<PAGE>   1
                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000

[ ]  TRANSITION REPORT UNDER 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)

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 past 12
months (or such shorter period that the registrant is required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes __X___ No _____

The aggregate number of shares of the registrant's common stock outstanding on
October 31, 2000 was 44,640,226.
<PAGE>   2
                              deCODE genetics, Inc.

                                      INDEX

<TABLE>
<CAPTION>
                                                                                Page No.
<S>                                                                             <C>
PART I. FINANCIAL INFORMATION ...............................................   3

Item 1. Financial Information ...............................................   3

        Condensed Consolidated Balance Sheets as of  September 30, 2000 and
          December 31, 1999 .................................................   3

        Condensed Consolidated Statements of Operations for the
          three and nine months ended September 30, 2000 and 1999 ...........   4

        Condensed Consolidated Statements of Cash Flows for the
          nine months ended September 30, 2000 and 1999 .....................   5

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

Item 2. Management's Discussion and Analysis of Financial Condition
        and Results of Operations ...........................................  11

Item 3. Quantitative and Qualitative Disclosures about Market Risk ..........  32

PART II. OTHER INFORMATION ..................................................  32

Item 2. Changes in Securities and Use of Proceeds ...........................  32

Item 6. Exhibits and Reports on Form 8-K ....................................  32

        (a) Exhibits ........................................................  33
        (b) Reports on Form 8-K .............................................  33

Signatures ..................................................................  34

Index to Exhibits   .........................................................  35
</TABLE>


                                       2
<PAGE>   3
                                    PART I
                            FINANCIAL INFORMATION


Item 1.      Financial Information


                             deCODE genetics, Inc.

                     CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                             SEPTEMBER 30,      DECEMBER 31,
                                                                                 2000               1999
                                                                            -------------      -------------
Assets                                                                                  (UNAUDITED)
<S>                                                                          <C>                <C>
Current assets:
    Cash and cash equivalents ..........................................     $ 210,403,763      $  29,845,664
    Receivable from share issuance .....................................                 0         33,143,836
    Prepaid expenses and other current assets ..........................         5,138,833          3,695,351
                                                                             -------------      -------------
          Total current assets .........................................       215,542,596         66,684,851
Investments and other long-term assets .................................           761,498            790,217
Property and equipment, net ............................................        24,006,724         13,051,466
                                                                             -------------      -------------
          Total assets .................................................     $ 240,310,818      $  80,526,534
                                                                             =============      =============

LIABILITIES, REDEEMABLE, CONVERTIBLE PREFERRED STOCK
    AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
    Accounts payable and accrued expenses ..............................     $  14,414,057      $   4,314,115
    Current portion of capital lease obligations .......................         1,870,052          2,218,726
    Deferred research revenue ..........................................         1,821,666          2,238,333
    Payable to preferred shareholders ..................................                 0         17,467,077
                                                                             -------------      -------------
          Total current liabilities ....................................        18,105,775         26,238,251
Capital lease obligations, net of current portion ......................         3,249,807          4,549,809
Other long-term liabilities ............................................           416,880            921,245
Redeemable, convertible preferred stock, $0.001 par value;
     No shares authorized at September 30, 2000:
    Series A;
       No shares issued or outstanding at September 30, 2000 ...........                 0         12,405,887
    Series B;
       No shares issued or outstanding at September 30, 2000 ...........                 0         99,865,152
    Series C;
       No shares issued or outstanding at September 30, 2000 ...........                 0          9,318,328
                                                                             -------------      -------------
   Total redeemable, convertible preferred stock .......................                 0        121,589,367
                                                                             -------------      -------------
Stockholders' equity (deficit):
    Preferred stock, $0.001 par value;
       6,716,666 shares  and no shares authorized;
       no shares issued or outstanding at September 30, 2000
      and December 31, 1999, respectively ..............................                 0                  0
    Common stock, $0.001 par value;
       Authorized: 60,000,000 shares
       Issued 44,666,453 and 9,604,012 shares
       and outstanding:  44,640,226 and 9,604,012 shares
       at September 30, 2000 and December 31, 1999, respectively .......            44,666              9,604
    Additional paid-in capital .........................................       340,646,031         35,072,575
    Notes receivable ...................................................        (9,619,209)        (9,597,830)
    Deferred compensation ..............................................       (10,334,156)       (12,549,757)
    Dividends accreted on redeemable, convertible preferred stock ......                 0         (8,384,951)
    Accumulated deficit ................................................      (102,277,926)       (77,324,190)
    Accumulated other comprehensive income .............................            78,950              2,411
                                                                             -------------      -------------
         Total stockholders' equity (deficit) ..........................       218,538,356        (72,772,138)
                                                                             -------------      -------------
          Total liabilities, redeemable, convertible preferred stock and
                stockholders' equity (deficit) .........................     $ 240,310,818      $  80,526,534
                                                                             =============      =============
</TABLE>

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


                                       3
<PAGE>   4
                             deCODE genetics, Inc.

                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                            FOR THE THREE MONTHS ENDED SEPTEMBER 30,        FOR THE NINE MONTHS ENDED SEPTEMBER 30,
                                            ----------------------------------------        ---------------------------------------
                                                2000                        1999                2000                      1999
                                            ------------                ------------        ------------               ------------
                                            (UNAUDITED)                 (UNAUDITED)         (UNAUDITED)                (UNAUDITED)
<S>                                         <C>                         <C>                 <C>                        <C>
Revenue
    Research collaborative contract ....    $  5,576,112                $  3,548,334        $ 13,811,667               $ 10,950,556
    Other revenue ......................               0                           0             211,358                    667,428
                                            ------------                ------------        ------------               ------------
          Total revenue ................       5,576,112                   3,548,334          14,023,025                 11,617,984
OPERATING EXPENSES
    Research and development ...........      11,716,720                   9,201,301          30,922,315                 23,778,244
    General and administrative .........       4,419,621                   2,248,719          12,160,829                  5,713,839
                                            ------------                ------------        ------------               ------------
          Total operating expenses .....      16,136,341                  11,450,020          43,083,144                 29,492,083
                                            ------------                ------------        ------------               ------------
Operating loss .........................     (10,560,229)                 (7,901,686)        (29,060,119)               (17,874,099)
Equity in net earnings (loss) of
    affiliate ..........................         (91,294)                   (158,493)           (159,531)                  (468,172)
Interest income and other, net .........       3,076,157                     166,908           4,354,697                    341,279
Taxes ..................................               0                           0                   0                          0
                                            ------------                ------------        ------------               ------------
Net loss ...............................      (7,575,366)                 (7,893,271)        (24,864,953)               (18,000,992)
Accrued dividends and amortized
    discount on preferred stock ........        (558,784)                 (1,888,171)         (5,318,655)                (5,330,866)
Premium on repurchase of preferred
    stock ..............................               0                 (15,294,967)                  0                (15,294,967)
                                            ------------                ------------        ------------               ------------
Net loss available to common
    stockholders .......................    $ (8,134,150)               $(25,076,409)       $(30,183,608)              $(38,626,825)
                                            ============                ============        ============               ============


Basic and diluted net loss per share ...    $      (0.23)               $      (3.85)       $      (1.77)              $      (6.32)
Shares used in computing basic and
    diluted net loss per share .........      35,645,739                   6,517,860          17,025,758                  6,107,297

Pro forma basic and
    diluted net loss per share .........    $      (0.18)               $      (0.29)       $      (0.73)              $      (0.68)
Shares used in computing
    pro forma basic and diluted net
    loss per share .....................      41,063,457                  27,252,864          34,139,493                 26,604,245
</TABLE>

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

                                       4
<PAGE>   5
                             deCODE genetics, Inc.

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                    FOR THE NINE MONTHS ENDED SEPTEMBER 30,
                                                                    ---------------------------------------
                                                                        2000                       1999
                                                                    -------------              ------------
                                                                     (UNAUDITED)                (UNAUDITED)
<S>                                                                 <C>                        <C>
Cash flows from operating activities:
Net loss ......................................................     $ (24,864,953)             $(18,000,992)
Adjustments to reconcile net loss to net cash used in operating
  activities:
    Depreciation and amortization .............................         2,785,483                 1,940,461
    Equity in net loss of affiliate ...........................           159,531                   468,172
    Amortization of deferred stock compensation ...............         6,817,994                 6,455,132
    Other stock-based remuneration ............................         3,415,930                   515,000
    Accrued interest on receivable from share issuance ........           893,836                         0
    Equipment received for services provided ..................                 0                  (414,000)
    Other .....................................................          (280,261)                        0
Changes in operating assets and liabilities:
    Prepaid expenses and other current assets .................        (1,623,140)                 (917,688)
    Accounts payable and accrued expenses .....................         3,485,913                   361,511
    Deferred research revenue .................................          (416,667)                  444,444
    Other long-term liabilities ...............................           100,000                   117,288
                                                                    -------------              ------------
      Net cash used in operating activities ...................        (9,526,334)               (9,030,672)
                                                                    -------------              ------------

Cash flows from investing activities:
    Purchase of property and equipment ........................        (6,806,582)               (1,848,541)
    Investment in affiliated company, net .....................          (518,851)                 (254,444)
                                                                    -------------              ------------
      Net cash used in investing activities ...................        (7,325,433)               (2,102,985)
                                                                    -------------              ------------

Cash flows from financing activities:
    Forfeiture of common stock ................................               (27)                     (360)
    Issuance of preferred stock and warrants ..................        34,534,276                41,658,444
    Issuance of common stock, net .............................       181,991,369                       588
    Repurchase of preferred stock .............................       (17,467,077)              (20,310,555)
    Repayment of notes receivable for common stock ............                 0                   112,000
    Installment payments on capital lease obligations .........        (1,648,675)               (1,540,732)
                                                                    -------------              ------------
      Net cash provided by financing activities ...............       197,409,866                19,919,385
                                                                    -------------              ------------

Net increase in cash ..........................................       180,558,099                 8,785,728
Cash and cash equivalents at beginning of period ..............        29,845,664                25,075,844
                                                                    -------------              ------------
Cash and cash equivalents at end of period ....................     $ 210,403,763              $ 33,861,572
                                                                    =============              ============



Supplemental schedule of non-cash transactions:
    Payable related to purchase of property and equipment .....         6,781,249                         0
    Series B Preferred Stock issued in
       exchange for shares in affiliate .......................                 0                   779,064
    Supplies received in exchange for services provided .......                 0                   239,600
</TABLE>

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

                                       5
<PAGE>   6
                             deCODE genetics, Inc.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

THE COMPANY

deCODE genetics, Inc. ("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 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, 1999 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 Registration Statement on Form S-1 are
adequate to make the information presented not misleading.

The unaudited condensed consolidated financial statements have been prepared on
the same basis as the annual financial statements and, in the opinion of
management, reflect all adjustments, which include only normal recurring
adjustments, necessary for a fair presentation of deCODE's financial position,
results of operations and cash flows for the periods presented. The results of
operations for the three and nine month periods ended September 30, 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 consolidated financial statements include the accounts and operations of
deCODE and its wholly owned subsidiary, Islensk erfdagreining ehf., which is an
Icelandic company registered in Reykjavik. deCODE conducts all of its operations
through this subsidiary and owns all of its outstanding share capital, all of
which is fully-paid. No dividends have been paid by this subsidiary. All
significant intercompany accounts and transactions are eliminated upon
consolidation. Investments in which deCODE has significant influence, but does
not control, are accounted for using the equity method.

USE OF ESTIMATES

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


                                       6
<PAGE>   7
                             deCODE genetics, Inc.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


COMPUTATION OF NET LOSS PER COMMON SHARE

Net loss per share is computed under Statement of Financial Accounting Standards
No. 128, "Earnings Per 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 consisted of the following:

<TABLE>
<CAPTION>
                                                FOR THE THREE MONTHS ENDED SEPTEMBER 30,     FOR THE NINE MONTHS ENDED SEPTEMBER 30,
                                              ------------------------------------------     ---------------------------------------
                                                 2000                          1999              2000                      1999
                                              -----------                  ------------      ------------              ------------
                                              (UNAUDITED)                  (UNAUDITED)       (UNAUDITED)               (UNAUDITED)
<S>                                           <C>                          <C>               <C>                       <C>
Net loss ................................     $(7,575,366)                 $ (7,893,271)     $(24,864,953)             $(18,000,992)
Accrued dividends on Series A,
  Series B and Series C preferred stock          (550,307)                   (1,866,476)       (5,229,872)               (3,561,609)
Amortized discount on Series A
  and Series C preferred stock ..........          (8,477)                      (21,695)          (88,783)               (1,769,257)
                                              -----------                  ------------      ------------              ------------
Accrued dividends and amortized
  discount on preferred stock ...........        (558,784)                   (1,888,171)       (5,318,655)               (5,330,866)
Premium on repurchase of preferred
  stock .................................               0                   (15,294,967)                0               (15,294,967)
                                              -----------                  ------------      ------------              ------------
Net loss available to
  common stockholders ...................     $(8,134,150)                 $(25,076,409)     $(30,183,608)             $(38,626,825)
                                              ===========                  ============      ============              ============
</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 since potential common shares are antidilutive for all
periods presented and are, therefore, excluded from the calculation. For the
three and nine month periods ended September 30, 2000 and for the three and nine
month periods ended September 30, 1999, preferred stock convertible into nil and
22,959,544 shares of common stock, respectively, options to purchase 504,500 and
30,000 shares of common stock, respectively, and warrants to purchase 1,242,500
shares of common stock and options and warrants to purchase 2,110,037 shares of
preferred stock,  respectively, were not included in the computation of diluted
loss per share  since their inclusion would be antidilutive.



                                      7
<PAGE>   8
                             deCODE genetics, Inc.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


PRO FORMA NET LOSS PER SHARE

Pro forma basic and diluted net loss per share is computed as if the preferred
shares had converted into common shares immediately upon their issuance.
Accordingly, in the calculation of pro forma net loss per share, net loss has
not been increased for the accumulated dividends or amortized discounts on
preferred stock. The calculation of pro forma net loss per share for the three
and nine month periods ended September 30, 2000 and 1999 is as follows:

<TABLE>
<CAPTION>
                                                           FOR THE THREE MONTHS                FOR THE NINE MONTHS
                                                            ENDED SEPTEMBER 30,                ENDED SEPTEMBER 30,
                                                      ------------------------------      ------------------------------
                                                          2000              1999             2000              1999
                                                      ------------      ------------      ------------      ------------
                                                      (UNAUDITED)       (UNAUDITED)       (UNAUDITED)       (UNAUDITED)
<S>                                                   <C>               <C>               <C>               <C>
Net loss available to common stockholders .........   $ (8,134,150)     $(25,076,409)     $(30,183,608)     $(38,626,825)
Pro forma adjustments to reflect assumed conversion
  of preferred stock:
Accrued dividends and amortized discounts on
  preferred stock .................................       (558,784)       (1,888,171)       (5,318,655)       (5,330,866)
Premium on repurchase of preferred
  stock ...........................................              0       (15,294,967)                0       (15,294,967)
                                                      ------------      ------------      ------------      ------------
Net loss used in computing pro forma basic and
  diluted net loss per share ......................   $ (7,575,366)     $ (7,893,271)     $(24,864,953)     $(18,000,992)
                                                      ============      ============      ============      ============

Shares used in computing basic and
  diluted net loss per share ......................     35,645,739         6,517,860        17,025,758         6,107,297

Pro forma adjustment to reflect weighted effect of
  assumed conversion of preferred stock ...........      5,417,718        20,735,004        17,113,735        20,496,948
                                                      ------------      ------------      ------------      ------------
Shares used in computing pro forma basic and
  diluted net loss per share ......................     41,063,457        27,252,864        34,139,493        26,604,245
                                                      ============      ============      ============      ============

Pro forma basic and diluted net loss per share ....   $      (0.18)     $      (0.29)     $      (0.73)     $      (0.68)
</TABLE>

SEGMENT INFORMATION

deCODE adopted SFAS 131, "Disclosure about Segments of an Enterprise and Related
Information," as of December 31, 1998. SFAS 131 establishes annual and interim
reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas and major customers.
Under SFAS 131, deCODE's operations are treated as one operating segment as
it only reports profit and loss information on an aggregate basis to chief
operating decision makers of the Company.

All of deCODE's research revenues from inception through September 30, 2000 have
been generated in Iceland, and all of deCODE's long-lived assets are located in
Iceland.


                                       8
<PAGE>   9
                             deCODE genetics, Inc.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


NOTE 2.  LITIGATION

In January 2000, Porsteinn Jonsson and Genealogia Islandorum hf., the
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 $9,000,000 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 January 2000, an individual advised deCODE that he believes that he and
another individual are entitled to receive, collectively, 1,000,000 shares of
deCODE common stock pursuant to an agreement with deCODE. The other individual
has not asserted a claim to these shares. This individual has not commenced
litigation against deCODE. deCODE believes that this assertion is without merit
and intends to defend vigorously any action that either party may commence.

On April 10, 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. The complaint seeks an order requiring
deCODE to recognize Mr. Snorrason as the owner of these shares. deCODE believes
that it has good defenses to this action and intends to defend it 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 Health
Sector Database Act No. 138/1998. In its press release, Mannvernd indicated that
it hopes to halt the construction and/or operation of the Icelandic Health
Sector Database. Mannvernd has not commenced litigation against deCODE and
deCODE is not aware of any other litigation commenced by Mannvernd with respect
to the Act. The ultimate resolution of this matter cannot yet be determined.

NOTE 3.  COMPREHENSIVE INCOME

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive
Income," which establishes standards for reporting and presentation of
comprehensive income. This standard defines comprehensive income as the changes
in equity of an enterprise except those resulting from stockholders
transactions. The following table presents the calculation of comprehensive
income as required by SFAS 130:

<TABLE>
<CAPTION>
                        FOR THE THREE MONTHS ENDED SEPTEMBER 30,      FOR THE NINE MONTHS ENDED SEPTEMBER 30,
                        ----------------------------------------      ---------------------------------------
                            2000                        1999              2000                     1999
                        -----------                  -----------      ------------              ------------
                        (UNAUDITED)                  (UNAUDITED)      (UNAUDITED)               (UNAUDITED)
<S>                     <C>                          <C>              <C>                       <C>
Net loss ..........     $(7,575,366)                 $(7,893,271)     $(24,864,953)             $(18,000,992)
Other comprehensive
  income (loss):

Foreign currency
  translation .....          60,325                      (13,747)           76,539                    (3,713)
                        -----------                  -----------      ------------              ------------

Total comprehensive
  income (loss) ...     $(7,515,041)                 $(7,907,018)     $(24,788,414)             $(18,004,705)
                        ===========                  ===========      ============              ============
</TABLE>

                                       9
<PAGE>   10
                             deCODE genetics, Inc.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


NOTE 4.  INITIAL PUBLIC OFFERING

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

Effective upon the closing of deCODE's initial public offering, the outstanding
shares of Series A, Series B, and Series C preferred stock were converted into
9,624,282, 10,046,132 and 4,066,667 shares of common stock, respectively, and
warrants to purchase 1,075,833 shares of Series A preferred stock and 416,667
shares of Series C preferred stock were converted into warrants to purchase the
same number of shares of common stock.

NOTE 5.  SUBSEQUENT EVENTS

In October 2000, F. Hoffmann-La Roche elected to extend the term of the
research collaboration and cross-license agreement, which will continue until
February 1,2003, provided Roche elects to extend the agreement for the one year
period commencing on the fourth anniversary of the agreement, February 1, 2002.

                                       10
<PAGE>   11
Item 2.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations.


         This Management's Discussion and Analysis of Financial Condition
and Results of Operations as of September 30, 2000 and for the three and nine
month periods ended September 30, 2000 and 1999 should be read in conjunction
with the unaudited condensed consolidated financial statements and notes thereto
set forth in Item 1 of this report.

OVERVIEW

         deCODE was incorporated in August 1996. deCODE is a genomics and health
informatics company which develops 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
relationships among individuals covered by this system and associated molecular
genetics data. We have three avenues of commercialization which are: Discovery
Services, with a focus on gene and drug target discovery; 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.

         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 has funded our gene discovery programs in
twelve diseases. Under the agreement, we may receive a total of more than $200
million in research funding and milestone payments and we 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 the fourth anniversary of the agreement. Revenues recognized by us
have consisted primarily of revenues generated under the research collaboration
and cross-license agreement with Roche.

         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 will fund research by investigators of Partners pursuant to
sponsored research agreements and/or clinical trial agreements to be entered
into from time to time, (b) we will collaborate with Partners on, and provide
funding for, development of an information technology bridge, called the
crosswalk, to facilitate studies with the deCODE Combined Data Processing system
and Partners' Research Patient Data Registry and (c) we will develop and
market, in

                                       11
<PAGE>   12
consultation with Partners, new 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
non-Icelandic medical institution whereby we are committed to pay royalties and
milestone payments if we are successful in developing and commercializing
products which result from a particular technology jointly owned by us and the
medical institution.

         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 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, for the remainder of
2000 and expect to report net losses for the next few 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.

         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.

RESULTS OF OPERATIONS

Comparison of the Quarters Ended September 30, 2000 and 1999

         Revenues for the three months ended September 30, 2000 increased to
$5.6 million as compared to $3.5 million for the corresponding period in 1999,
an increase of 57.1%. This increase was the result of an increase in revenue
recognized due to milestone payments. Milestone revenue is recognized on a
retrospective basis over the contractual term of the agreement with Roche.
Accordingly, upon achievement of the milestone, a portion of the milestone
payment equal to the percentage of the collaboration completed through that
date is recognized. The remainder is recognized as services are performed
(generally straight-line) over the remaining term of the collaboration.


                                       12
<PAGE>   13
         Research and development expenses for the three months ended September
30, 2000 increased to $11.7 million as compared to $9.2 million for the same
period in the previous year, an increase of 27.3%. This increase was primarily
attributable to the continued expansion of operations, including our hiring of
additional research personnel and the resulting salary and benefits costs, an
expansion of our laboratory facilities and equipment acquisition and the
resulting depreciation, and our increased research efforts. License fee costs
payable to the Icelandic government, as required by the Icelandic Health Sector
Database operating license, were also recorded in the three months ended
September 30, 2000; no such costs were recorded in the three months ended
September 30, 1999 because the license had not yet been issued. We expect
research and development spending to increase as we continue to pursue our
research efforts and accelerate the development of the database services.

         General and administrative expenses for the three months ended
September 30, 2000 increased to $4.4 million compared to $2.2 million for the
corresponding period in 1999, an increase of 96.5%. This increase was primarily
attributable to the continued expansion of operations, including our hiring of
additional administrative personnel and the resulting salary and benefits costs.
We expect that general and administrative expenses will increase for the
remainder of 2000.

         Stock-based compensation and remuneration expenses decreased to $3.4
million for the three months ended September 30, 2000 as compared to $3.8
million for the three months ended September 30, 1999, a decrease of 10.3%. This
decrease was primarily attributable to lower compensation expense recorded for
contractor services in the quarter ended September 30, 2000, compared to the
corresponding period in 1999.

         Equity in net loss of affiliate was $91,294 for the three months ended
September 30, 2000, compared to $158,493 for the corresponding quarter in 1999,
a decrease of 42.4%.

         Interest income and other, net for the three months ended September 30,
2000, increased to $3.1 million as compared to $0.2 million for the same period
in 1999. This increase is due to higher average cash reserves, as a result of
our initial public offering, in the three months ended September 30, 2000 as
compared to the same period in 1999.

         Net loss and pro forma basic and diluted net loss per share were $7.6
million and $0.18 for the three months ended September 30, 2000, respectively,
as compared to $7.9 million and $0.29 for the same period in 1999, respectively.
This is a decrease of 4.0% and 37.9 %, respectively. The decrease in loss per
share is impacted by increased number of average shares outstanding due to the
Company's initial public offering.


Comparison of the Nine Months Ended September 30, 2000 and 1999

         Revenues for the nine months ended September 30, 2000, increased to
$14.0 million as compared to $11.6 million for the corresponding period in 1999,
an increase of 20.7%. Revenues related to our agreement with Roche increased to
$13.8 million from $11.0 million for the same period in 1999, an increase of
26.1%. This increase was the result of an increase in revenue recognized due to
milestone payments. Milestone revenue is recognized on a retrospective basis
over the contractual term of the agreement with Roche. Accordingly, upon
achievement of the milestone, a portion of the milestone payment equal to the
percentage of the collaboration completed through that date is recognized. The
remainder is recognized as services are performed (generally straight-line)
over the remaining term of the collaboration.


                                       13
<PAGE>   14
         Research and development expenses for the nine months ended September
30, 2000, increased to $30.9 million as compared to $23.8 million for the same
period in 1999, an increase of 30.0%. This increase was primarily attributable
to the continued expansion of 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, and our increased research efforts. License fee costs, payable to
the Icelandic government, as required by the Icelandic Health Sector Database
operating license, were also recorded in the nine months ended September 30,
2000; no such costs were recorded in the nine months ended September 30, 1999
because the license had not yet been issued. We expect research and development
spending to increase as we continue to pursue research efforts and accelerate
the development of the database services.

         General and administrative expenses for the nine months ended September
30, 2000 increased to $12.2 million compared to $5.7 million for the
corresponding period in 1999, an increase of 112.8%. This increase was primarily
attributable to an approximately $3.0 million charitable contribution of our
Series B stock and the resulting expense recorded in the nine months ended
September 30, 2000. This increase is also due to continued expansion of
operations, including our hiring of additional general and administrative
personnel and the resulting salary and benefits costs. We expect that general
and administrative expenses will increase throughout 2000.

         Stock-based compensation and remuneration expenses increased to $10.2
million for the nine months ended September 30, 2000 as compared to $7.0 million
for the nine months ended September 30, 1999, an increase of 46.8%. This
increase was primarily attributable to an approximately $3.0 million charitable
contribution of our Series B stock and the resulting expense recorded in the
nine months ended September 30, 2000. The increase was also due to an increase
in the number of full-time employees in the nine months ended September 30, 2000
over the number for the same period in 1999, and thus, an increase in the number
of stock option grants resulting in compensation expense.

         Equity in net loss of affiliate decreased to $159,531 for the nine
months ended September 30, 2000, compared to $468,172 for the corresponding
period in 1999, a decrease of 65.9%.

         Interest income and other, net for the nine months ended September 30,
2000, increased to $4.4 million as compared to $0.3 million for the same period
in 1999. This increase is primarily due to higher average cash reserves, as a
result of our initial public offering, in the first nine months of 2000 as
compared to the first nine months of 1999.

         Net loss and pro forma basic and diluted net loss per share were $24.9
million and $0.73 for the nine months ended September 30, 2000, respectively, as
compared to $18.0 million and $0.68 for the same period in 1999, respectively.
This is an increase of 38.1% and 7.4%, respectively. The decrease in loss per
share is impacted by increased number of average shares outstanding due to the
Company's initial public offering.

LIQUIDITY AND CAPITAL RESOURCES


                                       14
<PAGE>   15
         As of September 30, 2000, we had $210.4 million 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.

         Net cash used in operating activities was $9.5 million for the nine
months ended September 30, 2000, as compared to $9.0 million for the nine months
ended September 30, 1999. The increase was primarily due to higher research and
development and general and administrative expenses in the period ended
September 30, 2000, as compared to the period ended September 30, 1999, which
were only partly offset by higher revenues in 2000.

         Our investing activities have consisted of capital expenditures and
long-term strategic equity investments in, and acquisitions of, technologies and
businesses that are complementary to our business. Purchase of property and
equipment for the nine months ended September 30, 2000 was $6.8 million compared
to $1.8 million in the same period in 1999, primarily due to the expansion of
our facilities and operations. Net cash used in investing activities may in the
future fluctuate significantly from quarter to quarter due to the timing of
capital expenditures and investments.

         Net cash provided by financing activities was $197.4 million for the
nine months ended September 30, 2000 as compared to $19.9 million for the nine
months ended September 30, 1999. This increase was primarily due to proceeds
from our initial public offering, completed in July 2000.

         We expect cash requirements to continue to increase significantly for
the remainder of 2000 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.

         In July 2000, we completed our initial public offering of our common
stock with net proceeds of approximately $182.0 million.

         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.

FORWARD LOOKING STATEMENTS AND CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS



                                       15
<PAGE>   16
         This report contains forward-looking statements. These statements
relate to future events or our future financial performance. In some cases,
forward-looking statements can be identified by terminology such as "may,"
"will," "should," "could," "expect," "plan," "anticipate," "believe,"
"estimate," "predict," "intend," "potential" or "continue" or the negative of
such terms or other comparable terminology. These statements are only
predictions. Actual events or results may differ materially due to a number of
factors, including those set forth in this section and elsewhere in this Form
10-Q. These factors include, but are not limited to, the risks set forth below.


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

    DISCOVERY SERVICES

    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. We have only identified
twelve specific candidate genes under our research programs and have not yet
validated any disease genes. 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



                                       16
<PAGE>   17
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, through our wholly-owned subsidiary Islensk erfdagreining ehf., received
a license permitting us to develop and operate the Icelandic Health Sector
Database in January 2000, and accordingly, are at the very 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;

    -   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, decision-support and privacy protection products have,
to date,

                                       17
<PAGE>   18
been tested only in connection with our own use of them and they may not meet
the needs of potential customers. We are at an 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 OUR
OPERATIONS

    We incurred net losses of $24,864,953 for the nine months ended September
30, 2000, and $23,788,447 for the year ended December 31, 1999. As of September
30, 2000, we had an accumulated deficit of $102,277,926. 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 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:

                                       18
<PAGE>   19
    -    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

                                       19
<PAGE>   20
records of their patients. Individuals may opt-out of having their records
included in the Icelandic Health Sector Database. To date 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. To date, between eighty
and ninety percent of individuals that we have asked to participate in our
research projects have done so. Because only a small portion of the Icelandic
population may carry certain mutations, the unwillingness of even a small
portion of the population to participate in our programs could diminish our
ability to develop and market information based on the use of genotypic data.

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, we and our partners 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 a 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 Monitoring Committee, the Data Protection Commission of Iceland
and an Interdisciplinary Ethics Committee will supervise our construction and
operation of the Icelandic Health Sector Database. These committees report to
the Ministry. In addition, the Icelandic Bioethics Committee

                                       20
<PAGE>   21
will review our operation of the Icelandic Health Sector Database. The Ministry
may withdraw our license in the event that we violate the terms and conditions
of the Icelandic Health Sector Database 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
Data Protection Commission's technical requirements. These technical
requirements cover areas such as data encryption and privacy protection. The
Data Protection Commission 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 types of research programs in the Icelandic Health Sector Database not
conducted in accordance with international rules of bioethics.

    At the expiration of the Icelandic Health Sector Database 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 being found to be 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 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 Icelandic Health Sector Database license, provided that the
        Icelandic government demonstrates that it was justified in agreeing to
        make payments pursuant to the

                                       21
<PAGE>   22
        settlement.

IF WE ARE NOT ABLE TO ENTER INTO AGREEMENTS WITH 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
workers regarding access to and the processing of information from medical
records. To date we have not entered into any such agreements. We cannot be
certain that we will be able to enter into such agreements or 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 they may refuse to enter into such agreements or may encourage
health institutions which employ them 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 the Icelandic Health Sector Database. Our inability to enter into such
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 five years. The Icelandic Health Sector Database 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 Icelandic Health Sector Database license, we and the Ministry will enter
into discussions on renewal of the license at the end of the term. The Ministry
might not renew the Icelandic Health Sector Database license 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 collaborations and licensing arrangements with several partners at the
same time. We currently have only two collaborative relationships. To succeed,
we will have to maintain these relationships and establish additional
collaborations. We cannot be sure that we


                                       22
<PAGE>   23
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.

    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.

    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

    Under our current strategy, and for the foreseeable future, 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 which 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.


                                       23
<PAGE>   24
    Disputes may arise in the future over the ownership of rights to any
technology developed with collaborators. These and other possible disagreements
between us and our collaborators 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.

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). 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
deCODE, to test the constitutionality of the Act. According to the press
release, the intended lawsuit will allege that the Act and the Icelandic Health
Sector Database 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. deCODE believes that any such
litigation would be without merit and intends to defend vigorously any such
action in which we become a party. However, 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 Icelandic Health Sector Database
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



                                       24
<PAGE>   25
OUR LICENSE

    The Act and our 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 are developing the Icelandic
Health Sector Database according to the Data Protection Commission's technology,
security and organizational terms. The Data Protection Commission 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 which the Data Protection Commission may establish when it revises
the terms. Although, to date, one expert in this field has criticized 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 Icelandic Health Sector Database license,
the loss of our customers and reputation and the loss 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




                                       25
<PAGE>   26
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 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 to construct and operate the Icelandic Health Sector Database provide us
with a unique 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

                                       26

<PAGE>   27
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 which 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 Icelandic Health
Sector Database license is in breach of such rules could result in a revocation
or dilution of the license 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. Recently, two holders of
copyrights in 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 $9,000,000. 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

                                       27

<PAGE>   28
considerations. We cannot be sure that any of our pending patent applications
will result in issued patents, that we will develop additional proprietary
technologies that are patentable, that any patents issued to us or our partners
will provide a basis for commercially viable products, will provide us with any
competitive advantages or will not be challenged by third parties, or that the
patents of others will not have an adverse effect on our ability to do business.

    In addition, patent law relating to the scope of claims in the area of
genetics and gene discovery is still evolving. There is substantial uncertainty
regarding the patentability of genes or gene fragments without known functions.
The laws of some European countries provide that genes and gene fragments may
not be patented. The Commission of the EU has passed a directive which 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
uses for such genes, 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
proposed.

    While we require employees, academic collaborators and consultants to enter
into

                                       28

<PAGE>   29
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.

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 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 programs. 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 will remain available in
sufficient quantities at acceptable costs. If we cannot obtain additional 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 which 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

                                       29

<PAGE>   30
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 U.S., 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

    We have recently experienced significant growth in the number of our
employees and the scope of our operations. 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.

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


                                       30
<PAGE>   31
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, Chief Executive Officer and
Secretary, Hannes Smarason, Executive Vice President and Senior Business and
Finance Officer, Dr. Jeffrey Gulcher, Vice President, Research and Development
and Dr. C. Augustine Kong, Director of 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.

CURRENCY FLUCTUATIONS MAY NEGATIVELY AFFECT OUR FINANCIAL CONDITION

    Our revenues and cash reserves are denominated in U.S. dollars, but a
portion of our operating costs are denominated in Icelandic kronas. A
strengthening of the Icelandic krona against the U.S. dollar may, therefore,
have a negative impact on our financial condition.

YEAR 2000 RISKS MAY HARM OUR BUSINESS

    Despite the passing of January 1, 2000, Year 2000 issues continue to pose
risks that could adversely affect our business in a number of significant ways.
Although we believe that our internally developed systems and technology are
Year 2000 compliant, latent Year 2000 problems nevertheless could substantially
impair or cause a failure of our information technology systems. Additionally,
we rely on information technology and automated laboratory equipment supplied by
third parties. Year 2000 problems that we or any such third parties experience
could materially adversely affect our business.


                                       31
<PAGE>   32
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 the investment will probably decline. To minimize this risk in the
future, we intend to maintain our portfolio of cash equivalents and short-term
investments in a variety of securities, including commercial paper, money market
funds and government and non-government debt securities. In general, money
market funds are not subject to market risk because the interest paid on such
funds fluctuates with the prevailing interest rate. As of September 30, 2000,
all of our cash and cash equivalents were in money market and checking accounts.


                                     PART II
                                OTHER INFORMATION


Item 2. Changes in Securities and Use of Proceeds

     (c) During the period covered by this quarterly report on Form 10-Q, the
Company sold the following securities that were not registered under the
Securities Act:

             In August, 2000 two holders of warrants to purchase Series A
preferred stock, which became warrants to purchase common stock upon the closing
of our initial public offering, exercised their warrants and purchased an
aggregate of 236,110 shares of common stock. Pursuant to the terms of the
warrants, the transaction was a "net issue exercise" in which the purchase price
of the stock was paid by the cancellation of a portion of the warrants.

         The sale and issuance of securities in the transaction described above
were deemed to be exempt from registration under the Securities Act by virtue of
Section 4(2) as a transactions not involving a public offering. Appropriate
legends will be affixed to the stock certificates issued in this transaction.
The recipient either received adequate information about the Company or had
access, through employment or other relationships, to adequate information.


     (d) The Company commenced an initial public offering of its 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 the
Company after deduction of expenses were approximately $182,000,000. The
proceeds are temporarily invested in money market funds pending use by the
Company.

Item 6.    Exhibits and Reports on Form 8-K



                                       32
<PAGE>   33
(a)      Exhibits

       Exhibit
         No.      Description of Exhibit

         3.1      Amended and Restated Certificate of Incorporation, as further
                  amended (Incorporated by reference to Exhibit 3.1 and Exhibit
                  3.3 to the Company's Registration Statement on Form S-1
                  (Registration No. 333-31984) which became effective on July
                  17, 2000.)

         3.2      Bylaws, as amended (Incorporated by reference to Exhibit 3.2
                  to Company's Registration Statement on Form S-1 (Registration
                  No. 333-31984) which became effective on July 17, 2000.)

        27.1      Financial Data Schedule

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


(b)      Reports on Form 8-K.

         No current reports on Form 8-K were filed during the reporting period.


                                       33

<PAGE>   34
                                   SIGNATURES

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

                                       deCODE genetics, Inc.


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


                                       /s/ Axel Nielsen
                                       ------------------------------
                                       Axel Nielsen
                                       Vice President, Finance and
                                       Treasurer (principal financial
                                       officer and principal accounting officer)

November 9, 2000


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                                INDEX TO EXHIBITS



       Exhibit
         No.      Description of Exhibit

         3.1      Amended and Restated Certificate of Incorporation, as further
                  amended (Incorporated by reference to Exhibit 3.1 and Exhibit
                  3.3 to the Company's Registration Statement on Form S-1
                  (Registration No. 333-31984) which became effective on July
                  17, 2000.)

         3.2      Bylaws, as amended (Incorporated by reference to Exhibit 3.2
                  to Company's Registration Statement on Form S-1 (Registration
                  No. 333-31984) which became effective on July 17, 2000.)

         27.1     Financial Data Schedule



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