<PAGE>   1

                       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 JUNE 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)



                                  +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
July 17, 2001 was 45,183,567.



<PAGE>   2



                              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 six month periods ended June 30, 2001
          and 2000 (unaudited)........................................       3

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

        Condensed Consolidated Statements of Cash Flows for the six
          month periods ended June 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 1. Legal Proceedings.............................................      20

Item 2. Changes in Securities and Use of Proceeds ....................      21

Item 3. Defaults Upon Senior Securities...............................      22

Item 4. Submission of Matters to a Vote of Security Holders...........      22

Item 5. Other Information.............................................      22

Item 6. Exhibits and Reports on Form 8-K .............................      37

        (a) Exhibits .................................................      37

        (b) Reports on Form 8-K ......................................      38

Signatures ...........................................................      38

Index to Exhibits   ..................................................      39
</TABLE>



<PAGE>   3


PART I   FINANCIAL INFORMATION


ITEM 1.  FINANCIAL STATEMENTS


                              deCODE genetics, Inc.

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS



<TABLE>
<CAPTION>
                                     FOR THE THREE MONTHS        FOR THE SIX MONTHS
                                         ENDED JUNE 30,            ENDED JUNE 30,
                                   --------------------------  -------------------------
                                       2001          2000          2001          2000
                                   ------------  ------------  ------------  -----------
                                    (UNAUDITED)   (UNAUDITED)   (UNAUDITED)  (UNAUDITED)
<S>                               <C>           <C>           <C>            <C>
REVENUE
  Research collaborative contract. $  5,985,832  $  3,798,333  $ 10,992,499   $ 8,235,555
  Other revenue...................      212,074        30,194       238,393       211,358
                                   ------------  ------------  ------------   -----------
         Total revenue............    6,197,906     3,828,527    11,230,892     8,446,913

OPERATING EXPENSES
  Research and development........   16,332,187     9,971,227    36,547,488    19,205,595
  General and administrative......    3,727,291     4,794,871     6,730,847     7,741,208
                                   ------------  ------------  ------------   -----------
         Total operating expenses.   20,059,478    14,766,098    43,278,335    26,946,803
                                   ------------  ------------  ------------   -----------

Operating loss....................  (13,861,572)  (10,937,571)  (32,047,443)  (18,499,890)

Interest income...................    1,903,372       646,209     4,523,601     1,417,801
Other non-operating income
   and (expense), net.............     (332,305)     (100,086)     (854,426)     (207,498)
Taxes.............................            0             0             0             0
                                   ------------  ------------  ------------  ------------
Net loss..........................  (12,290,505)  (10,391,448)  (28,378,268)  (17,289,587)

Accrued dividends and amortized
   Discount on preferred stock....            0    (4,602,717)            0    (6,982,095)
                                   ------------  ------------  ------------  ------------
Net loss available to
   common stockholders............ $(12,290,505) $(14,994,165) $(28,378,268) $(24,271,682)
                                   ============  ============  ============  ============

Basic and diluted net loss
   per share...................... $      (0.28) $      (1.94) $      (0.64) $     (3.20)

Shares used in computing basic and
   diluted net loss per share.....   44,143,344     7,717,614    44,031,899    7,578,244
</TABLE>









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

<PAGE>   4

                              deCODE genetics, Inc.

                      CONDENSED CONSOLIDATED BALANCE SHEETS



<TABLE>
<CAPTION>
                                                        JUNE 30,            DECEMBER 31,
                                                          2001                  2000
                                                      ------------          ------------
                                                       (UNAUDITED)
<S>                                                  <C>                   <C>
ASSETS
Current assets:
  Cash and cash equivalents.........................  $154,592,662          $194,144,688
  Receivables and other current assets..............    13,335,877            14,482,336
                                                      ------------          ------------
          Total current assets......................   167,928,539           208,627,024
Property and equipment, net.........................    45,903,115            37,100,690
Other long-term assets..............................     7,536,957             3,172,853
                                                      ------------          ------------
          Total assets..............................  $221,368,611          $248,900,567
                                                      ============          ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued expenses.............  $ 10,677,526         $  22,957,481
  Current portion of capital lease obligations......     1,796,075             1,749,807
  Deferred research revenue.........................    14,592,500             4,404,999
                                                      ------------          ------------
          Total current liabilities.................    27,066,101            29,112,287
Capital lease obligations, net of current portion...     1,891,796             2,801,853
Other long-term liabilities.........................       195,578               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 June 30, 2001 and December 31, 2000,
     respectively
     Outstanding: 45,183,567 and 45,041,969 shares
     at June 30, 2001 and December 31, 2000,
     respectively...................................        45,184                45,042
  Additional paid-in capital........................   351,152,909           350,398,909
  Notes receivable..................................   (11,325,769)          (11,850,953)
  Deferred compensation.............................    (8,708,277)          (11,568,776)
  Accumulated deficit...............................  (139,131,968)         (110,753,700)
  Accumulated other comprehensive income (loss).....       183,057                (1,356)
                                                      ------------         -------------
          Total stockholders' equity................   192,215,136           216,269,166
                                                      ------------         -------------
          Total liabilities, and
             stockholders' equity...................  $221,368,611         $ 248,900,567
                                                      ============         =============
</TABLE>








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


<PAGE>   5


                              deCODE genetics, Inc.

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                      FOR THE SIX MONTHS ENDED JUNE 30,
                                                      ----------------------------------
                                                          2001                  2000
                                                      ------------          ------------
                                                      (UNAUDITED)           (UNAUDITED)

<S>                                                  <C>                  <C>
Net loss ...........................................  $(28,378,268)        $(17,289,587)
Adjustments to reconcile net loss to net cash
   used in operating activities:
   Depreciation and amortization ...................     4,755,559            1,727,893
   Amortization of deferred stock compensation .....     2,352,627            3,427,121
   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..................       144,311               68,237
   Accrued interest on receivable from share
      issuance......................................             0              893,836
   Other............................................             0             (280,394)
Changes in operating assets and liabilities:
  Receivables and other current assets .............     1,146,459           (1,411,786)
  Accounts payable and accrued expenses ............       870,212            1,786,096
  Deferred research revenue ........................    10,187,501             (305,555)
  Unbilled research revenue ........................    (5,000,000)                   0
  Other long-term liabilities ......................      (521,683)              66,666
                                                      ------------         ------------
     Net cash used in operating activities .........   (11,490,557)          (7,901,543)
                                                      ------------         ------------

Cash flows from investing activities:
   Purchase of property and equipment ..............   (27,429,569)          (3,458,926)
   Investment in affiliated company, net ...........             0             (518,851)
                                                      ------------         ------------
     Net cash used in investing activities .........   (27,429,569)          (3,977,777)
                                                      ------------         ------------

Cash flows from financing activities:
  Issuance of preferred stock and warrants .........             0           34,534,276
  Issuance of common stock .........................             0               63,000
  Repurchase of preferred stock ....................             0          (17,467,077)
  Forfeiture of common stock .......................           (50)                  (1)
  Repayment of notes receivable for common stock ...       231,939                    0
  Installment payments on capital lease obligations.      (863,789)          (1,089,285)
                                                      ------------         ------------
     Net cash provided by (used in)
     financing activities ..........................      (631,900)          16,040,913
                                                      ------------         ------------

Net increase (decrease) in cash ....................   (39,552,026)           4,161,593
Cash and cash equivalents at beginning of period ...   194,144,688           29,845,664
                                                      ------------         ------------
Cash and cash equivalents at end of period .........  $154,592,662         $ 34,007,257
                                                      ============         ============

Supplemental schedule of non-cash transactions:
    Payables related to purchase of property
       and equipment................................  $          0         $  1,423,000
</TABLE>



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


<PAGE>   6


                              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 company, 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. deCODE was founded in 1996 and its facilities are located in
Reykjavik, Iceland, where all of deCODE's operations presently take place.


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 six month periods ended June 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 all of 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.



<PAGE>   7


                              deCODE genetics, Inc.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


REVENUE

        Revenues recognized through June 2001 are derived primarily from
research funding and milestone payments received under the 1998 research and
collaboration agreement with F. Hoffmann-La Roche, or Roche. Research funding
revenue from Roche is recorded when due and recognized on an accrual basis as
services are provided and are recorded with reference to contracted rates.
Research funding payments are not refundable in the event that the research
efforts are not successful. 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
agreement with Roche. deCODE believes that the milestone payments represent
additional amounts of the aggregate total revenue to be earned under the
arrangement with Roche, and that such revenue is more appropriately accounted
for over the service period of the agreement. Accordingly, upon the achievement
of a milestone, the milestone payment is recorded and a portion of the milestone
payment equal to the percentage of the collaboration completed through that date
is recognized. The remainder of the milestone payment is recognized as services
are performed (generally straight-line) over the remaining estimated term of the
collaboration. Payments due in advance of being earned are recorded as deferred
revenue.

        The following is a summary of deferred revenue:

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

<S>                                <C>           <C>           <C>           <C>
Revenue recorded during the period.$ 16,927,074  $  3,495,194  $ 21,418,393  $  8,141,358
Revenue recognized during the
   period..........................  (6,197,906)   (3,828,527)  (11,230,892)   (8,446,913)
                                   ------------  ------------  ------------  ------------
                                     10,729,168      (333,333)   10,187,501      (305,555)
Deferred revenue at beginning of
   period..........................   3,863,332     2,266,111     4,404,999     2,238,333
                                   ------------  ------------  ------------  ------------
Deferred revenue at end of period..$ 14,592,500  $  1,932,778  $ 14,592,500  $  1,932,778
                                   ============  ============  ============  ============
</TABLE>

        Other long-term assets at June 30, 2001 include $5,000,000 of unbilled
and deferred revenue.

        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 six-month periods ended
June 30, 2001 by $0.3 million and $0.5 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.




<PAGE>   8


                              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 will collaborate on the development and marketing of DNA-based
diagnostics for major diseases, work 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 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 will collaborate on the
research, development, and commercialization of new antibody therapeutic
products. Under this five year collaboration, deCODE will utilize novel targets
discovered in its research on the genetics of common diseases along with
Genmab's human antibody technology. The collaboration will cover 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 will collaborate 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 will undertake 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 will collaborate 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 minimum of $24.3 million in the first fourteen
months.




<PAGE>   9


                              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 unaudited condensed consolidated statements of operations in the
following captions:

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

<S>                                 <C>           <C>           <C>           <C>
Research and development expense... $    762,562  $  1,208,851  $  1,595,292  $  1,986,797
General and administrative expense.      427,516       506,666       757,335     1,856,269
                                    ------------  ------------  ------------  ------------
          Total.................... $  1,190,078  $  1,715,517  $  2,352,627  $  3,843,066
                                    ============  ============  ============  ============
</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
contributions 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. As of June 30, 2001,
1,345,000 shares were available for grant under the Plan.


<PAGE>   10


                              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 SIX MONTHS
                                       ENDED JUNE 30,                ENDED JUNE 30,
                                 ---------------------------  ---------------------------
                                     2001           2000          2001           2000
                                 ------------  -------------  ------------  -------------
                                 (UNAUDITED)    (UNAUDITED)   (UNAUDITED)    (UNAUDITED)

<S>                             <C>           <C>            <C>           <C>
Net loss........................ $(12,290,505) $(10,391,448)  $(28,378,268) $(17,289,587)
Accrued dividends on Series A,
   Series B and Series C
   preferred stock..............            0    (2,340,340)             0    (4,679,565)
Amortized discount on Series A
   And Series C preferred stock.            0    (2,262,377)             0    (2,302,530)
                                 ------------  ------------  -------------  ------------
Accrued dividends and amortized
   discount on preferred stock..            0    (4,602,717)             0    (6,982,095)
                                 ------------  ------------  -------------  ------------
Net loss available to
   common stockholders.......... $(12,290,505) $(14,994,165) $ (28,378,268) $(24,271,682)
                                 ============  ============  =============  ============
</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>
                                                        JUNE 30,             JUNE 30,
                                                          2001                 2000
                                                      -----------          -----------
                                                      (UNAUDITED)          (UNAUDITED)

                                                        (SHARES)             (SHARES)

<S>                                                   <C>                  <C>
Preferred stock convertible into shares of
   common stock.....................................           0            23,737,081
Warrants to purchase shares of common stock.........   1,167,500             1,492,500
Options to purchase shares of common stock..........   1,526,000                30,000
</TABLE>


<PAGE>   11


                              deCODE genetics, Inc.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


COMPREHENSIVE INCOME (LOSS)

        The following table presents the calculation of comprehensive income as
required by SFAS No. 130:

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

<S>                            <C>           <C>            <C>            <C>
Net loss....................... $(12,290,505) $(10,391,448)  $(28,378,268)  $(17,289,587)
Other comprehensive
  income (loss):
     Foreign currency
        translation ...........      143,954        24,031        184,413         16,214
                                ------------  ------------   ------------   ------------
Total comprehensive
   income (loss) .............. $(12,146,551) $(10,367,417)  $(28,193,855)  $(17,273,373)
                                ============  ============   ============   ============
</TABLE>


SEGMENT INFORMATION

        Management plans to organize deCODE's main business units along three
avenues of commercialization: discovery services, database services, and
healthcare informatics. Discovery services, or the development and applications
of proprietary bioinformatics tools to discover disease-related genes and
associated drug targets, are currently carried-out in collaboration with Roche,
other collaborators and in deCODE's own research programs. deCODE intends that
this business unit will also ultimately encompass diagnostic and therapeutic
products and pharmacogenomic services. The database services business unit will
involve the construction and commercialization of the Icelandic Health Sector
Database containing non-personally identifiable data from Icelandic healthcare
records, and the deCODE Combined Data Processing system to cross-reference data
from the Icelandic Health Sector Database with genealogical and genotypic data.
deCODE expects to derive revenues from the database business unit by providing
services through the deCODE Combined Data Processing system to pharmaceutical
and biotechnology companies, healthcare providers and other participants in the
healthcare industry. 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 June 30, 2001, deCODE's efforts have largely been directed
toward discovery services and financial information available for evaluation by
management 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 97% and 99% of consolidated revenue in the three-month periods ended June
30, 2001 and 2000, respectively, and 98% and 97% of consolidated revenue in the
six-month periods ended June 30, 2001 and 2000, respectively.



<PAGE>   12
                              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 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, or approximately $5.9 million (as of June 30, 2001) 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.

<PAGE>   13

                             deCODE genetics, Inc.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


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 six months ended June 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 from five to four years.
This change in estimate had the effect of increasing depreciation expense $0.5
million in the three and six-month periods ended June 30, 2001.























<PAGE>   14


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 June 30, 2001 and for the three and six month
periods ended June 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 Exhibit 99.1 to 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 have or are developing three avenues of
commercialization: Discovery Services, with a focus on gene and drug target
discovery and pharmacogenomics; Database Services, with a focus on the
construction and commercialization of the Icelandic Health Sector Database,
which contains non-personally identifiable data from Icelandic healthcare
records, and the deCODE Combined Data Processing system, to cross-reference data
from the Icelandic Health Sector Database with genealogical and genotypic data;
and, Healthcare Informatics, which is computerized analysis of healthcare data,
with a focus on bioinformatics, which is the computerized analysis of biological
information, decision-support tools and privacy products.

        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 June 30, 2001 we had an accumulated deficit of
$139,131,968. We anticipate incurring additional losses over at least the next
several years as we expand our internal and collaborative gene discovery
efforts, continue our technology development and construction of the deCODE
Combined Data Processing system and healthcare informatics systems. 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 our gene discovery programs in
the twelve diseases. Under the agreement, we may receive a total of more than
$200 million in research funding and milestone payments and will receive royalty
payments on the sale of diagnostic and therapeutic products resulting from the
collaboration. The term of the agreement will continue until February 1, 2003
provided that Roche elects to extend the agreement for the one-year period
commencing on the fourth anniversary of the agreement. Revenues recognized by us
to-date have consisted primarily of revenues generated under the research
collaboration and cross-license agreement with Roche. Roche constituted 97% and
99% of our total revenues in the three-month periods ended June 30, 2001 and
2000, respectively, and 98% and 97% of our total revenues in the six-month
periods ended June 30, 2001 and 2000, respectively.

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

<PAGE>   15

information technology products and services relating to the use of the
crosswalk for future pharmaceutical and biotechnology applications.

        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. In addition, 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.

RECENT DEVELOPMENTS

        In June 2001, we entered into a collaboration and cross-license
agreement with Roche regarding diagnostics. Under the terms of this new
agreement, we will collaborate on the development and marketing of DNA-based
diagnostics for major diseases. We will work 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. The agreement further
provides for research to be conducted under the direction of a jointly appointed
steering committee, which will oversee all research projects. Under the
agreement we will receive payments including research funding, research
milestones and royalties on any products that are commercialized. The research
term under the agreement is five years.

        In June 2001, we entered into a collaboration agreement with Genmab A/S
and Medarex, Inc. pursuant to which we will collaborate on the research,
development, and commercialization of new antibody therapeutic products. Under
this five-year collaboration, we will utilize novel targets discovered in our
research on the genetics of common diseases along with Genmab's human antibody
technology. The collaboration will cover 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 will collaborate 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 will undertake 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 will work 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.
<PAGE>   16


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.

        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 June 30, 2001 reflect the expenses
incurred in our gene discovery activities, partly offset by the revenues
received pursuant to our research collaboration agreement with Roche 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
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 deCODE Combined Data Processing
system, 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 SIX MONTH PERIODS ENDED JUNE 30, 2001
AND 2000

        REVENUES. Revenues we have recognized through June 2001 are derived
primarily from research funding and milestone payments received under the 1998
research and collaboration agreement with Roche. In connection with our July
2000 initial public offering, we adopted the provisions of Staff Accounting
Bulletin No. 101 (SAB 101) on revenue recognition. Under SAB 101, milestone
payments received under the 1998 research and collaboration agreement with Roche
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 agreement with Roche. Accordingly, upon the
achievement of a milestone, the milestone payment is recorded and a portion of
the milestone payment equal to the percentage of the collaboration completed
through that date is recognized. The remainder of the milestone payment is
recognized as services are performed (generally straight-line) over the
remaining term of the collaboration. Payments due in advance of being earned are
recorded as deferred revenue. We could have significant downward revisions to
revenue under the retrospective straight-line basis of recognizing milestone
revenues in our 1998 research collaboration with Roche resulting from, among
other things, extension by Roche of the contractual term of our collaboration
with them.



<PAGE>   17


        The following is a summary of deferred revenue:

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

<S>                               <C>           <C>           <C>           <C>
Revenue recorded during the period.$ 16,927,074  $  3,495,194  $ 21,418,393  $  8,141,358
Revenue recognized during the
   period..........................  (6,197,906)   (3,828,527)  (11,230,892)   (8,446,913)
                                   ------------  ------------  ------------  ------------
                                     10,729,168      (333,333)   10,187,501      (305,555)
Deferred revenue at beginning of
   period..........................   3,863,332     2,266,111     4,404,999     2,238,333
                                   ------------  ------------  ------------  ------------
Deferred revenue at end of period..$ 14,592,500  $  1,932,778  $ 14,592,500  $  1,932,778
                                   ============  ============  ============  ============
</TABLE>


        Our revenues increased to $6,197,906 for the quarter ended June 30, 2001
as compared to $3,828,527 for the quarter ended June 30, 2000, an increase of
62%. Quarterly revenues attributable to our research collaboration agreement
with Roche were $5,985,832 as compared to $3,798,333 in the same quarter of the
preceding year. Our revenues increased to $11,230,892 for the six months ended
June 30, 2001 as compared to $8,446,913 for the six months ended June 30, 2000,
an increase of 33%. Six-month revenues attributable to our research
collaboration agreement with Roche were $10,992,499 as compared to $8,235,555 in
the same period of the preceding year. The increase in revenues in the three and
six month periods principally results from the recognition of revenue from new
milestone achievements under our research collaboration with Roche.

        At June 30, 2001, the total amount of deferred research revenue that
will be recognized in future periods aggregated $14,592,500. Revenues recorded
for the quarter ended June 30, 2001 increased to $16,927,074 as compared to
$3,495,194 for the quarter ended June 30, 2000, an increase of 384%. Revenues
recorded in the six months ended June 30, 2001 increased to $21,418,393 as
compared to $8,141,358 for the six months ended June 30, 2000, an increase of
163%. The increase in recorded revenues in the three and a six-month period is
principally attributable to our new diagnostics collaboration with Roche but
also results from greater milestone achievements under our 1998 research
collaboration with Roche.

        RESEARCH AND DEVELOPMENT. Our research and development expenses
increased to $16,332,187 for the quarter ended June 30, 2001 as compared to
$9,971,227 for the quarter ended June 30, 2000, an increase of 64%. Our research
and development expenses increased to $36,547,488 for the six months ended June
30, 2001 as compared to $19,205,595 for the six months ended June 30, 2000, an
increase of 90%. We have continued to expand our research and development
operations, including our hiring of additional research personnel and 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
six-month periods ended June 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 research efforts and accelerate the
development of the database services. 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 $3,727,291 for the quarter ended June 30, 2001 as compared to
$4,794,871 for the quarter ended June 30, 2000, a decrease of 22%. Our general
and administrative expenses decreased to $6,730,847 for the six months ended
June 30, 2001 as compared to $7,741,208 for the six months ended June 30, 2000,
a decrease of 13%. Without regard to a $1.3 million non-cash
<PAGE>   18

litigation settlement charge in the quarter and six month periods ended June 30,
2001 and a $3.0 million stock-based contribution in the quarter and six month
periods ended June 30, 2000, general and administrative expense increased
approximately $0.7 million as compared to the same periods in 2000 as a result
of added salaries, contractor services and other general and administrative
expenses in the continued expansion of our operations, offset somewhat by lower
stock-based compensation. We continue to expand our operations, including hiring
of additional general and administrative personnel, and we expect that general
and administrative expenses may continue to increase in 2001.

        STOCK-BASED COMPENSATION AND REMUNERATION EXPENSE. Stock-based
compensation and remuneration expense was $1,190,078 for the quarter ended June
30, 2001 as compared to $1,715,517 for the quarter ended June 30, 2000, a
decrease of 31%. Stock-based compensation and remuneration expense was
$2,352,627 for the six months ended June 30, 2001 as compared to $3,843,066 for
the six months ended June 30, 2000, a decrease of 39%. 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 and the fair value of additional stock
options that may be granted in future years.

        INTEREST INCOME. Our interest income was $1,903,372 for the quarter
ended June 30, 2001 as compared to $646,209 for the quarter ended June 30, 2000
and $4,523,601 for the six months ended June 30, 2001 as compared to $1,417,801
for the six months ended June 30, 2000. The increase in interest income is
generally due to higher average cash reserves as a result of our initial public
offering.

        OTHER NON-OPERATING INCOME AND (EXPENSE), NET. Our other non-operating
income and expense, net increased to a net expense of $332,305 for the quarter
ended June 30, 2001 as compared to a net expense of $100,086 for the quarter
ended June 30, 2000. Our other non-operating income and expense, net increased
to a net expense of $854,426 for the six months ended June 30, 2001 as compared
to a net expense of $207,498 for the six months ended June 30, 2000. The
increase in net other non-operating expense primarily results from foreign
exchange losses in the current periods.

        INCOME TAXES. As of June 30, 2001, we had an accumulated deficit of
$139,131,968 and did not owe any Icelandic or U.S. federal income taxes nor did
we pay any in the three or six months periods ended June 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 $12,290,505 and $0.28 for the quarter ended
June 30, 2001, respectively, as compared to $10,391,448 and $1.94 for the
quarter ended June 30, 2000, respectively. This is an increase of 18% in net
loss and a decrease of 86% in basic and diluted net loss per share. Net loss and
basic and diluted net loss per share were $28,378,268 and $0.64 for the six
months ended June 30, 2001, respectively, as compared to $17,289,587 and $3.20
for the six months ended June 30, 2000, respectively. This is an increase of 64%
in net loss and a decrease of 80% in basic and diluted net loss per share.
Although net loss has increased in the three and six month periods ended June
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 decreased to $0.28 for the quarter ended June 30,
2001 as compared to pro forma basic and diluted net loss per share of $0.34 for
the quarter ended June 30, 2000. Basic and diluted net loss per share increased
to $0.64 for the six months ended June 30, 2001 as compared to pro forma basic
and diluted net loss per share of $0.56 for the six months ended June 30, 2000.
<PAGE>   19

LIQUIDITY AND CAPITAL RESOURCES

        As of June 30, 2001, we had $154,592,662 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 six months ended June 30,
2001 but has not had a material effect on our business.

        Net cash used in operating activities was $11,490,557 in the six months
ended June 30, 2001, as compared to $7,901,543 in the six months ended June 30,
2000. Cash expenditures for research and development and general and
administrative expenses during the six months were mitigated by the collection
of receivables and other working capital sources of funds.

        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 six months ended June 30, 2001 were $27,429,569 as compared
to $3,458,926 for the same period last year, primarily due to the expansion of
our facilities and operations. Particularly, during the six months ended June
30, 2001 we expended $7.1 million in respect of a 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 $631,900 was used for financing activities in the six months
ended June 30, 2001 as compared to $16,040,913 provided in the six months ended
June 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 six months ended June 30, 2001.

        Our cash is deposited only with financial institutions in Iceland,
United Kingdom and the United States having a high credit standing. Almost all
of this cash is invested in U.S. dollar denominated money market instruments but
partly invested in Icelandic krona denominated financial securities.

        In January 2001 we engaged a contractor for the construction of a new
building to house our operations in the University District of Reykjavik. Total
project cost is estimated to be approximately $30 million and $10.6 million has
been incurred through June 30, 2001. We expect that the new building will be
complete before the end of 2001 and occupied in early 2002. We are currently
exploring various methods for financing this project. We had no other material
commitments for capital expenditures at June 30, 2001.

        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
<PAGE>   20

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.


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 June 30, 2001, all of
our cash and cash equivalents were in money market and checking accounts.



PART II  OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS

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

        On January 13, 2000 Thorsteinn Jonsson and Genealogia Islandorum hf.,
the alleged holders of copyrights to approximately 100 books of genealogical
information, commenced an action against us in the District Court of Reykjavik
in Iceland. They allege that our genealogy database infringes their copyrights
and seek damages in the amount of approximately 616 million Icelandic kronas, or
approximately $5.9 million (as of June 30, 2001) and a declaratory judgment to
prevent us from using the allegedly infringing data. We believe the suit is
without merit and intend to defend this action vigorously; however, the ultimate
resolution of this matter cannot yet be determined.

        Mannvernd issued a press release in February 2000, announcing its
intention to file lawsuits against the State of Iceland and any other relevant
parties, including us, to test the constitutionality of the Act. In its press
release, Mannvernd indicated that it hopes to halt the construction and/or
operation of the Icelandic Health Sector Database. On April 30, 2001, a lawsuit
was filed against the Icelandic Directorate of Public Health but Mannvernd has
not commenced litigation against us; however, the ultimate resolution of this
matter cannot yet be determined.

        On April 10, 2000, Ernir Snorrason, one of our original stockholders,
filed a complaint in the Court of Chancery of the State of Delaware for New
Castle County alleging that we improperly exercised an option to repurchase
256,637 shares of common stock that we issued to him in 1996 pursuant to a
Founders' Stock Purchase Agreement. The complaint seeks an order requiring us to
recognize Mr. Snorrason as the owner of these shares. On June 26, 2001, we and
Mr. Snorrason 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.







<PAGE>   21


ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

CHANGES IN SECURITIES

        (c) During the three month period ended June 30, 2001 covered by this
quarterly report on Form 10-Q, we issued the following securities that were not
registered under the Securities Act:

        (1) On June 26, 2001, we issued 166,814 shares of our common stock to
Ernir Snorrason for $0.001 per share, the par value, in settlement of
litigation. The fair market value of the shares was a general and administrative
expense.

        The issuance of securities in the transaction described above was deemed
to be exempt from registration under the Securities Act by virtue of Section
4(2) as a transaction not involving any public offering. The transferee made
appropriate representations as part of the settlement and had, or had access to,
adequate information about the company. Appropriate legends are affixed to the
stock certificate that was issued.

USE OF PROCEEDS

        (d) 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 June 30,
2001, we have used approximately $65.6 million dollars of the proceeds as
follows:

<TABLE>
<S>                                                                                      <C>
                  Discovery and research programs.......................................  $32.6
                  ABI Prism 3700 DNA Analyzers..........................................   13.1
                  Construction of executive office and laboratory facilities............    7.1
                  Construction of other laboratory facilities...........................    2.5
                  Computer equipment....................................................    1.8
                  Other laboratory equipment............................................    2.6
                  Other property and equipment..........................................    0.3
                  General and administrative activities.................................    4.5
                  Installment payments on capital lease obligations.....................    0.9
                  Interest..............................................................    0.2
                                                                                          -----
                                                                                          $65.6
                                                                                          =====
</TABLE>

        Pending use, we have invested the remaining proceeds primarily in U.S.
dollar denominated money market funds but also partly in Icelandic krona
denominated financial securities.




<PAGE>   22


ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

        None.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        On June 15, 2001, we held our annual meeting of stockholders. The
results of the proposals submitted for vote at this meeting were as follows:

        1. Election of five Directors (there were no abstentions or broker
non-votes in connection with the election of directors).

<TABLE>
<CAPTION>
                                            For:                  Withheld:

<S>                                     <C>                        <C>
Sir John Vane                            27,687,456                 4,995

Jean-Francois Formela                    27,688,326                 4,125

Andre Lamotte                            26,654,921               1,037,530

Kari Stefansson                          26,653,211               1,039,240

Terrance G. McGuire                      27,688,491                 3,960
</TABLE>


        2. Ratification of the appointment of PricewaterhouseCoopers ehf. as our
independent auditors for the fiscal year ending December 31, 2001.

<TABLE>
<CAPTION>
                  For:              Against:             Abstain:

<S>                                 <C>                  <C>
               27,686,809             3,913                1,729
</TABLE>


        3. Ratification of the amendment of our 1996 Equity Incentive Plan, as
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.

<TABLE>
<CAPTION>
                  For:              Against:             Abstain:

<S>                                <C>                     <C>
               24,748,623           2,918,866               535
</TABLE>


ITEM 5.  OTHER INFORMATION


RISK FACTORS



FORWARD LOOKING STATEMENTS AND CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS

        This report contains forward-looking statements. These statements relate
to future events or our future financial performance. In some cases,
forward-looking statements can be identified by terminology such as "may,"
"will," "should," "could," "expect," "plan," "anticipate," "believe,"
"estimate," "predict," "intend," "potential" or "continue" or the negative of
such terms or other comparable terminology. 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
<PAGE>   23

        DISCOVERY SERVICES

        Our gene discovery programs are still in the early stages of development
and may not result in marketable products. We direct our technology and
development focus primarily toward identifying genes or gene fragments which are
responsible for, or indicate the presence of, certain diseases. Our technologies
and approach to gene discovery may not enable us to identify successfully the
specific genes that cause or predispose individuals to the complex diseases that
are the targets of our gene discovery program, even where we have identified
candidate genes. In addition, the diseases we are targeting are generally
believed to be caused by a number of genetic and environmental factors. It may
not be possible to address such diseases through gene-based therapeutic or
diagnostic products. Accordingly, even if we are successful in identifying
specific genes, our discoveries may not lead to the development of commercial
products.

        Even if we, or our collaborators, are able to develop pharmaceutical
products, those products will fail to produce revenues unless they:

      -     are safe and effective;

      -     meet regulatory standards in a timely manner;

      -     successfully compete with other technologies and products;

      -     avoid infringing on the proprietary rights of others;

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

      -     can be marketed successfully.

        We are not certain that we will be able to achieve these conditions for
product revenues. We expect that it will be a number of years, if ever, before
we will recognize revenue from therapeutic or diagnostic product sales or
royalties on such sales. Our initiatives in pharmacogenomics and the study of
the function of genes, a field known as functional genomics, are not certain to
provide any revenues. There may be no market for these services because of
competition, lack of market acceptance or our inability to develop these
services successfully. We may not be able to develop our functional genomics
capabilities to a state that is adequate for realizing revenues.

        DATABASE SERVICES

        We received a license to create and operate the Icelandic Health Sector
Database in January 2000, and accordingly, are at the early stages of its
development. The collection of genotypic data, which is another integral part of
the deCODE Combined Data Processing system, is also in the early stages of
development. We expect that it will take several years before we have fully
developed the deCODE Combined Data Processing system. We are presently devoting
substantial resources to the development of the deCODE Combined Data Processing
system and its components. We plan to continue to devote substantial resources
to this development for the foreseeable future. We cannot be sure that the
deCODE Combined Data Processing system will result in marketable products or
services. Our intended method for cross-referencing genealogical, genotypic and
healthcare data is central to the development of the deCODE Combined Data
Processing system and is unproven.

        The success of our database services is contingent upon:

      -     the development of the Icelandic Health Sector Database and
            collection of genotypic data;

      -     the creation of database and cross reference software that is free
            from design defects or errors;

      -     compliance with governmental requirements regarding the Icelandic
            Health Sector Database;

      -     the security and reliability of encryption technology;
<PAGE>   24

      -     the cooperation of the Icelandic healthcare system;

      -     the ability to obtain blood samples from consenting Icelanders and
            consents to the use of their genotypic data by cross-referencing
            through the deCODE Combined Data Processing system;

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

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

        If we fail to successfully commercialize our database services, we will
not realize revenues from this part of our business.

        HEALTHCARE INFORMATICS

        Our bioinformatics and privacy protection products have, to date, been
tested only in connection with our own use of them and they 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, and we have generated
no revenues from sales or licenses of bioinformatics, decision-support, or
privacy protection products. To date we have not produced any decision-support
tools and there can be no assurance 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 for
healthcare delivery.

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 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 FOR A PERIOD LONGER THAN ANTICIPATED,OR
IN AN AMOUNT GREATER THAN ANTICIPATED, WE MAY BE UNABLE TO CONTINUE
OUROPERATIONS

        We incurred net losses of $12,290,505 and $28,378,268 for the quarter
and six-month periods ended June 30,2001, respectively, and $10,391,448 and
$17,289,587 for the quarter and six-month periods ended June 30, 2000. As of
June 30, 2001, we had an accumulated deficit of $139,131,968. To date, we have
never generated a profit and we have not generated any significant revenues
except for payments received in connection with our research collaboration with
Roche and interest revenues. The development of our technologies will require
substantial increases in expenditures over the next several years. In addition,
we expect to spend more in connection with our internal research programs and
the preparation of 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.

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 used substantial amounts of cash to fund our research and
development activities. We expect our capital and operating expenditures to
increase over the next several years as we expand our research and development
activities, construct the
<PAGE>   25

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 progress of our discovery and research programs;

      -     the number and breadth of these programs;

      -     our ability to attract collaborators for, subscribers to or
            customers for our products and services;

      -     our achievement of milestones under our research collaboration
            agreement with Roche;

      -     our ability to establish and maintain additional collaborations;

      -     our collaborators' progress in commercializing our gene discoveries;

      -     the level of our activities relating to commercialization rights we
            retain in our collaborations;

      -     competing technological and market developments;

      -     the costs involved in enforcing patent claims and other intellectual
            property rights; and

      -     the costs and timing of regulatory approvals.

        We intend to rely on Roche and future collaborators for significant
funding in support of our research efforts. In addition, we may seek additional
funding through public or private equity offerings and debt financings.
Additional financing may not be available when needed. If available, such
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 certain 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. We believe that the net proceeds from
our initial public offering, other cash and investment securities and
anticipated cash flow from Roche will be sufficient to support our current
operating plan for several years. We have based this belief on assumptions that
may prove wrong.

IF WE DO NOT MAINTAIN THE GOODWILL AND RECEIVE THE COOPERATION OF THE ICELANDIC
POPULATION, WE MAY BE UNABLE TO PURSUE OUR GENE IDENTIFICATION PROGRAMS,
PHARMACOGENOMICS OR FUNCTIONAL GENOMICS EFFORTS, COLLECT GENOTYPE DATA OR
DEVELOP THE ICELANDIC HEALTH SECTOR DATABASE AND THE DECODE COMBINED DATA
PROCESSING SYSTEM

        Our approach to gene identification and the development and maintenance
of genotype data, the Icelandic Health Sector Database and the deCODE Combined
Data Processing system depend on the goodwill and cooperation of the Icelandic
population, including the Icelandic government and the healthcare system. 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 or healthcare providers
attempt to prevent us from having access to medical records of their patients.
Individuals may opt-out of having their records included in the Icelandic Health
Sector Database. As of June 30, 2001 approximately 7% of the population has
exercised this right. Some doctors practicing in Iceland have expressed
opposition to the Icelandic Health Sector Database and may attempt to withhold
their patients' data from inclusion in such database or encourage their patients
to exercise their opt-out rights. Our development of genotype data and our
cross-referencing through the deCODE Combined Data Processing system of that
data with information about the manifestations of disease, which are known as
phenotypes, in the Icelandic Health Sector Database require that a substantial
portion of the Icelandic population provide us with blood samples for genotyping
and consent to the use of their DNA to cross-reference molecular genetics data
with the Icelandic Health Sector Database. Because only a small portion of the
Icelandic population may carry certain mutations, the unwillingness of even a
small portion of the
<PAGE>   26

population to participate in our programs could diminish our ability to develop
and market information based on the use of genotypic data.

OUR RELIANCE ON THE ICELANDIC POPULATION IN OUR GENE DISCOVERY PROGRAMS AND
DATABASE SERVICES MAY LIMIT THE APPLICABILITY OF OUR DISCOVERIES TO CERTAIN
POPULATIONS

        In general, the genetic make-up and prevalence of disease vary across
populations around the world. Common complex diseases generally occur with a
similar frequency in Iceland as in other western countries. We are already
studying some of these diseases in our gene discovery programs. 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 take more time or may be unable to develop
diagnostic products that are effective on all, or a portion, of those people
with such diseases. Similarly, any difference between the Icelandic population
and the populations of other countries may have an effect on the usefulness of
the Icelandic Health Sector Database and deCODE Combined Data Processing system
in studying disease in populations of countries other than Iceland. We do not
anticipate developing any products solely for the Icelandic market. For our
business to succeed, we must 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 IS BASED UPON
A LICENSE FROM THE ICELANDIC MINISTRY OF HEALTH AND SOCIAL SECURITY AND IS
SUBJECT TO GOVERNMENT SUPERVISION AND REGULATION, WHICH MAY MAKE OUR DEVELOPMENT
OF DATABASE PRODUCTS MORE EXPENSIVE AND TIME-CONSUMING THAN WE ANTICIPATED

        We may construct the Icelandic Health Sector Database and
cross-reference it with our genealogical and genetic data, through the deCODE
Combined Data Processing system, only in accordance with the stipulations of the
Icelandic Health Sector Database license which the Ministry of Health and Social
Security, or the Ministry, granted us 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. The Icelandic Health Sector Database
Monitoring Committee, or the Monitoring Committee, the Data Protection Authority
of Iceland, or Authority, and an Interdisciplinary Ethics Committee will
supervise our construction and operation of the Icelandic Health Sector
Database. In addition, the Icelandic Bioethics Committee will review our
operation of the Icelandic Health Sector Database. The Ministry may withdraw the
license in the event that we violate the terms and conditions of the license,
the Act or its rules. In addition, the Icelandic parliament could amend the Act
in ways which would adversely affect our ability to develop or market the
Icelandic Health Sector Database and, consequently, the deCODE Combined Data
Processing system. Because the Icelandic parliament and government recently
adopted the Act and its rules, there is no precedent interpreting the Act or the
rules. In preparing the Icelandic Health Sector Database, we must comply with
the Authority's technical requirements. These technical requirements cover areas
such as data encryption and privacy protection. The Authority may review these
requirements from time to time and may require greater technical capabilities
than we currently have. Compliance with these requirements can be expensive and
time-consuming and may delay the development of the Icelandic Health Sector
Database and the deCODE Combined Data Processing system or make such development
more expensive than we anticipated. In addition, the agencies imposing these
requirements will evaluate our compliance efforts. We cannot control the time
required for this evaluation, and accordingly, the evaluation process may lead
to delay in the development of the Icelandic Health Sector Database and the
deCODE Combined Data Processing system.

        The Interdisciplinary Ethics Committee has the power to withdraw
permission for any type of research program in the Icelandic Health Sector
Database not conducted in accordance with international rules of bioethics. At
the expiration of the license, we are required to ensure that the Ministry or
its designee will receive, without payment of consideration, intellectual
property rights necessary for the creation and operation of the database for
public health purposes and for scientific research.

        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

<PAGE>   27

            inconsistent with the rules of the European Economic Area, or EEA,
            or other international rules and agreements to which Iceland is or
            becomes a party;

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

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

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

        The Icelandic Health Sector Database license requires us 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 be able to enter into
agreements with a sufficient number of health institutions as the operations of
the Icelandic Health Sector Database will require. Neither can we be certain
that such agreements will be on terms favorable to us. Some doctors practicing
in Iceland have expressed opposition to the Icelandic Health Sector Database and
it is possible that those who have private practices, and as such have authority
to enter into agreements with us, may refuse to do so or those who are employed
by health institutions may encourage the institutions to refuse to do so. We
cannot be certain that individuals within health institutions will adhere to the
requirements of such agreements. The Icelandic Medical Association is currently
publicly opposing some aspects of the way in which the Icelandic Health Sector
Database will be created. Our inability to enter into additional agreements on
favorable terms or in a timely manner, or to obtain others' compliance with the
terms of such agreements, could have a material adverse effect on our ability to
construct and operate the Icelandic Health Sector Database.

IF WE CANNOT OBTAIN AN EXTENSION OF THE TERM OF THE ICELANDIC HEALTH SECTOR
DATABASE LICENSE BEYOND ITS EXPIRATION DATE IN JANUARY 2012, WE WILL NOT BE ABLE
TO OPERATE OR DERIVE RESOURCES FROM THE ICELANDIC HEALTH SECTOR DATABASE OR THE
DECODE COMBINED DATA PROCESSING SYSTEM AFTER THAT DATE

        Even if we are successful in creating and marketing the Icelandic Health
Sector Database and the deCODE Combined Data Processing system, the Icelandic
Health Sector Database license will expire in January 2012 unless we are able to
obtain an extension. There is no assurance that we will obtain further access
rights on favorable terms, if at all. Our negotiations with healthcare
institutions, the process of genotyping and the development of database
infrastructure, among other factors, will determine when we can begin marketing
the deCODE Combined Data Processing system. We expect that the Icelandic Health
Sector Database and the deCODE Combined Data Processing system will not be fully
operational for up to four years. The license will be subject to a review in
2008, and at that time, in accordance with an agreement we entered into with the
Ministry simultaneously with the granting of the license, the Ministry and we
will enter into discussions on renewal of the license at the end of the term.
The Ministry might not renew the license in 2012 and we cannot guarantee any
renewal.

WE MAY NOT BE ABLE TO FORM AND MAINTAIN THE COLLABORATIVE RELATIONSHIPS THAT OUR
BUSINESS STRATEGY REQUIRES

        Our strategy for deriving revenues from the discovery of genes and the
development of products based upon our discoveries depends upon the formation of
research
<PAGE>   28

collaborations and licensing arrangements with several partners at the same
time. 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, that any future collaborations or licensing arrangements will be on
terms favorable to us, or that current or future collaborations or licensing
arrangements ultimately will be successful. If we are not able to manage
multiple collaborations successfully, our programs will suffer.

        As we attempt to establish additional collaborations, we will need to
balance our rights and obligations with any new co-collaborators with the rights
and obligations relating to our existing and potential future agreements. As the
number of collaborators grows, it will become more difficult to manage the
various collaborations successfully and the potential for conflicts among the
collaborators will increase.

        We also expect to rely on collaborations in other parts of our business
such as the construction of the deCODE Combined Data Processing system. During
the development of the deCODE Combined Data Processing system, we intend to
pursue collaborations to assist us in the development of certain of its
components. Such collaborations may involve the use of particular technologies
or collaborative development and marketing activities. If we are unable to enter
into such collaborations on favorable terms, our ability to commercialize the
deCODE Combined Data Processing system will be adversely affected. We currently
have only one substantial collaborative relationship for the development and
commercialization of software products for the collection organization and
analysis of genotyping information.

        To develop our healthcare informatics products, we also plan to rely on
collaborative relationships. To date we have not established any such
collaborative relationships. If we are unable to form or maintain such
collaborative arrangements, our healthcare informatics operations will be
adversely affected.

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

        Currently we do not expect to develop or market pharmaceutical products
on our own. As a result, we will be 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 pharmaceutical
collaborators or collaborators for gene research projects 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 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.

        In addition, we expect to develop our database products, in part, with
various collaborators, and we may develop healthcare informatics tools that are
designed to work in conjunction with or to enhance the healthcare informatics
tools of other developers. These arrangements may place responsibility for key
aspects of product development and marketing on our collaborative partners.
Accordingly, the performance of these key aspects is uncertain and beyond our
direct control. 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.

        If any pharmaceutical, healthcare informatics or database collaborator
were to breach or terminate its agreement with us, or otherwise fail to conduct
collaborative activities successfully and in a timely manner, the development or
commercialization of products, services, technologies or research programs may
be delayed or terminated. Competing products that our collaborators develop or
to which our collaborators have rights may result in their withdrawal of support
for our products and services. 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.
<PAGE>   29

ETHICAL AND PRIVACY 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 and
privacy concerns in Iceland and internationally among healthcare professionals
and others including the Icelandic Medical Association and the World Medical
Association. Ethical and privacy concerns about the development and use of the
Icelandic Health Sector Database and the deCODE Combined Data Processing system
may lead to litigation in U.S., Icelandic or other national courts, or in
international courts such as the European Court of Human Rights in Strasbourg
(e.g., 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). One such lawsuit
has been brought in Icelandic courts against the Directorate of Public Health in
Iceland. The results of such litigation could have a material adverse affect on
our ability to construct and operate the Icelandic Health Sector Database and
the deCODE Combined Data Processing system.

CERTAIN PARTIES HAVE ANNOUNCED AN INTENTION TO INSTITUTE LITIGATION TESTING THE
CONSTITUTIONALITY OF THE ACT, WHICH COULD DELAY OR PREVENT US FROM DEVELOPING
AND OPERATING THE ICELANDIC HEALTH SECTOR DATABASE AND THE DECODE COMBINED DATA
PROCESSING SYSTEM

        In February 2000, an organization known as The Association of Icelanders
for Ethics in Science and Medicine, or Mannvernd, 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 intended lawsuit will allege that the Act and the License involve human
rights violations and will challenge the validity of provisions of the Act which
allow the use of presumed consent for the processing of health data into the
Icelandic Health Sector Database and the grant of a License to operate a single
database. To date no such suit has been brought against us. We believe that any
such litigation would be without merit and intend to defend vigorously any such
action in which we become a party. 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.

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

        The Act and the Icelandic Health Sector Database license require us 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. We must comply with any such revised data protection terms within
a deadline that the Authority may establish when it revises the terms. Although
we have received criticism regarding the security terms, we believe that they
are, and will continue to be, in line with international best industry-practice
standards. In addition, the customers for other products we may develop may
impose confidentiality requirements. Accidental disclosures of confidential data
may result from technical failures in encryption technology or from 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
<PAGE>   30

of the goodwill and cooperation of the Icelandic population including healthcare
professionals.

ETHICAL AND PRIVACY CONCERNS MAY LIMIT THE USE OF GENETIC TESTING AND THEREFORE
THE COMMERCIAL LIABILITY 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 genetics tests even if permissible. These factors may limit the market for,
and therefore the commercial viability of, products that we and our
collaborators develop.

WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY WITH BIOTECHNOLOGY COMPANIES AND
ESTABLISHED PHARMACEUTICAL COMPANIES IN THE DEVELOPMENT AND MARKETING OF
PRODUCTS BASED UPON THE IDENTIFICATION OF DISEASE-CAUSING GENES

        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 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. 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.

        Our collaboration with Roche does not prevent it from initiating its own
gene research or developing products based upon its, or any other party's, gene
research. Such products may compete with any products that we develop through
our gene discovery programs. We expect that future additional collaborations may
allow our future partners to undertake research and develop products on their
own or with third parties.

        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.

        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.

WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY WITH ESTABLISHED COMPANIES AND
GOVERNMENT AGENCIES IN THE FIELD OF DATABASE SERVICES

        Others are currently developing or marketing a number of databases to
assist participants in the healthcare industry and academic researchers in the
management and analysis of their own genomic data and data available in the
public domain. Although we believe that our existing genealogy database and our
License provide us with a unique
<PAGE>   31

opportunity to cross-reference databases that include genetic makeup, genealogy,
medical history, disease symptoms, resource use and treatment outcomes, we
cannot be sure that any of the databases that we create will achieve greater
market acceptance than those of our competitors. We plan to grant limited
Internet access to our genealogy data to the Icelandic public for non-business
use. Although our genealogy data will be restricted both by technical and legal
means, it is possible that this Internet access will in some way facilitate the
construction of similar databases intended for commercial purposes.

WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY WITH OTHER COMPANIES IN THE FIELD OF
HEALTHCARE INFORMATICS

        The healthcare informatics field is highly competitive. Many companies
compete with us to develop healthcare informatics similar to our expected
products, including products relating to medical record maintenance, medical
decision-support systems and systems design. We expect that competition will
continue to intensify. Many of our competitors have significantly greater
financial resources and market presence than we have. We cannot be sure that any
products that we develop in the field of healthcare informatics, including
medical decision-support systems, will compete effectively with those of our
competitors.

REGULATORY AUTHORITIES MAY DETERMINE THAT OUR LICENSE TO DEVELOP THE ICELANDIC
HEALTH SECTOR DATABASE INFRINGES UPON COMPETITION RULES IN THE EUROPEAN ECONOMIC
AREA, OR EEA, WHICH COULD NEGATIVELY AFFECT OUR ABILITY TO DERIVE REVENUES FROM
THE ICELANDIC HEALTH SECTOR DATABASE AND THE DECODE COMBINED DATA PROCESSING
SYSTEM

        Iceland is a member of the European Free Trade Association, or EFTA,
together with Norway, Switzerland and Liechtenstein. Through this membership,
Iceland has become a part of the EEA that was created by the EEA agreement
between EFTA and the European Union, or EU. The EEA agreement extends the EU
internal market and its regulations to EFTA countries that adopt certain EU
legislation. Accordingly, Iceland is subject to both EFTA and EU competition and
public procurement rules. A determination that the Act or our License is in
breach of such rules could result in a revocation or dilution of the License for
the Icelandic Health Sector Database and could have a negative impact on the
profitability and marketing potential of the deCODE Combined Data Processing
system.

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

        We are aware that there are other firms and individuals who have
prepared, or are currently preparing, genealogy databases similar to the one we
have developed. If any parties should successfully claim that the creation or
use of any of our databases infringes upon their intellectual property rights,
it could have a material adverse effect on our business. Two parties alleging to
hold copyrights to approximately 100 Icelandic genealogy books have filed a
copyright infringement suit against us in Iceland claiming that we have used
data from these books in the creation of our genealogy database, in violation of
their rights. The claimants seek a declaratory judgment to prevent our use of
the database and monetary damages in the amount of approximately 616 million
Icelandic kronas, or approximately $5.9 million (as of June 30, 2001). 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
<PAGE>   32

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
subjecting us to potential liability for damages, require us or our partners to
obtain a license in order to continue to manufacture or market the affected
products and processes. There can be no assurance that we or our partners would
prevail in any action or that any license required under any patent would be
made available on commercially acceptable terms, if at all. If licenses are not
available, we or our partners may be required to cease marketing our products or
practicing our methods.

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

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

        Disputes may arise in the future over our right to conduct research
programs relating to third party products and intellectual property. These and
other possible disagreements could lead to delays in the research, development
or commercialization of products. Such disagreements could also result in
litigation.

IF WE OR OUR COLLABORATORS ARE UNABLE TO OBTAIN REGULATORY APPROVALS FOR
PRODUCTS RESULTING FROM OUR GENE DISCOVERY PROGRAMS, 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
regulatory approval
<PAGE>   33

for any drugs or diagnostic products resulting from our gene discovery programs
will be obtained. 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.

WE MAY NOT BE ABLE TO OBTAIN NECESSARY TECHNOLOGY

        We have acquired or licensed certain components of our technologies from
third parties. Changes in or termination of these third party agreements could
materially adversely affect our discovery or research programs. We cannot be
certain that we will be able to acquire any new technologies that we need.

WE WILL HAVE TO RELY ON OTHERS FOR CLINICAL TRIALS, MANUFACTURING, MARKETING,
REGULATORY COMPLIANCE AND SALES CAPABILITIES, WHICH MAY IMPAIR OUR ABILITY TO
DELIVER PRODUCTS

        In our research collaborations, we will seek to retain rights to develop
and market certain therapeutic and diagnostic products or services. If we are
able to retain these rights and successfully develop products, we expect to
contract with others for conducting clinical trials, manufacturing, marketing
and sales.

        We are not certain that we will be able to enter into such arrangements
on favorable terms, if at all. Our dependence upon third parties for the conduct
of clinical trials, the obtaining of governmental approvals or the manufacture,
marketing or sales of products may adversely affect our ability to develop and
deliver products on a timely and competitive basis. 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.

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

Our success will depend in part on the extent to which government and health
administration authorities, private health insurers and other third party payors
will pay for our products. Reimbursement for newly approved healthcare products
is uncertain. Third party payors, including Medicare in the United States, are
increasingly challenging the prices charged for medical products and services.
Government and other third party payors 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 government or other third party payors do not provide adequate coverage and
reimbursement levels for our products, the market acceptance of these products
may be materially reduced.

OUR OPERATIONS MAY BE IMPAIRED UNLESS WE CAN SUCCESSFULLY MANAGE OUR GROWTH
<PAGE>   34

        We have recently experienced significant growth in the number of our
employees and the scope of our operations and our facilities. We intend to hire
additional personnel to construct the Icelandic Health Sector Database and the
deCODE Combined Data Processing system, and to develop our healthcare
informatics products. Our management and operations are, and may continue to be,
under significant strain due to this growth. To manage such growth, we must
strengthen our management team and attract and retain skilled 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 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 tendency to outsource those projects, our operations,
financial condition and growth rate could be materially and adversely affected.

        Recently, 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. In addition, numerous governments have undertaken efforts to control
growing healthcare costs through legislation, regulation and voluntary
agreements with medical care providers and pharmaceutical companies. If further
regulatory cost containment efforts limit the profits that can be derived on new
drugs, our customers may reduce their research and development spending which
could reduce the business they outsource to us. We cannot predict the likelihood
of any of these events or the effects they would have on our business, results
of operations or financial condition.

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.
Its services include supervising clinical trials, data and laboratory analysis,
patient recruitment and other services. The process of bringing a new drug to
market is time-consuming and expensive. If we do not perform our services to
contractual or regulatory standards, the clinical trial process could be
adversely affected. Additionally, if clinical trial services such as monitoring
clinical trials, adherence to good clinical practice and laboratory analysis do
not conform to contractual or regulatory standards, trial participants could be
affected. In such case these events would create a risk of liability to us from
the drug companies with whom we contract or the study participants.

        Encode also contracts with physicians to serve as investigators in
conducting clinical trials. Such testing creates risk of liability for personal
injury to or death of patients or volunteers, particularly to patients with
life-threatening illnesses, resulting from adverse reactions to the test drugs.
It is possible third parties could claim that we should be held liable for
losses arising from any deficiencies in the professional conduct of the
investigators with whom we contract or in the event of personal injury to or
death of persons participating in clinical trials. We do not believe we are
legally accountable for the medical care rendered by third party investigators,
and we would vigorously defend any such claims. Nonetheless, it is possible we
could be found liable for such losses.

        In addition to supervising tests or performing laboratory analysis,
Encode will also engage in Phase I clinical trials. We also could be liable for
the general risks associated with the conducting of such trials. These risks
include, but are not limited to, adverse events resulting from the
administration of drugs to clinical trial participants or the unprofessional
practice of Phase I medical care providers. We also could be held liable for
errors or omissions in connection with our services. For example, we could be
held liable for errors or omissions or breach of contract if one of our

<PAGE>   35

laboratories inaccurately reports or fails to report lab results or if our
informatics products violate rights of third parties. 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 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 we or our collaborators will be able to obtain such insurance or,
if obtained, that sufficient coverage can be acquired at a reasonable cost. If
we cannot protect against potential liability claims, we or our collaborators
may find it difficult or impossible to commercialize products.

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

        We depend on the principal members of our management and scientific
staff, including Dr. Kari Stefansson, Chairman, President and Chief Executive
Officer, Hannes Smarason, Executive Vice President and Senior Business and
Finance 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.

OUR OPERATIONS INVOLVE A RISK OF INJURY FROM HAZARDOUS MATERIALS, WHICH COULD BE
VERY EXPENSIVE TO US

        Our research and manufacturing activities involve the generation, use
and disposal of hazardous materials and wastes, including various chemicals and
radioactive compounds. We are subject to laws and regulations governing the use,
storage, handling and disposal of these materials, including standards
prescribed by Iceland and applicable EU standards. Although we believe that our
safety procedures comply with such laws and regulations, we cannot eliminate the
risk of environmental contamination or injury. In the event of such an
occurrence, we could be held liable for any damages that result, which could
exceed our resources. Although we believe that we comply in all material aspects
with applicable environmental laws and regulations and do not expect to make
additional material capital expenditures in this area, we cannot predict whether
new regulatory restrictions on the production, handling and marketing of
biotechnology products will be imposed. Any such new regulatory restrictions
could require us to incur significant costs to comply.

OUR COMMON STOCK PRICE HAS BEEN HIGHLY VOLATILE

        The market price of our common stock has been highly volatile. In
addition to various risks described elsewhere in this report, the following
factors could also cause price volatility:

            -     announcements that we or our competitors make concerning the
                  results of research activities, technological innovations or
                  new commercial products;

            -     changes in or adoption of new government regulations;

            -     regulatory actions;

            -     changes in patent laws;

            -     developments concerning proprietary rights;

            -     variations in operating results; and
<PAGE>   36

            -     actual, announced or threatened litigation.

        Extreme price and volume fluctuations occur in the stock market from
time to time and can particularly affect the prices of technology and
biotechnology stocks. These extreme fluctuations are unrelated to the actual
performance of the affected issuers. These broad market fluctuations may
adversely affect the market price of our common stock.

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 as revenues and cash reserves are
mostly in U.S. dollars but a portion of our cash reserves and our operating
costs are in Icelandic kronas. A fluctuation 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
have not previously engaged in, and do not now contemplate entering into,
currency hedging transactions. However, we may enter into such transactions on a
non-speculative basis to the extent that we may in the future have substantial
foreign currency exposure, for example, in connection with payments from
collaborative partners or due to investments.




<PAGE>   37


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.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER         DESCRIPTION OF EXHIBIT

<S>           <C>
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           Amended and Restated Employee Confidentiality, Invention
               Assignment and Non-Compete Agreement between deCODE genetics,
               Inc. and Mark Gurney, dated as of August 21, 2000 and signed on
               August 13, 2001.

10.2           Employee Confidentiality, Invention Assignment and Non-Compete
               Agreement between deCODE genetics, Inc. and Lance Thibault, dated
               February 1, 2001, and signed on June 20, 2001.

10.3           Employment Agreement between deCODE genetics, Inc. and Michael W.
               Young dated June 4, 2001.

10.4 *         Collaboration Agreement between Genmab A/S, Medarex, Inc. and
               deCODE genetics ehf. dated June 12, 2001.

10.5 *         Contract Services Agreement Re. Gene Expression Profiles In
               Rheumatoid Arthritis between Encode ehf. and Genmab A/S dated
               June 12, 2001.

10.6 *         Collaboration and Cross-License Agreement Re. Diagnostics
               between F.Hoffman-La Roche Ltd. AG and deCODE genetics, ehf.
               dated as of June 29, 2001.

10.7 *         Joint Development and Commercialization Agreement between
               deCODE genetics, ehf. and PE Corporation (NY) through its Applied
               Biosystem Group dated July 16, 2001.

10.8 *         Reagent Supply Agreement between deCODE genetics, ehf. and PE
               Corporation (NY) through its Applied Biosystems Group, dated July
               16, 2001.

10.9 *         Pharmacogenomics Collaboration and License Agreement between
               Encode ehf. and Affymetrix, Inc. dated July 16, 2001.

</TABLE>

* 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.

<PAGE>   38

* 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.



                                   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 August 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)


<PAGE>   39


                                INDEX TO EXHIBITS



<TABLE>
<CAPTION>
EXHIBIT
NUMBER                   DESCRIPTION OF EXHIBIT


<S>          <C>
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           Amended and Restated Employee Confidentiality, Invention
               Assignment and Non-Compete Agreement between deCODE genetics,
               Inc. and Mark Gurney, dated as of August 21, 2000 and signed on
               August 13, 2001.

10.2           Employee Confidentiality, Invention Assignment and Non-Compete
               Agreement between deCODE genetics, Inc. and Lance Thibault, dated
               February 1, 2001 and signed on June 20, 2001.

10.3           Employment Agreement between deCODE genetics, Inc. and Michael W.
               Young dated June 4, 2001.

10.4 *         Collaboration Agreement between Genmab A/S, Medarex, Inc. and
               deCODE genetics ehf. dated June 12, 2001.

10.5 *         Contract Services Agreement Re. Gene Expression Profiles In
               Rheumatoid Arthritis between Encode ehf. and Genmab A/S dated
               June 12, 2001.

10.6 *         Collaboration and Cross-License Agreement Re. Diagnostics
               between F.Hoffman-La Roche Ltd. AG and deCODE genetics, ehf.
               dated as of June 29, 2001.

10.7 *        Joint Development and Commercialization Agreement between
               deCODE genetics, ehf. and PE Corporation (NY) through its Applied
               Biosystem Group dated July 16, 2001.

10.8 *        Reagent Supply Agreement between deCODE genetics, ehf. and PE
               Corporation (NY) through its Applied Biosystems Group, dated July
               16, 2001.

10.9 *        Pharmacogenomics Collaboration and License Agreement between
               Encode ehf. and Affymetrix, Inc. dated July 16, 2001.
</TABLE>

* 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.