equivalents at end of period ..............      $ 143,843,183       $ 210,403,763
                                                               =============       =============

Supplemental schedule of non-cash transactions:
    Payables related to purchase of property
       and equipment ....................................      $           0       $   6,781,249
</TABLE>


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



                                       5
<PAGE>



                              deCODE genetics, Inc.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



THE COMPANY

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

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


BASIS OF PRESENTATION

        The condensed consolidated financial statements included herein have
been prepared by deCODE, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The condensed balance sheet as of
December 31, 2000 has been derived from the audited financial statements as of
that date, but does not include all disclosures required by generally accepted
accounting principles. deCODE believes the disclosures included in the unaudited
condensed consolidated financial statements when read in conjunction with the
financial statements and the notes thereto included in deCODE's Annual Report on
Form 10-K/A are adequate to make the information presented not misleading.

        The unaudited condensed consolidated financial statements have been
prepared on the same basis as the annual financial statements and, in the
opinion of management, reflect all adjustments, which include only normal
recurring adjustments, necessary for a fair presentation of deCODE's financial
position, results of operations and cash flows for the periods presented. The
results of operations for the three and nine month periods ended September 30,
2001 and 2000 are not necessarily indicative of the results that may be expected
for any other interim period or for the full fiscal year.


PRINCIPLES OF CONSOLIDATION

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


USE OF ESTIMATES

        The preparation of the unaudited condensed consolidated financial
statements in conformity with generally accepted accounting principles requires
management to make certain estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reported period. Actual results could differ
from those estimates.



                                       6
<PAGE>


                              deCODE genetics, Inc.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


REVENUE

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

        The following is a summary of deferred revenue:

<TABLE>
<CAPTION>
                                                  FOR THE THREE MONTHS                   FOR THE NINE MONTHS
                                                   ENDED SEPTEMBER 30,                   ENDED SEPTEMBER 30,
                                             -------------------------------       -------------------------------
                                                  2001               2000               2001               2000
                                             ------------       ------------       ------------       ------------
                                              (UNAUDITED)        (UNAUDITED)        (UNAUDITED)        (UNAUDITED)

<S>                                          <C>                <C>                <C>                <C>
Revenue recorded during the period ....      $  8,963,795       $  5,465,000       $ 30,382,189       $ 13,606,358
Revenue recognized during the
   period .............................        (9,720,955)        (5,576,112)       (20,951,848)       (14,023,025)
                                             ------------       ------------       ------------       ------------
                                                 (757,160)          (111,112)         9,430,341           (416,667)
Deferred revenue at beginning of
   period .............................        14,592,500          1,932,778          4,404,999          2,238,333
                                             ------------       ------------       ------------       ------------
Deferred revenue at end of period .....      $ 13,835,340       $  1,821,666       $ 13,835,340       $  1,821,666
                                             ============       ============       ============       ============
</TABLE>


        Receivables and other current assets at September 30, 2001 include
$5,000,000 of unbilled and deferred revenue.

        Revenue for the three and nine month periods ended September 30, 2001
includes $184,400 due from Prokaria, a related party.

        In October 2000, deCODE changed the estimated contract term over which
milestone revenue is recognized under the 1998 research and collaboration
agreement with Roche from three to four years. The cumulative effect of this
revision ($1,333,000) was recorded as reduction to revenue in the fourth quarter
of 2000. This change in estimate had the effect of increasing what would have
otherwise been recognized to revenue in the three and nine-month periods ended
September 30, 2001 by $0.3 million and $0.8 million, respectively. deCODE could
have significant downward revision to revenue under the retrospective
straight-line basis of recognizing milestone revenues for the 1998 research
collaboration with Roche resulting from, among other things, extension by Roche
of the contractual term of the collaboration with them.



                                       7
<PAGE>


                              deCODE genetics, Inc.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


RECENT COLLABORATIONS

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

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

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

        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.

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

        In July 2001, deCODE also entered into a separate three-year reagent
supply agreement with ABG. Under the terms of the agreement, ABG has agreed to
supply and deCODE has agreed to purchase reagents and other supplies over three
years, including a remaining minimum of $24.3 million through September 2002.



                                       8
<PAGE>


                              deCODE genetics, Inc.

       NOTES TO CONDENSED 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 condensed consolidated statements of operations in the following
operating expense captions:

<TABLE>
<CAPTION>
                                      FOR THE THREE MONTHS             FOR THE NINE MONTHS
                                       ENDED SEPTEMBER 30,             ENDED SEPTEMBER 30,
                                    --------------------------      --------------------------
                                       2001            2000            2001            2000
                                    ----------      ----------      ----------      ----------
                                    (UNAUDITED)     (UNAUDITED)     (UNAUDITED)     (UNAUDITED)

<S>                                 <C>             <C>             <C>             <C>
Research and development .....      $  897,847      $  997,344      $2,493,139      $2,984,141
General and administrative ...         264,828       2,393,529       1,022,163       4,249,798
                                    ----------      ----------      ----------      ----------
          Total ..............      $1,162,675      $3,390,873      $3,515,302      $7,233,939
                                    ==========      ==========      ==========      ==========
</TABLE>

        In January 2001, deCODE made a charitable contribution of 5,000 shares
of common stock amounting to $52,500. In May 2000, deCODE made a charitable
contribution of 150,000 shares of Series B preferred stock amounting to $3.0
million.

        In March and June 2001, deCODE granted 406,000 and 313,500 stock
options, respectively, to employees under the 1996 Equity Incentive Plan (the
"Plan"). In June 2001, the Plan was amended to increase the number of shares of
common stock reserved for issuance upon the exercise of stock awards granted
under the Plan from 6,000,000 to 7,000,000 shares. In November 2001, deCODE
granted a further 429,500 stock options to employees after which 940,188 shares
remain available for grant under the Plan.



                                       9
<PAGE>


                              deCODE genetics, Inc.

       NOTES TO CONDENSED 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 THREE MONTHS                   FOR THE NINE MONTHS
                                                 ENDED SEPTEMBER 30,                  ENDED SEPTEMBER 30,
                                          -------------------------------       -------------------------------
                                              2001               2000               2001               2000
                                          ------------       ------------       ------------       ------------
                                           (UNAUDITED)        (UNAUDITED)        (UNAUDITED)        (UNAUDITED)

<S>                                       <C>                <C>                <C>                <C>
Net loss ...........................      $ (8,867,423)      $ (7,575,366)      $(37,245,690)      $(24,864,953)
Accrued dividends on Series A,
   Series B and Series C
   preferred stock .................                 0           (550,307)                 0         (5,229,872)
Amortized discount on Series A
   and Series C preferred stock ....                 0             (8,477)                 0         (2,311,007)
                                          ------------       ------------       ------------       ------------
Accrued dividends and amortized
   discount on preferred stock .....                 0           (558,784)                 0         (7,540,879)
                                          ------------       ------------       ------------       ------------
Net loss available to
   common stockholders .............      $ (8,867,423)      $ (8,134,150)      $(37,245,690)      $(32,405,832)
                                          ============       ============       ============       ============
</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>
                                                     SEPTEMBER 30,         SEPTEMBER 30,
                                                          2001                 2000
                                                     -------------         -------------
                                                      (UNAUDITED)          (UNAUDITED)
                                                        (SHARES)             (SHARES)
<S>                                                  <C>                   <C>
Preferred stock convertible into shares of
   common stock.....................................           0                     0
Warrants to purchase shares of common stock.........   1,167,500             1,242,500
Options to purchase shares of common stock..........   1,501,312               504,500
</TABLE>



                                       10
<PAGE>


                              deCODE genetics, Inc.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


COMPREHENSIVE INCOME (LOSS)

        The following is a summary of comprehensive income:

<TABLE>
<CAPTION>
                                                 FOR THE THREE MONTHS                  FOR THE NINE MONTHS
                                                  ENDED SEPTEMBER 30,                   ENDED SEPTEMBER 30,
                                            -------------------------------       -------------------------------
                                                2001               2000               2001               2000
                                            ------------       ------------       ------------       ------------
                                             (UNAUDITED)        (UNAUDITED)        (UNAUDITED)        (UNAUDITED)

<S>                                         <C>                <C>                <C>                <C>
Net loss .............................      $ (8,867,423)      $ (7,575,366)      $(37,245,690)      $(24,864,953)
Other comprehensive income (loss):
     Foreign currency
        translation ..................          (144,071)            60,325             40,342             76,539
                                            ------------       ------------       ------------       ------------
Total comprehensive
   income (loss) .....................      $ (9,011,494)      $ (7,515,041)      $(37,205,348)      $(24,788,414)
                                            ============       ============       ============       ============
</TABLE>


SEGMENT INFORMATION

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

        Through September 30, 2001, deCODE's efforts have largely been directed
toward discovery services and financial information available for evaluation by
senior management and members of the Board in deciding how to allocate resources
and assess performance is that of the business as a whole. For these reasons,
deCODE has a single reportable segment. All of deCODE's revenue from inception
have been generated in Iceland, and all of deCODE's long-lived assets are
located in Iceland. Roche accounted for 79% and 100% of consolidated revenue in
the three-month periods ended September 30, 2001 and 2000, respectively, and 89%
and 98% of consolidated revenue in the nine month periods ended September 30,
2001 and 2000, respectively.




                                       11
<PAGE>


                              deCODE genetics, Inc.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


ACQUISITION - DIGITALIS EHF.

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


LITIGATION

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

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

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


RECENT PRONOUNCEMENTS

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

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



                                       12
<PAGE>


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


OTHER

        In February 2001, deCODE settled a payable for laboratory equipment of
$13,150,000, which amount is included in investing cash flows for the purchase
of property and equipment during the nine months ended September 30, 2001.

        In light of current conditions and pace of technological change,
effective from April 1, 2001 deCODE changed the estimated useful life of
sequencing instruments for purposes of depreciation to 4 years. This change in
estimate had the effect of increasing depreciation expense $0.5 million and $0.9
million in the three and nine month periods ended September 30, 2001,
respectively.



                                       13
<PAGE>


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS.


        This Management's Discussion and Analysis of Financial Condition and
Results of Operations as of September 30, 2001 and for the three and nine month
periods ended September 30, 2001 and 2000 should be read in conjunction with the
unaudited condensed consolidated financial statements and notes thereto set
forth in Item 1 of this report.

        This quarterly report on Form 10-Q 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 Part II, Item 5 of this quarterly report, which
discussion is expressly incorporated by reference herein.

OVERVIEW

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

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

        We have incurred losses since our inception, principally as a result of
research and development and general and administrative expenses in support of
our operations. As of September 30, 2001 we had an accumulated deficit of
$147,999,390. We anticipate incurring additional losses over at least the next
several years as we expand our internal and collaborative gene discovery
efforts, continue our commercialization of discovery efforts, technology
development and construction of database services and informatics. We expect
that our losses will fluctuate from quarter to quarter and that such
fluctuations may be substantial especially because progress in our scientific
work and milestone payments that are related to progress can fluctuate between
quarters.

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

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



                                       14
<PAGE>



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

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

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

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

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

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


GENERAL

        We anticipate that collaborations will remain an important element of
our business strategy and future revenues. Our ability to generate revenue
growth and become profitable is dependent, in part, on our ability to enter into
additional collaborative arrangements, and on our ability and our collaborative
partners' ability to successfully commercialize products incorporating, or based
on, our work. There can be no assurance that we will be able to maintain or
expand our existing collaborations, enter into future collaborations to develop
applications based on existing or future research agreements or successfully
commercialize the deCODE Combined Data Processing system.

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


                                       15
<PAGE>



        Our failure to successfully develop and market products over the next
several years, or to realize product revenues, would have a material adverse
effect on our business, financial condition and results of operations. We do not
expect to receive royalties or other revenues from commercial sales of products
developed using our technologies for at least several years, if at all.

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

        Our operating results through September 30, 2001 reflect the expenses
incurred in our gene discovery activities, partly offset by the revenues
received pursuant to our research and development collaborations with Roche and
other recent collaborations in connection with these activities. We will
continue these activities, but our operating results will also reflect the
substantial costs we expect to incur in building technology and services for the
Clinical Genome Miner and commencing the development of the Icelandic Health
Sector Database and the deCODE Combined Data Processing system. While we intend
to enter into collaborations to help fund and develop the development of these
database services, until we do so there will be no revenue from our database
service activities to offset against these costs.

RESULTS OF OPERATIONS FOR THE QUARTER AND NINE MONTH PERIODS ENDED SEPTEMBER 30,
2001 AND 2000

        REVENUES. Our revenues consist of fees earned from research and
development collaboration agreements and are recorded and recognized in
accordance with the applicable performance requirements and terms of the
respective contracts either as contract research costs are incurred or upon the
achievement of certain milestones. Milestones are recorded when acknowledgement
of having achieved applicable performance requirements is received and are
recognized as revenue on a retrospective basis over the contractual term of the
underlying agreement. Accordingly, upon achievement of the milestone a portion
of the milestone payment equal to the percentage of the collaboration completed
through that date is recognized, with the remainder recognized as services are
performed (generally straight-line) over the remaining estimated term of the
collaboration. Contractual payments due us are recorded as deferred revenue
until earned. The following is a summary of deferred revenue:

<TABLE>
<CAPTION>
                                                FOR THE THREE MONTHS                   FOR THE NINE MONTHS
                                                 ENDED SEPTEMBER 30,                   ENDED SEPTEMBER 30,
                                            ------------------------------      ------------------------------
                                                2001              2000              2001              2000
                                            ------------      ------------      ------------      ------------
                                             (UNAUDITED)       (UNAUDITED)       (UNAUDITED)       (UNAUDITED)

<S>                                         <C>               <C>               <C>               <C>
Revenue recorded during the period ....     $  8,963,795      $  5,465,000      $ 30,382,189      $ 13,606,358
Revenue recognized during the
   period .............................       (9,720,955)       (5,576,112)      (20,951,848)      (14,023,025)
                                            ------------      ------------      ------------      ------------
                                                (757,160)         (111,112)        9,430,341          (416,667)
Deferred revenue at beginning of
   period .............................       14,592,500         1,932,778         4,404,999         2,238,333
                                            ------------      ------------      ------------      ------------
Deferred revenue at end of period .....     $ 13,835,340      $  1,821,666      $ 13,835,340      $  1,821,666
                                            ============      ============      ============      ============
</TABLE>

        Our revenues increased to $9,720,955 for the quarter ended September 30,
2001 as compared to $5,576,112 for the quarter ended September 30, 2000, an
increase of 74%. Quarterly revenues attributable to our research collaboration
agreement with Roche were $7,709,167 as compared to $5,576,112 in the same
quarter of the preceding year. Our revenues increased to $20,951,848 for the
nine months ended September 30, 2001 as compared to $14,023,025 for the nine
months ended September 30, 2000, an increase of 49%. Nine-month revenues


                                       16
<PAGE>

attributable to our research collaboration agreement with Roche were
$18,701,667 as compared to $13,811,667 in the same period of the preceding year.
The increase in revenues in the three and nine month periods principally results
from the recognition of revenue from new milestone achievements under our 1998
research collaboration with Roche but also from the new diagnostics
collaboration with Roche and the joint development and commercialization with
ABG.

        At September 30, 2001, the total amount of deferred research revenue
that will be recognized in future periods aggregated $13,835,340. Revenues
recorded for the quarter ended September 30, 2001 increased to $8,963,795 as
compared to $5,465,000 for the quarter ended September 30, 2000, an increase of
64%. Revenues recorded in the nine months ended September 30, 2001 increased to
$30,382,189 as compared to $13,606,358 for the nine months ended September 30,
2000, an increase of 123%. The increase in recorded revenues in the periods is
principally attributable to our new diagnostics collaboration with Roche and
other recent collaborations, but also results from greater milestone
achievements under our 1998 research collaboration with Roche.

        RESEARCH AND DEVELOPMENT. Our research and development expenses
increased to $16,836,656 for the quarter ended September 30, 2001 as compared to
$11,716,720 for the quarter ended September 30, 2000, an increase of 44%. Our
research and development expenses increased to $53,384,144 for the nine months
ended September 30, 2001 as compared to $30,922,315 for the nine months ended
September 30, 2000, an increase of 73%. We have continued to expand our research
and development operations, including hiring of additional research
personnel with the resulting salary and benefits costs, an expansion of our
laboratory facilities and equipment acquisitions, and the resulting
depreciation, purchase and use of consumables, and our increased research
efforts. The increase in the quarter and nine-month periods ended September 30,
2001 as compared to the same periods in 2000 is primarily attributable to
depreciation on the expanded asset base and increased purchases of consumables
in support of, among other things, our new ABI Prism 3700 DNA Analyzers,
salaries and contractor services, and the disposal of laboratory equipment. We
expect to continue to increase research and development spending as we pursue
and expand our efforts. We also expect research and development to increase with
the establishment of our new subsidiaries, Encode, and deCODE Cancer as well as
a result of our new diagnostics development contract with Roche and other recent
collaborations.

        GENERAL AND ADMINISTRATIVE. Our general and administrative expenses
decreased to $2,830,965 for the quarter ended September 30, 2001 as compared to
$4,419,621 for the quarter ended September 30, 2000, a decrease of 36%. Our
general and administrative expenses decreased to $9,561,812 for the nine months
ended September 30, 2001 as compared to $12,160,829 for the nine months ended
September 30, 2000, a decrease of 21%. Without regard to a $1.3 million non-cash
litigation settlement charge in the nine month period ended September 30, 2001,
a $3.0 million stock-based contribution in the nine month period ended September
30, 2000, and stock-based compensation and remuneration charges during both
periods, general and administrative expense increased approximately $2.9 million
in the nine-months ended September 30, 2001 as compared to the same period in
2000 as a result of added salaries, contractor services and other general and
administrative expenses in the continued expansion of our operations. We
continue to build our operations, including the hiring of additional general and
administrative personnel in Iceland and in the United States, and we expect that
general and administrative expenses will continue to increase into 2002.

        STOCK-BASED COMPENSATION AND REMUNERATION EXPENSE. Stock-based
compensation and remuneration expense was $1,162,675 for the quarter ended
September 30, 2001 as compared to $3,390,873 for the quarter ended September 30,
2000, a decrease of 66%. Stock-based compensation and remuneration expense was
$3,515,302 for the nine months ended September 30, 2001 as compared to
$7,233,939 for the nine months ended September 30, 2000, a decrease of 51%.
Historical stock-based compensation and remuneration is not necessarily
representative of the effects on reported income or loss for future years due
to, among other things, the vesting period of the stock options, the value of
stock options that have been granted in recent times and the value of additional
options that may be granted in future years.

        INTEREST INCOME. Our interest income was $1,514,099 for the quarter
ended September 30, 2001 as compared to $3,274,629 for the quarter ended
September 30, 2000, a decrease of 54%. Our interest income was $6,037,700 for
the nine months ended September 30, 2001 as compared to $4,692,430 for the nine
months ended September 30, 2000, an increase of 29%. Our levels of interest
income have declined with prevailing interest rates and as we continue to

                                       17
<PAGE>



invest the proceeds of our initial public offering into operations.

        OTHER NON-OPERATING INCOME AND (EXPENSE), NET. Our other non-operating
income and expense, net increased to a net expense of $434,856 for the quarter
ended September 30, 2001 as compared to a net expense of $289,766 for the
quarter ended September 30, 2000, an increase of 50%. Our other non-operating
income and expense, net increased to a net expense of $1,289,282 for the nine
months ended September 30, 2001 as compared to a net expense of $497,264 for the
nine months ended September 30, 2000, an increase of 159%. The increase in net
other non-operating expense primarily results from foreign exchange losses in
the current periods.

        INCOME TAXES. As of September 30, 2001, we had an accumulated deficit of
$147,999,390 and did not owe any Icelandic or U.S. federal income taxes nor did
we pay any in the three or nine month periods ended September 30, 2001 and 2000.
Realization of deferred tax assets is dependent on future earnings, if any. As
of December 31, 2000, we had net operating losses able to be carried forward for
federal income tax purposes of approximately $458,000 to offset future federal
taxable income in the United States which begins to expire in 2018 and our
subsidiary had net operating loss carryforwards of approximately $20.2 million
which expire in varying amounts beginning in 2004.

        NET LOSS AND BASIC AND DILUTED NET LOSS PER SHARE. Net loss and basic
and diluted net loss per share were $8,867,423 and $0.20 for the quarter ended
September 30, 2001, respectively, as compared to $7,575,366 and $0.23 for the
quarter ended September 30, 2000, respectively. This is an increase of 17% in
net loss and a decrease of 13% in basic and diluted net loss per share. Net loss
and basic and diluted net loss per share were $37,245,690 and $0.84 for the nine
months ended September 30, 2001, respectively, as compared to $24,864,953 and
$1.90 for the nine months ended September 30, 2000, respectively. This is an
increase of 50% in net loss and a decrease of 56% in basic and diluted net loss
per share. Although net loss has increased in the three and nine month periods
ended September 30, 2001 as compared to the same periods in 2000, basic and
diluted net loss per share has decreased primarily as a result of the greater
number of average shares outstanding as a result of our initial public offering
in July 2000.

        PRO FORMA BASIC AND DILUTED NET LOSS PER SHARE. Pro forma basic and
diluted net loss per share is computed for periods prior to our initial public
offering as if the preferred shares had converted into common shares immediately
upon their issuance. Accordingly, in the calculation of pro forma net loss per
share for such periods, net loss has not been increased for the dividends
accumulated or discounts on preferred stock amortized during such periods. Basic
and diluted net loss per share increased to $0.20 for the quarter ended
September 30, 2001 as compared to pro forma basic and diluted net loss per share
of $0.18 for the quarter ended September 30, 2000. Basic and diluted net loss
per share increased to $0.84 for the nine months ended September 30, 2001 as
compared to pro forma basic and diluted net loss per share of $0.73 for the nine
months ended September 30, 2000.

LIQUIDITY AND CAPITAL RESOURCES

        As of September 30, 2001, we had $143,843,183 in cash and cash
equivalents. Available cash is invested in accordance with our investment
policy's primary objectives of liquidity, safety of principal and diversity of
investments. Inflation has been significant in Iceland during the nine months
ended September 30, 2001 but has not had a material effect on our business.

        Collections of contractual amounts due in our research and development
collaborations and other working capital sources of funds provided $10,986,862
of cash for the nine months ended September 30, 2001 as compared to $1,546,100
for the nine months ended September 30, 2000. As a result, although net loss
increased $12,380,737 for the nine months ended September 30, 2001 as compared
to the same period last year, net cash used in operating activities increased
just $2,634,969 to $12,170,303 in the nine months ended September 30, 2001 as
compared to $9,526,334 in the nine months ended September 30, 2000.

        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 nine months ended September 30, 2001 were $37,159,254 as
compared to $6,806,582 for the same period last year, primarily due to the

                                       18
<PAGE>



expansion of our facilities and operations. Particularly, during the nine months
ended September 30, 2001 we expended $15.2 million in respect of the new
building to house our operations in the University District of Reykjavik and we
paid for the fifty new ABI Prism 3700 DNA Analyzers acquired late in 2000. Net
cash used in investing activities may in the future fluctuate significantly from
period to period due to the timing of capital expenditures and investments.

        Net cash of $971,948 was used for financing activities in the nine
months ended September 30, 2001 as compared to $197,409,866 provided in the nine
months ended September 30, 2000. Although we made installment payments on our
capital leases during both periods we did not enter into any significant
financing activities during the nine months ended September 30, 2001.

        Our cash is deposited only with financial institutions in Iceland,
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
but is also partly invested in Icelandic krona denominated accounts.

        During 2001 we have been constructing a new building in the University
District of Reykjavik to house our operations. Total project cost is estimated
to be approximately $30 million and $18.7 million has been incurred through
September 30, 2001. The new building will be largely complete before the end of
2001 and occupied in early 2002. We are currently exploring various methods for
financing this project. At September 30,2001 we had no other material
commitments for capital expenditures but we have committed to purchase reagents
and supplies from ABG over three years, including a remaining minimum of $24.3
million through September 2002.

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

        Based upon our current plans, and taking into consideration the proceeds
of the initial public offering, we believe that our existing resources will be
adequate to satisfy our capital needs for several years. Our cash requirements
depend on numerous factors, including our ability to obtain new research
collaboration agreements, to obtain subscription and collaboration agreements
for the database services; expenditures in connection with alliances, license
agreements and acquisitions of and investments in complementary technologies and
businesses; competing technological and market developments; the cost of filing,
prosecuting, defending and enforcing patent claims and other intellectual
property rights; the purchase of additional capital equipment, including capital
equipment necessary to ensure that our sequencing and genotyping operations
remain competitive; capital expenditures required to expand the company's
facilities. Changes in our research and development plans or other changes
affecting our operating expenses may result in changes in the timing and amount
of expenditures of our capital resources.

        We will require significant additional capital in the future, which we
may seek to raise through public or private equity offerings, debt financing or
additional 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.



                                       19
<PAGE>



ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        The primary objective of our investment activities is to preserve
principal while maximizing income we receive from our investments without
significantly increasing risk. Some of the securities in our investment
portfolio may be subject to market risk. This means that a change in prevailing
interest rates may cause the market value of the investment to fluctuate. For
example, if we hold a security that was issued with a fixed interest rate at the
then-prevailing rate and the prevailing interest rate later rises, the market
value of our investment will probably decline. To minimize this risk in the
future, we intend to maintain our portfolio of cash equivalents and short-term
investments in a variety of securities, including commercial paper, money market
funds and government and non-government debt securities. In general, money
market funds are not subject to market risk because the interest paid on such
funds fluctuates with the prevailing interest rate. As of September 30, 2001,
all of our cash and cash equivalents were in money market and checking accounts.


PART II  OTHER INFORMATION


Item 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

(d)  USE OF PROCEEDS

        We commenced an initial public offering of our common stock, $.001 par
value, on July 17, 2000 pursuant to registration statements on Form S-1
(Registration Nos. 333-31984 and 333-41598), which were declared effective by
the Securities and Exchange Commission on July 17, 2000. Net proceeds to us
after deduction of expenses were approximately $182.0 million. Through September
30, 2001, we have used approximately $91.8 million dollars of the proceeds as
follows:

<TABLE>
       <S>                                                                      <C>
        Discovery and research programs.......................................  $46.0
        ABI Prism 3700 DNA Analyzers..........................................   13.1
        Construction of executive office and laboratory facilities............   15.2
        Construction of other laboratory facilities...........................    3.3
        Computer equipment....................................................    2.1
        Other laboratory equipment............................................    3.3
        Other property and equipment..........................................    0.9
        General and administrative activities.................................    7.0
        Installment payments on capital lease obligations.....................    1.3
        Interest..............................................................    0.3
                                                                                -----
                                                                                $91.8
                                                                                =====
</TABLE>

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


                                       20
<PAGE>


ITEM 5.  OTHER INFORMATION

RISK FACTORS

        This report contains forward-looking statements. These statements relate
to future events or our future financial performance. In some cases,
forward-looking statements can be identified by terminology such as "may,"
"will," "should," "could," "expect," "plan," "anticipate," "believe,"
"estimate," "predict," "intend," "potential" or "continue" or the negative of
these terms or other comparable terminology. Actual events or results may differ
materially from such statements due to a number of factors, including those set
forth in this section and elsewhere in this Form 10-Q. These factors include,
but are not limited to, the risks set forth below.


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

        DISCOVERY SERVICES

        We are still in the early stages of our gene discovery programs. We use
our technology and development primarily to identify genes or gene fragments
that are responsible for certain diseases. We also try to identify genes or gene
fragments that indicate the presence of certain diseases. We use technologies
and approaches that we believe will identify specific genes that cause or
predispose individuals to certain complex diseases. Although we have identified
some genes that we believe are likely to cause certain diseases, we may not be
correct. We may not be successful in identifying any other similar genes. In
addition, many experts believe that some of the diseases we are targeting are
caused by both genetic and environmental factors. Even if we identify specific
genes that are partly responsible for causing diseases, any gene-based
therapeutic or diagnostic products may not detect, prevent or cure a particular
disease. Accordingly, even if we are successful in identifying specific genes,
our discoveries may not lead to the development of commercial products.

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

           - establish that they are safe and effective;

           - successfully compete with other technologies and products;

           - do not infringe on the proprietary rights of others;

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

           - can be marketed successfully; and

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

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

        DATABASE SERVICES

        We received a license to create and operate the Icelandic Health Sector
Database in January 2000. We are at the early stages of developing the database.
We are also in the early stages of commercializing the Clinical Genome Miner
Service. It will probably take us several years to fully develop the deCODE
Combined Data Processing System. We will devote substantial resources to the
development of these systems and their components for the foreseeable future. We
cannot be sure that marketing the Clinical Genome Miner will lead to
collaborations with potential clients. We can also not be sure that the deCODE
Combined Data Processing System will result in marketable products or services.
Although our intended method for cross-referencing genealogical, genotypic and
healthcare data is central to the development of the deCODE Combined Data
Processing System, it is unproven.


        The success of our database services depends on our ability to:

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

                                       21
<PAGE>




              -     obtain the cooperation of the Icelandic healthcare system,
                    including doctors who may attempt to withhold their
                    patients' data from the Icelandic Health Sector Database or
                    encourage their patients to exercise their opt-out rights;

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

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

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

        Our development of the Icelandic Health Sector Database will be impaired
if individual Icelanders refuse to allow information from their medical records
to be included in the Icelandic Health Sector Database. As of September 30, 2001
approximately 7% of the population had exercised their rights to exclude their
medical records from the database.

        Because only a small portion of the Icelandic population may carry
certain mutations, the unwillingness of even a small portion of the population
to participate in our programs could diminish our ability to develop and market
information based on the use of genotypic data. If we fail to successfully
commercialize our database services, we will not realize revenues from this part
of our business.

        HEALTHCARE INFORMATICS

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

IF OUR ASSUMPTION ABOUT THE ROLE OF GENES IN DISEASE IS WRONG, WE MAY NOT BE
ABLE TO DEVELOP USEFUL PRODUCTS

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

IF WE CONTINUE TO INCUR OPERATING LOSSES LONGER THAN ANTICIPATED, OR IN AMOUNTS
GREATER THAN ANTICIPATED, WE MAY BE UNABLE TO CONTINUE OUR OPERATIONS

        We incurred net losses of $8,867,423 and $37,245,690 for the quarter and
nine-month periods ended September 30, 2001, respectively, and $7,575,366 and
$24,864,953 for the quarter and nine-month period ended September 30, 2000,
respectively. As of September 30, 2001, we had an accumulated deficit of
$147,999,390. We have never generated a profit and we have not generated
revenues except for payments received in connection with our research and
development collaborations with Roche, other recent collaborations and interest
revenues. We must increase our expenditures substantially over the next several
years to develop our technologies and our internal research programs and to
prepare the Clinical Genome Miner and the Icelandic Health Sector Database, the
deCODE Combined Data Processing System and informatics. As a result, we expect
to incur operating losses for several years. If the time required to generate
product revenues and achieve profitability is longer than we currently
anticipate or the level of operating losses is greater than we currently
anticipate, we may not be able to continue our operations.


                                       22
<PAGE>


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

        We have spent substantial amounts of cash to fund our research and
development activities and expect to spend substantially more over the next
several years. We expect to use cash to expand our research and development
activities, develop the Clinical Genome Miner, construct the Icelandic Health
Sector Database and the deCODE Combined Data Processing System, collect the
genotype data and develop healthcare informatics products. Many factors will
influence our future capital needs, including:

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

              -     our ability to attract customers;

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

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

              -     the costs and timing of regulatory approvals.

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

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

OUR RELIANCE ON THE ICELANDIC POPULATION MAY LIMIT THE APPLICABILITY OF OUR
DISCOVERIES TO CERTAIN POPULATIONS

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

OUR CREATION AND OPERATION OF THE ICELANDIC HEALTH SECTOR DATABASE DEPENDS ON
OUR LICENSE FROM THE ICELANDIC GOVERNMENT AND IS SUBJECT TO SUPERVISION AND
REGULATION, WHICH MAY MAKE OUR DEVELOPMENT OF DATABASE PRODUCTS MORE EXPENSIVE
AND TIME-CONSUMING THAN WE ANTICIPATED

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

              -     The Ministry may withdraw the license in the event that we
                    violate the terms and conditions of the license, the Act or
                    its rules;

              -     The Icelandic parliament may amend the Act in ways which
                    would adversely affect our ability to develop or market the
                    database;

              -     There is no precedent interpreting the Act or the rules on
                    which we can rely;

                                       23
<PAGE>



              -     We may fail to comply with existing data confidentiality
                    requirements of the Act or our license, resulting in a loss
                    of our license;

              -     The Authority may modify or impose additional technical
                    requirements covering areas such as data encryption and
                    privacy protection and may require greater technical
                    capabilities than we currently have; and

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

        Compliance with these requirements can be expensive and time-consuming
and may delay or increase the cost of development of the Icelandic Health Sector
Database and the deCODE Combined Data Processing System.

        Iceland is subject to both European Free Trade Association and European
Union competition and public procurement rules. If it is determined that the Act
or our license breaches such rules, the license could be revoked or diluted.

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

IF WE FAIL TO PROTECT CONFIDENTIAL DATA ADEQUATELY, WE COULD INCUR LIABILITY OR
LOSE OUR LICENSE

        We are required, under the Act and the Icelandic Health Sector Database
license, to encrypt all patient data and to take other actions to ensure
confidentiality of data included in the Icelandic Health Sector Database and
restrict access to it. We must develop the Icelandic Health Sector Database
according to the Authority's technology, security and organizational terms. The
Authority may periodically review and amend such terms in light of new
technology or change of circumstances. The customers for our products may impose
confidentiality requirements.

        We may accidentally disclose confidential data as a result of technical
failures or human error by our employees or those of our customers or
collaborators. Any failure to comply fully with all confidentiality requirements
could lead to liability for damages incurred by individuals whose privacy is
violated, the loss of the license, the loss of our customers and reputation and
the loss of the goodwill and cooperation of the Icelandic population, including
healthcare professionals.

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

        We are required by the Icelandic Health Sector Database license to enter
into agreements with Icelandic health institutions and self-employed health
service professionals regarding access to and the processing of information from
medical records. To date we have only entered into agreements with nineteen
Icelandic health institutions. We cannot be certain that we will enter into
agreements with enough additional health institutions or on terms favorable to
us. Our inability to enter into additional agreements on favorable terms or in a
timely manner could have a material adverse effect on our ability to construct
and operate the Icelandic Health Sector Database.

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

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


                                       24
<PAGE>


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

WE HAVE AGREED TO INDEMNIFY AND HOLD HARMLESS THE ICELANDIC GOVERNMENT, WHICH
MAY CAUSE US TO INCUR DAMAGES AND MAY LIMIT OUR RIGHT TO TAKE CERTAIN LEGAL
ACTIONS AGAINST THE GOVERNMENT

        We are subject to a very extensive indemnity clause in our agreement
with the Ministry, pursuant to which we have 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 are found
                    to be inconsistent with the rules of the European Economic
                    Area, or other international rules and agreements to which
                    Iceland is or becomes a party;

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

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

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

        We must form research collaborations and licensing arrangements with
several partners at the same time to operate our business strategy. We currently
have only five substantial collaborative relationships, including two with
Roche. To succeed, we will have to maintain these relationships and establish
additional collaborations. We cannot be sure that we will be able to establish
the additional research collaborations or licensing arrangements necessary to
develop and commercialize products using our technology or that we can do so on
terms favorable to us. If our collaborations are not successful or we are not
able to manage multiple collaborations successfully, our programs will suffer.
If we increase the number of collaborations, it will become more difficult to
manage the various collaborations successfully and the potential for conflicts
among the collaborators will increase.

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

        We are 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 our
technology. Our agreements with collaborators will typically allow them
significant discretion in electing whether to pursue such activities. We cannot
control the amount and timing of resources collaborators will devote to our

                                       25
<PAGE>



programs or potential products. Our collaborations may have the effect of
limiting the areas of research that we may pursue either alone or with others.

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

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

        Our current facilities and staff are inadequate for commercial
production and distribution of products. If we choose in the future to engage
directly in the development, manufacturing and marketing of certain products, we
will require substantial additional funds, personnel and production facilities.

CONCERNS REGARDING THE USE OF GENETIC TESTING RESULTS MAY LIMIT THE COMMERCIAL
VIABILITY OF ANY PRODUCTS WE DEVELOP

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

WE 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 our other areas of business including database
services and healthcare information is intense and is expected to increase. We
have numerous competitors, including major pharmaceutical and diagnostic
companies, specialized biotechnology firms, universities and other research
institutions, the United States-funded Human Genome Project and other
government-sponsored entities and companies providing healthcare information
products. Our collaborators, including Roche, may also compete with us. Many of
our competitors have considerably greater capital resources, research and
development staffs and facilities, and technical and other resources than we do,
which may allow them to discover important genes before we do. We believe that a
number of our competitors are developing competing products and services that
may be commercially successful and that are further advanced in development than
our potential products and services. To succeed, we, together with our
collaborators, must discover disease-predisposing genes, characterize their
functions, develop genetic tests or therapeutic products and related information
services based on such discoveries, obtain regulatory and other approvals, and
launch such services or products before competitors. Even if our collaborators
or we are successful in developing effective products or services, our products
and services may not successfully compete with those of our competitors. Our
competitors may succeed in developing and marketing products and services that
are more effective than ours or that are marketed before ours.

        Competitors have established, and in the future may establish, patent
positions with respect to gene sequences related to our research projects. Such
patent positions or the public availability of gene sequences comprising
substantial portions of the human genome could decrease the potential value of
our research projects and make it more difficult for us to compete. We may also
face competition from other entities in gaining access to DNA samples used for
research and development purposes.


                                       26
<PAGE>


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

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

        There are other firms and agencies that have prepared, or are currently
preparing, genealogy databases similar to the one we have developed. If any
parties claim that any of our databases infringes on their intellectual property
rights, we would have to defend against their claim, cease using the infringing
property or pay them for the use of the infringing property.

        Two parties have filed a copyright infringement suit against us in
Iceland. They claim to hold copyrights to approximately 100 Icelandic genealogy
books and claim that we have used data from these books in the creation of our
genealogy database, in violation of their rights. The claimants seek to prevent
our use of our genealogy database. They also seek monetary damages in the amount
of approximately 616 million Icelandic kronas. We believe that this suit is
without merit and intend to defend it vigorously, but if it were successful it
could have a material adverse effect on our database and gene discovery
services.

WE MAY NOT BE ABLE TO PROTECT THE PROPRIETARY RIGHTS THAT ARE CRITICAL TO OUR
SUCCESS

        Our success will depend on our ability to protect our genealogy database
and genotypic data and any other proprietary databases that we develop,
proprietary software and other proprietary methods and technologies. Despite our
efforts to protect our proprietary rights, unauthorized parties may be able to
obtain and use information that we regard as proprietary.

        Our commercial success will depend in part on obtaining patent
protection. The patent positions of pharmaceutical, biopharmaceutical and
biotechnology companies, including ours, are generally uncertain and involve
complex legal and factual considerations. We cannot be sure that any of our
pending patent applications will result in issued patents, that we will develop
additional proprietary technologies that are patentable, that any patents issued
to us or our partners will provide a basis for commercially viable products,
will provide us with any competitive advantages or will not be challenged by
third parties, or that the patents of others will not have an adverse effect on
our ability to do business.

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

        Others may have filed and in the future are likely to file patent
applications covering genes or gene products that are similar or identical to
our products. We cannot be certain that our patent applications will have
priority over any patent applications of others. The mere issuance of a patent
does not guarantee that it is valid or enforceable; thus even if we are granted
patents we cannot be sure that they would be valid and enforceable against third
parties. Further, a patent does not provide the patent holder with freedom to
operate in a way that infringes the patent rights of others. Any legal action
against us or our partners claiming damages and seeking to enjoin commercial
activities relating to the affected products and processes could, in addition to


                                       27
<PAGE>



subjecting us to potential liability for damages, require us or our partners to
obtain a license in order to continue to manufacture or market the affected
products and processes. There can be no assurance that our partners or we 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, our partners or we may be required to cease marketing our products or
practicing our methods.

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

        While we require employees, academic collaborators and consultants to
enter into confidentiality agreements, there can be no assurance that
proprietary information will not be disclosed, that others will not
independently develop substantially equivalent proprietary information and
techniques, otherwise gain access to our trade secrets or disclose such
technology, or that we can meaningfully protect our trade secrets. If the
information processed by the deCODE Combined Data Processing system is disclosed
without our authorization, demand for our products and services may be adversely
affected.

REGULATORY APPROVALS FOR PRODUCTS RESULTING FROM OUR GENE DISCOVERY PROGRAMS
MUST BE OBTAINED OR WE WILL NOT BE ABLE TO DERIVE REVENUES FROM THESE PRODUCTS

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

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

OUR DEPENDENCE UPON A SINGLE THIRD PARTY FOR SEQUENCING MACHINES MAY IMPAIR OUR
RESEARCH PROGRAMS

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

EFFORTS TO REDUCE HEALTHCARE COSTS MAY REDUCE MARKET ACCEPTANCE OF OUR PRODUCTS

        Our success will depend in part on the price and extent to which we will
be paid for our products by government and health administration authorities,
private health insurers and other third party payors. Reimbursement for

                                       28
<PAGE>

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

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

OUR OPERATIONS MAY BE IMPAIRED UNLESS WE CAN SUCCESSFULLY MANAGE OUR GROWTH

        We have recently experienced significant growth in the number of our
employees and the scope of our operations and our facilities. Our management
and operations are, and may continue to be, under significant strain due to this
growth. To manage our growth, we must strengthen our management team and attract
and retain skilled employees. We cannot be sure that we will be able to retain
qualified employees. Our success will also depend on our ability to improve our
management information, research information and operational control systems and
to expand, train and manage our workforce.

CHANGES IN OUTSOURCING TRENDS AND CONSOLIDATION IN THE PHARMACEUTICAL AND
BIOTECHNOLOGY INDUSTRIES COULD ADVERSELY AFFECT OUR GROWTH

        Economic factors and industry trends that affect our primary customers,
pharmaceutical and biotechnology companies, also affect our business. For
example, the practice of many companies in these industries has been to
outsource from organizations like ours to conduct genetic research, clinical
research and sales and marketing projects. Some industry commentators believe
that the rate of growth of outsourcing will trend downward. If these industries
reduce their present endency to outsource those projects, our operations,
financial condition and growth rate could be materially and adversely affected.

        We also believe we have been negatively impacted by pending mergers and
other factors in the pharmaceutical industry, which appear to have slowed
decision making by our customers and delayed certain trials. A continuation of
these trends would have an ongoing adverse effect on our business.

SOME PARTS OF OUR PRODUCT DEVELOPMENT SERVICES CREATE A RISK OF LIABILITY FROM
CLINICAL TRIAL PARTICIPANTS AND THE PARTIES WITH WHOM WE CONTRACT

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

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

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

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


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<PAGE>


              -     one of our laboratories inaccurately reports or fails to
                    report lab results; or

              -     our informatics products violate rights of third parties;

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

USE OF THERAPEUTIC OR DIAGNOSTIC PRODUCTS DEVELOPED AS A RESULT OF OUR PROGRAMS
MAY RESULT IN PRODUCT LIABILITY CLAIMS FOR WHICH WE HAVE INADEQUATE INSURANCE

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

WE MAY BE UNABLE TO HIRE AND RETAIN THE KEY PERSONNEL UPON WHOM OUR SUCCESS
DEPENDS

        We depend on the principal members of our management and scientific
staff, including Dr. Kari Stefansson, Chairman, President and Chief Executive
Officer, Hannes Smarason, Executive Vice President and Senior Business Officer,
Dr. Jeffrey Gulcher, Vice President, Research and Development and Dr. C.
Augustine Kong, Vice President, Statistics. We have not entered into agreements
with any of these persons that bind them to a specific period of employment. If
any of these people leaves us, our ability to conduct our operations may be
negatively affected. Our future success also will depend in part on our ability
to attract, hire and retain additional personnel. There is intense competition
for such qualified personnel and we cannot be certain that we will be able to
continue to attract and retain such personnel. Failure to attract and retain key
personnel could have a material adverse effect on us.

CURRENCY FLUCTUATIONS MAY NEGATIVELY AFFECT OUR FINANCIAL CONDITION

        We publish our consolidated financial statements in U.S. dollars.
Currency fluctuations can affect our financial results because a portion of our
cash reserves and our operating costs are in Icelandic kronas. A fluctuation of
the exchange rates of the Icelandic krona against the U.S. dollar can thus
adversely affect the "buying power" of our cash reserves and revenues. Most of
our long-term liabilities are U.S. dollar denominated. We do not intend to enter
into currency hedging transactions. However, we may enter into hedging
transactions if we have substantial foreign currency exposure in the future. We
may have increased exposure as a result of investments or payments from
collaborative partners.



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<PAGE>



ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  EXHIBITS

        The following is a list of exhibits filed as part of this Quarterly
Report on Form 10-Q.


EXHIBIT
NUMBER          DESCRIPTION OF EXHIBIT

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
                Company's Registration Statement on Form S-1 (Registration No.
                333-31984) which became effective on July 17, 2000)

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

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

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

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

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



(b)  REPORTS ON FORM 8-K.

        None.


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<PAGE>


                                   SIGNATURES


        Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.


Dated November 14, 2001

                                                           deCODE genetics, Inc.


                                                             /s/ Kari Stefansson
                                          --------------------------------------
                                                                 Kari Stefansson
                                                            Chairman, President,
                                            Chief Executive Officer and Director


                                                              /s/ Lance Thibault
                                          --------------------------------------
                                                                  Lance Thibault
                                           Chief Financial Officer and Treasurer
                                                (principal financial officer and
                                                   principal accounting officer)



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<PAGE>


                                INDEX TO EXHIBITS

EXHIBIT
NUMBER          DESCRIPTION OF EXHIBIT


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
                Company's Registration Statement on Form S-1 (Registration No.
                333-31984) which became effective on July 17, 2000)


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

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

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

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

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


                                       33