Use these links to rapidly review the documentdeCODE genetics, Inc. INDEX



SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

FORM 10-Q

|(Mark One)                                        |                                                                                         
|------------------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                                 | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
|FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007
|OR                                               
|o                                                 | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES 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(State or Other Jurisdiction of
Incorporation or Organization) |  | 04-3326704(I.R.S. Employer Identification No.)
|---------------------------------------------------------------------- |  | ----------------------------------------------

STURLUGATA 8, IS-101 REYKJAVIK, ICELAND(Address of Principal Executive Offices)

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

Indicate
by check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days.    ý Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check One):

Large
accelerated filer o                Accelerated
filer ý                Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    o Yes ý No

The aggregate number of shares of the registrant's common stock outstanding on October 31, 2007 was 61,731,513 shares of common stock $.001 par value.



---





deCODE genetics, Inc.        INDEX



|PART I.           |  | FINANCIAL INFORMATION                                                                                                 
|----------------- |  | ----------------------------------------------------------------------------------------------------------------------
|Item 1.           |  | Financial Statements (Unaudited)                                                                                      
|                  |  | Condensed Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006                                  
|                  |  | Condensed Consolidated Statements of Operations for the three and nine-month periods ended September 30, 2007 and 2006
|                  |  | Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2007 and 2006          
|                  |  | Notes to Condensed Consolidated Financial Statements                                                                  
|Item 2.           |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                                 
|Item 3.           |  | Quantitative and Qualitative Disclosures about Market Risk                                                            
|Item 4.           |  | Controls and Procedures                                                                                               
|PART II.          |  | OTHER INFORMATION                                                                                                     
|Item 1.           |  | Legal Proceedings                                                                                                     
|Item 1A.          |  | Risk Factors                                                                                                          
|Item 6.           |  | Exhibits                                                                                                              
|                  |  | (a) Exhibits                                                                                                          
|Signatures       
|Index to Exhibits

1

---





PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

deCODE genetics, Inc.  CONDENSED CONSOLIDATED BALANCE SHEETS  (Unaudited)

|                                                             |                                                                                                                                                                                                                                                                                                                   | September 30,
2007          |                                             | December 31,
2006 |         
|------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------- | ------------------------------------------- | ----------------- | --------
|
|ASSETS                                                       |                                                                                                                                                                                                                                                                                                                   |                             |                                             |                   |         
|Current assets:                                              |                                                                                                                                                                                                                                                                                                                   |                             |                                             |                   |         
|                                                             | Cash and cash equivalents                                                                                                                                                                                                                                                                                         |                             | $                                           | 45,839            |         
|                                                             | Investments                                                                                                                                                                                                                                                                                                       |                             |                                             | 67,751            |         
|                                                             | Receivables                                                                                                                                                                                                                                                                                                       |                             |                                             | 9,194             |         
|                                                             | Other current assets                                                                                                                                                                                                                                                                                              |                             |                                             | 14,298            |         
|                                                             |                                                                                                                                                                                                                                                                                                                   |                             |                                             |                   |         
|                                                             |                                                                                                                                                                                                                                                                                                                   | Total current assets        |                                             |                   | 137,082 
|                                                             |                                                                                                                                                                                                                                                                                                                   |                             |                                             |                   |         
|Restricted cash equivalents                                  |                                                                                                                                                                                                                                                                                                                   |                             | 5,051                                       |                   |         
|Property and equipment, net                                  |                                                                                                                                                                                                                                                                                                                   |                             | 22,974                                      |                   |         
|Goodwill                                                     |                                                                                                                                                                                                                                                                                                                   |                             | 10,055                                      |                   |         
|Intangible assets, net                                       |                                                                                                                                                                                                                                                                                                                   |                             | 4,099                                       |                   |         
|Other long-term assets                                       |                                                                                                                                                                                                                                                                                                                   |                             | 6,882                                       |                   |         
|                                                             |                                                                                                                                                                                                                                                                                                                   |                             |                                             |                   |         
|                                                             |                                                                                                                                                                                                                                                                                                                   |                             | Total assets                                |                   | $       
|                                                             |                                                                                                                                                                                                                                                                                                                   |                             |                                             |                   |         
|LIABILITIES AND STOCKHOLDERS' DEFICIT                        |                                                                                                                                                                                                                                                                                                                   |                             |                                             |                   |         
|Current liabilities:                                         |                                                                                                                                                                                                                                                                                                                   |                             |                                             |                   |         
|                                                             | Accounts payable                                                                                                                                                                                                                                                                                                  |                             | $                                           | 4,933             |         
|                                                             | Accrued expenses and other current liabilities                                                                                                                                                                                                                                                                    |                             |                                             | 14,659            |         
|                                                             | Deferred revenue                                                                                                                                                                                                                                                                                                  |                             |                                             | 8,953             |         
|                                                             | Current portion of capital lease obligations                                                                                                                                                                                                                                                                      |                             |                                             | 3,130             |         
|                                                             | Current portion of finance obligation on sale-leaseback                                                                                                                                                                                                                                                           |                             |                                             | 549               |         
|                                                             | Current portion of long-term debt                                                                                                                                                                                                                                                                                 |                             |                                             | 220               |         
|                                                             |                                                                                                                                                                                                                                                                                                                   |                             |                                             |                   |         
|                                                             |                                                                                                                                                                                                                                                                                                                   | Total current liabilities   |                                             |                   | 32,444  
|                                                             |                                                                                                                                                                                                                                                                                                                   |                             |                                             |                   |         
|Deferred revenue                                             |                                                                                                                                                                                                                                                                                                                   |                             | 6,219                                       |                   |         
|Deferred gain on sale-leaseback                              |                                                                                                                                                                                                                                                                                                                   |                             | 24,263                                      |                   |         
|Capital lease obligations, net of current portion            |                                                                                                                                                                                                                                                                                                                   |                             | 3,012                                       |                   |         
|Finance obligation on sale-leaseback, net of current portion |                                                                                                                                                                                                                                                                                                                   |                             | 24,295                                      |                   |         
|Long-term debt, net of current portion                       |                                                                                                                                                                                                                                                                                                                   |                             | 210,142                                     |                   |         
|Commitments and contingencies                                |                                                                                                                                                                                                                                                                                                                   |                             |                                             |                   |         
|Stockholders' deficit:                                       |                                                                                                                                                                                                                                                                                                                   |                             |                                             |                   |         
|                                                             | Preferred stock, $0.001 par value; Authorized: 6,716,666 shares; Issued and outstanding: none                                                                                                                                                                                                                     |                             |                                             |                  |         
|                                                             | Common stock, $0.001 par value; Authorized: 150,000,000 and 100,000,000 shares at September 30, 2007 and December 31, 2006, respectively; issued and outstanding: 61,759,676 and 61,729,676 shares, respectively, at September
30, 2007; and 61,556,985 and 61,555,985 shares, respectively, at December 31, 2006 |                             |                                             | 62                |         
|                                                             | Additional paid-in capital                                                                                                                                                                                                                                                                                        |                             |                                             | 487,508           |         
|                                                             | Notes receivable                                                                                                                                                                                                                                                                                                  |                             |                                             | (2,578            | )       
|                                                             | Accumulated deficit                                                                                                                                                                                                                                                                                               |                             |                                             | (598,789          | )       
|                                                             | Accumulated other comprehensive income                                                                                                                                                                                                                                                                            |                             |                                             | (253              | )       
|                                                             | Treasury stock, 30,000 and 1,000 shares stated at cost at September 30, 2007 and December 31, 2006, respectively                                                                                                                                                                                                  |                             |                                             | (182              | )       
|                                                             |                                                                                                                                                                                                                                                                                                                   |                             |                                             |                   |         
|                                                             |                                                                                                                                                                                                                                                                                                                   | Total stockholders' deficit |                                             |                   | (114,232
|                                                             |                                                                                                                                                                                                                                                                                                                   |                             |                                             |                   |         
|                                                             |                                                                                                                                                                                                                                                                                                                   |                             | Total liabilities and stockholders' deficit |                   | $       
|                                                             |                                                                                                                                                                                                                                                                                                                   |                             |                                             |                   |         

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

2

---





deCODE genetics, Inc.  CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  (Unaudited)

|                                                              |                                     | For the Three Months Ended
September 30, |         | For the Nine Months Ended
September 30, |        
|------------------------------------------------------------- | ----------------------------------- | ---------------------------------------- | ------- | --------------------------------------- | -------
|
|
|Revenue                                                       |                                     | $                                        | 10,892  |                                         | $      
|Operating expenses:                                           |                                     |                                          |         |                                         |        
|                                                              | Cost of revenue                     |                                          |         | 11,976                                  |        
|                                                              | Research and development            |                                          |         | 14,069                                  |        
|                                                              | Selling, general and administrative |                                          |         | 7,070                                   |        
|                                                              |                                     |                                          |         |                                         |        
|                                                              |                                     | Total operating expenses                 |         |                                         | 33,115 
|                                                              |                                     |                                          |         |                                         |        
|Operating loss                                                |                                     |                                          | (22,223 | )                                       |        
|Interest income                                               |                                     |                                          | 1,646   |                                         |        
|Interest expense                                              |                                     |                                          | (4,019  | )                                       |        
|Other non-operating income, net                               |                                     |                                          | 348     |                                         |        
|                                                              |                                     |                                          |         |                                         |        
|                                                              |                                     | Net loss                                 |         | $                                       | (24,248
|                                                              |                                     |                                          |         |                                         |        
|Basic and diluted net loss per share                          |                                     | $                                        | (0.40   | )                                       | $      
|Shares used in computing basic and diluted net loss per share |                                     |                                          | 61,033  |                                         |        

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

3

---





deCODE genetics, Inc.  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (Unaudited)

|                                                                            |                                                                          | For the Nine-Months Ended
September 30,             |        
|--------------------------------------------------------------------------- | ------------------------------------------------------------------------ | --------------------------------------------------- | -------
|
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                                       |                                                                          |                                                     |        
|Net loss                                                                    |                                                                          | $                                                   | (63,101
|Adjustments to reconcile net loss to net cash used in operating activities: |                                                                          |                                                     |        
|                                                                            | Depreciation and amortization                                            |                                                     |        
|                                                                            | Amortization of deferred gain on sale-leaseback of real estate           |                                                     |        
|                                                                            | Stock-based compensation                                                 |                                                     |        
|                                                                            | Disposal of equipment, net                                               |                                                     |        
|                                                                            | Foreign currency translation                                             |                                                     |        
|                                                                            | Amortization of debt discount                                            |                                                     |        
|                                                                            | Amortization of deferred financing costs                                 |                                                     |        
|                                                                            | Accretion on investments                                                 |                                                     |        
|Changes in operating assets and liabilities:                                |                                                                          |                                                     |        
|                                                                            | Receivables and other assets                                             |                                                     |        
|                                                                            | Accounts payable, accrued expenses and other current liabilities         |                                                     |        
|                                                                            | Deferred revenue                                                         |                                                     |        
|                                                                            |                                                                          |                                                     |        
|                                                                            | Net cash used in operating activities                                    |                                                     |        
|                                                                            |                                                                          |                                                     |        
|CASH FLOWS FROM INVESTING ACTIVITIES:                                       |                                                                          |                                                     |        
|                                                                            | Purchase of investments                                                  |                                                     |        
|                                                                            | Sale of investments                                                      |                                                     |        
|                                                                            | Purchase of property and equipment                                       |                                                     |        
|                                                                            | Funding of restricted cash equivalents                                   |                                                     |        
|                                                                            | Proceeds from sale of property and equipment                             |                                                     |        
|                                                                            | Acquisition of UVS, net of cash acquired                                 |                                                     |        
|                                                                            |                                                                          |                                                     |        
|                                                                            |                                                                          | Net cash provided by (used in) investing activities |        
|                                                                            |                                                                          |                                                     |        
|CASH FLOWS FROM FINANCING ACTIVITIES:                                       |                                                                          |                                                     |        
|                                                                            | Proceeds from issuance of common stock                                   |                                                     |        
|                                                                            | Repayment of notes receivable for common stock                           |                                                     |        
|                                                                            | Proceeds from property and equipment financing, net of transaction costs |                                                     |        
|                                                                            | Proceeds from short term borrowings                                      |                                                     |        
|                                                                            | Repayments of debt, capital lease and finance obligations                |                                                     |        
|                                                                            |                                                                          |                                                     |        
|                                                                            |                                                                          | Net cash provided by financing activities           |        
|                                                                            |                                                                          |                                                     |        
|Net increase (decrease) in cash and cash equivalents                        |                                                                          |                                                     | 23,957 
|Cash and cash equivalents at beginning of period                            |                                                                          |                                                     | 21,882 
|                                                                            |                                                                          |                                                     |        
|Cash and cash equivalents at end of period                                  |                                                                          | $                                                   | 45,839 
|                                                                            |                                                                          |                                                     |        
|Supplemental cash flow information:                                         |                                                                          |                                                     |        
|                                                                            | Cash paid for interest                                                   |                                                     | $      
|Supplemental schedule of non-cash transactions:                             |                                                                          |                                                     |        
|                                                                            | Cancellation of notes receivable and forfeiture of common stock          |                                                     | $      
|                                                                            | Deferred gain on sale and leaseback of equipment                         |                                                     |        
|                                                                            | Unrealized (loss) gain associated with investments                       |                                                     |        
|                                                                            | Note receivable for sale of property                                     |                                                     |        
|                                                                            | Common stock issued for acquisition                                      |                                                     |        

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

4

---





deCODE genetics, Inc.  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  (tabular amounts in thousands, except share and per share amounts)

1.     Organization and Business

References in these financial statements to deCODE refer to deCODE genetics, Inc., a Delaware company, and deCODE genetics, Inc.'s wholly-owned
subsidiary, Islensk erfdagreining ehf., an Icelandic company registered in Reykjavik, and its subsidiaries, as well as deCODE genetics, Inc.'s wholly-owned subsidiary, MediChem Life
Sciences, Inc., a Delaware corporation, and its subsidiaries.

2.     Basis of Presentation

In the opinion of deCODE's management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of items of a
normal and recurring nature) necessary to present fairly the financial position as of September 30, 2007, the results of operations for the three and nine-month periods ended
September 30, 2007 and 2006 and cash flows for the nine-month periods ended September 30, 2007 and 2006. The results of operations for the three and nine-month
periods ended September 30, 2007 are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with deCODE's Annual
Report on Form 10-K for the year ended December 31, 2006, which includes consolidated financial statements and notes thereto for the years ended December 31, 2006,
2005 and 2004.

3.     Revenue

Significant elements of deCODE's revenue are summarized as follows:

For the Three Months
Ended September 30,

For the Nine Months
Ended September 30,2007

2006

2007

2006(In thousands)Service fees and research funding

$
5,941

$
4,096

$
15,353

$
15,009Milestone payments


182


215


773


514Up-front, exclusivity, technology access, and technology development fees


1,000





1,000


1,000Government research contracts and grant funding


3,510


3,878


9,194


10,804Other


259


377


740


1,732Total

$
10,892

$
8,566

$
27,060

$
29,059


Significant
sources of our revenue as a percentage of consolidated revenue are summarized as follows:

For the Three Months Ended September 30,

For the Nine Months Ended September 30,2007

2006

2007

2006F. Hoffmann-La Roche (Roche)

5
%
10
%
6
%
21
%National Institutes of Health (NIH)

24
%
40
%
22
%
32
%


During
the three and nine-month periods ended September 30, 2007, deCODE performed services totaling $0 and $124,000 for an employer of a member of deCODE's Board of
Directors.

5

---



4.     Research and Development

deCODE's research and development expense consists of the costs of its own proprietary programs, comprised of the following during the three and
nine-months ended September 30, 2007 and 2006:

For the Three Months
Ended September 30,

For the Nine Months
Ended September 30,2007

2006

2007

2006(In thousands)Salaries and other personnel costs

$
4,615

$
4,044

$
14,486

$
13,740Materials and supplies


2,961


2,006


9,191


4,765Contractor services and other third party costs


4,083


5,758


10,132


16,724Overhead expenses


1,420


1,086


4,247


3,909Depreciation and amortization


586


885


1,934


2,648Stock-based compensation


404


399


1,283


1,116Total

$
14,069

$
14,178

$
41,273

$
42,902


5.     Stock-Based Compensation

Stock-based compensation related to stock options for the three and nine-month periods ended September 30, 2007 and 2006 is included in
deCODE's results of operations as follows:

For the Three Months
Ended September 30,

For the Nine Months
Ended September 30,2007

2006

2007

2006(In thousands)Operating Expenses:Cost of revenue

$
158

$
179

$
410

$
438Research and development


404


399


1,283


1,116Selling, general and administrative


835


457


2,494


1,425Total

$
1,397

$
1,035

$
4,187

$
2,979


As
of September 30, 2007 there was approximately $8,158,000 of total unrecognized compensation expense related to nonvested stock options. This expense is expected to be
recognized over a weighted-average period of approximately 2.2 years.

deCODE
calculated the fair value of each option award on the date of grant using the Black-Scholes option pricing model. The following weighted average assumptions were used for the
nine-months ended September 30, 2007 and 2006:

Nine Months Ended
September 30,2007

2006Dividend yield

0
%
0
%Expected volatility

64.4
%
67.2
%Expected term (in years)

5.4

5.11Risk-free interest rate

4.5
%
4.8
%


6

---



deCODE
estimates the expected term of the options based on historical patterns by employees with respect to exercise and post vesting employment termination behaviors. deCODE's expected
volatility is calculated using a weighted average of the volatility over a period equal to the expected term of the award and the most recent one year volatility. deCODE bases the
risk-free interest rate used on the implied rate currently available on the U.S. Treasury zero-coupon issues with a comparable term. As deCODE does not pay dividends, the
dividend variable rate is zero.

The
following table summarizes stock option activity for the nine-months ended September 30, 2007:

Number
of Shares

Weighted
Average
Exercise
PriceOutstanding at January 1, 2007

4,975,074

$
8.14Granted

2,975,000


3.49Exercised

(53,507
)

2.07Forfeited/cancelled

(360,380
)

8.27Outstanding at September 30, 2007

7,536,187

$
6.34Exercisable at September 30, 2007

3,991,737

$
7.98


The
weighted average grant date fair value of options granted during the three and nine-month periods ended September 30, 2007 was $1.91 and $2.09, per share
respectively, and $3.05 and $4.98, per share during the three and nine-month periods ended September 30, 2006, respectively.

deCODE's
Equity Incentive Plans allow for the issuance of restricted stock awards that may not be sold or otherwise transferred until certain restrictions have lapsed. The unearned
stock-based compensation related to these awards is amortized to compensation expense over the period the restrictions lapse. The stock-based compensation expense for these awards is determined based
on the market price of our stock at the date of the grant applied to the total numbers of shares that are anticipated to fully vest and then amortized over the vesting period. During the three and
nine-months ended September 30, 2007, deCODE recognized expense related to restricted stock grants of $54,000
and $159,000, respectively. During the three and nine-months ended September 30, 2006, deCODE recognized expense related to restricted stock grants of $54,000 and $159,000,
respectively. At September 30, 2007, deCODE had 62,138 unvested restricted shares with a weighted average grant date fair value of $8.23.

In
November 2007, deCODE adopted a Change in Control Benefits Plan that provides for, among other things, upon a change in control, all outstanding stock options, restricted stock
and stock appreciation rights, and any similar awards under any equity compensation plan of deCODE, shall vest, become immediately exercisable or payable and have all restrictions lifted. In the event
of a change in control, the Plan also requires deCODE to make a lump sum payment to the CEO and reporting officers based on their most recent salary and bonus history. Also, the Plan requires other
benefits to be paid, to include life, disability, accident and health insurance for these employees for a period of 24 to 36 months depending on employment. deCODE believes that it is unlikely
that these circumstances will transpire, as such no charge has been recognized in its Statements of Operations. As of September 30, 2007, the potential minimum lump sum payment (salary and
bonus amounts only) under these change in control provisions would have totaled approximately $7,169,000 (calculated as of September 30, 2007).

7

---



6.     Net Loss 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.

Diluted
net loss per share is computed using the weighted-average number of common shares outstanding during the period, plus the dilutive effect of potential common shares. Diluted net
loss per share does not differ from basic net loss per share in all periods presented as potential common shares are antidilutive for all such periods and are, therefore, excluded from the
calculation. Potential common shares excluded from the calculation of diluted net loss per share were:

|                                                                                                    |  | September 30,
2007
(Shares) |  | September 30,
2006
(Shares)
|--------------------------------------------------------------------------------------------------- |  | --------------------------- |  | ---------------------------
|Warrants to purchase shares of common stock                                                         |  | 856,371                     |  | 2,385,022                  
|Options to purchase shares of common stock                                                          |  | 7,536,187                   |  | 4,754,306                  
|Restricted shares subject to vesting or with an associated outstanding non-recourse promissory note |  | 672,238                     |  | 724,394                    
|Convertible shares issuable upon conversion of 3.5% senior convertible notes                        |  | 16,428,572                  |  | 10,714,286                 
|                                                                                                    |  |                             |  |                            
|                                                                                                    |  | 25,493,368                  |  | 18,578,008                 
|                                                                                                    |  |                             |  |                            

7.     Authorized Shares

In May 2007, deCODE increased its number of authorized shares to 156,716,666, of which 150,000,000 is $0.001 par value Common Stock and 6,716,666 is $0.001
par value Preferred Stock.

8.     Other non-operating income, net

In June 2007, deCODE entered into a legal settlement to end ongoing litigation regarding certain proprietary and confidential information. Financial terms
of the legal settlement stipulated that deCODE would be paid $9,000,000, in two installments. The first installment of $4,000,000 was received in June 2007 and the second payment of $5,000,000
is due to be paid prior to December 31, 2007 and is included in Other Current Assets on the Condensed Consolidated Balance Sheet at September 30, 2007. deCODE recognized $0 and
$9,000,000 of the settlement amount during the three and nine-months ended September 30, 2007, net of related expenses of $61,000 and $747,000, respectively.

9.     Comprehensive Income

Comprehensive income generally represents all changes in stockholders' equity except those resulting from investments or contributions by stockholders. Amounts
reported in other comprehensive income include foreign currency translation adjustments, derivative financial instruments designated and effective as hedges of underlying foreign currency denominated
transactions, and unrealized gains and

8

---



losses
associated with investments. The following table presents the calculation of comprehensive income (loss):

For the Three Months
Ended September 30,

For the Nine Months
Ended September 30,2007

2006

2007

2006(In thousands)Net loss

$
(24,248
)
$
(23,632
)
$
(63,101
)
$
(62,248
)Other comprehensive income (loss):Foreign currency translation


(10
)

(14
)

(32
)

7Unrealized (loss) gain associated with investments


(225
)

86


(200
)

71Total comprehensive loss

$
(24,483
)
$
(23,560
)
$
(63,333
)
$
(62,170
)


10.   Investments

deCODE invests its excess cash with large U.S. based financial institutions and considers its investment portfolio as available-for-sale.
Investments are available for current operations and are classified as current assets. Investments are carried at fair value with the unrealized holding gain or loss included in accumulated other
comprehensive income. Fair value is generally determined with reference to quotations in active markets. Premium and discounts associated with investments in bonds are amortized using the effective
interest rate method.

Investments
as of September 30, 2007 are summarized as follows:

Amortized
Cost

Estimated
Fair Value(In thousands)Auction rate securities

$
58,000

$
58,000Municipal bond


4,991


4,750Agency Bond


5,000


5,001$
67,991

$
67,751


Gross
unrealized holding gains and gross unrealized holding losses at September 30, 2007 were $1,000 and $241,000, respectively, and at December 31, 2006 were $0 and
$78,000, respectively, and are included in accumulated other comprehensive income.

11.   Sale-Leaseback Financing

Woodridge

In June 2007, deCODE completed a sale and leaseback of its property (land and building) in Woodridge, Illinois. Pursuant to the agreement, deCODE sold the
Woodridge property for $25,000,000 in cash and leased the property back under a 17 year lease at an initial rent of $163,000 per month, subject to annual rent increases of 2.5%. Under the
lease, deCODE has two 5-year renewal options with rent at the then prevailing market rate. The lease is an absolute net lease and deCODE will continue to pay all expenses relating to the
property, including taxes, utilities, insurance and maintenance. deCODE's obligations under the lease are collateralized by a letter of credit in an initial amount of $5,000,000, that may be reduced
upon certain conditions. The letter of credit is collateralized by cash equivalents held in a restricted account ($5,051,000) at September 30, 2007).

The
sale and leaseback of the Woodridge property is being accounted for as a financing, as such, the property remains on the balance sheet and continues to be depreciated through the
lease term.

9

---



Proceeds
on the sale have been recorded on the balance sheet as a finance obligation and a portion of the rental payments under the lease will be applied, using the effective interest method, to
reduce the finance obligation over the term of the lease, with the remainder of the rental payments being recorded as interest expense. Transaction costs amounting to $1,183,000 have been deferred and
included in other long term assets on the condensed consolidated balance sheets and will be amortized to interest expense over the term of the lease, using the effective interest method.

Concurrent
with the sale and leaseback of Woodridge, deCODE paid the existing mortgage loan ($5,430,000) which had been collateralized by the Woodridge property.

Equipment

In September 2007, deCODE entered into a financing for the sale and leaseback of equipment. The sale price of the equipment was $2,110,000 and the
resulting gain of $305,000 has been deferred and is being recognized over the 24-month term of the leaseback.

12.   Litigation

Other than claims and legal proceedings that arise from time to time in the ordinary course of business which are not material, and matters described below, there
has been no change in the matters reported in deCODE's Annual Report on Form 10-K for the year ended December 31, 2006 and deCODE's Quarterly Reports on
Form 10-Q for the quarters ended March 31, 2007 and June 30, 2007.

In
the matter of In re deCODE genetics, Inc. Initial Public Offering, which is described in deCODE's Annual Report on Form 10-K for the year ended
December 31, 2006 and deCODE's Quarterly Reports on Form 10-Q for the quarters ended March 31, 2007 and June 30, 2007, on June 25, 2007, the United
States District Court for the Southern District of New York entered an order formally denying the motion for final approval of the settlement agreement because the settlement class could not be
certified. On August 14, 2007, the plaintiffs filed their second consolidated amended class action complaints against the "focus cases" and on September 27, 2007, again moved for class
certification. The focus cases are a small group of cases that were selected as test cases due to the large number of nearly identical actions which were consolidated in the Initial Public Offering
litigation. The court has indicated that the focus cases are intended to provide strong guidance for the other cases. The case involving deCODE is not a focus case. Due to the inherent uncertainties
of litigation, deCODE cannot accurately predict the ultimate outcome of the matter.

On
August 9, 2007, deCODE received a letter dated July 31, 2007, written on behalf of a purported stockholder (the "Demand Letter"), requesting that our board of directors
initiate a claim against the underwriters of our initial public offering, in addition to certain unnamed officers, directors and principal stockholders as identified in our IPO prospectus, for
violations of Section 16(b) of the Securities Exchange Act of 1934, as amended. The Demand Letter alleges that the combined number of shares of our common stock beneficially owned by the
entities and individuals identified in the Demand Letter exceeded ten percent of our outstanding common stock from the date of our initial public offering on July 18, 2000, through
July 17, 2001. It further alleges that those entities and individuals were thus subject to the reporting requirements of Section 16(a) and the short-swing trading prohibition of
Section 16(b) and failed to comply with those provisions. Under Section 16(b), we had 60 days from the date of the Demand Letter to bring a claim against the individuals and
entities named therein. In the absence of any such action, a claim may be brought in our name and on our behalf by any stockholder. After considering the basis for the claims articulated in the Demand
Letter, we
determined that it would not be appropriate for us to take any action in response to it. As of the date of this filing, we are not aware of any suits filed by a stockholder arising from this Demand
Letter.

10

---





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, 2007 and for the three and
nine-month periods ended September 30, 2007 and 2006 should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto set forth in Item
1 of this report.

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

Overview

Headquartered in Reykjavik, Iceland, deCODE is a biopharmaceutical company applying its discoveries in human genetics to develop drugs and diagnostics for common
diseases. Our population approach and resources enable us to isolate genes and drug targets directly involved in the development of many of the diseases which pose the biggest challenges to public
health. We are turning these discoveries into a growing pipeline of therapeutics and diagnostic tests taking aim at the causes of disease, not just the signs and symptoms. As these diseases are common
and current therapies are of limited effectiveness, we believe that our strategy represents a significant opportunity to create better medicine with major potential in the global marketplace.

We
believe that deCODE's advantage derives from our population approach to human genetics and the ability to apply this approach directly to drug and diagnostic development. In Iceland,
we have comprehensive population resources and one of the largest genotyping facilities in the world, enabling our scientists to isolate key genes and gene variants contributing to common diseases.
The proteins encoded by these genes and other proteins with which they interact in the disease pathway offer drug targets that we believe are directly involved in the onset and progression of disease.
Our work indicates that these genes confer risk by increasing or decreasing the activity of common biological pathways, placing individuals on a spectrum of risk that encompasses the population as a
whole. Small-molecule drugs that can modulate the activity of the pathway in question may therefore have broad potential
utility, not only to those at highest risk but perhaps also to those at average risk, which in the common diseases may be unacceptably high. Moreover, these pathways often provide biomarkers that can
be used to assess the efficacy of a compound from preclinical to mid-stage clinical testing.

We
are also applying our findings to create DNA-based diagnostic tests to detect many of the same genetic variations that we have used to identify drug targets. Such tests
can be employed as an aid in developing more effective disease prevention strategies by helping individuals to better understand their inherited risk of a given condition, as well as to identify
patients likely to respond well to a given drug. Earlier this year, we began offering deCODE T2, our first reference laboratory DNA-based test, which detects a gene variant we
discovered to be associated with increased risk of type 2 diabetes. In July, we introduced our second reference laboratory DNA-based test deCODE AF, for a gene variant
we discovered to be associated with increased risk of atrial fibrillation and stroke. In October, we began offering deCODE MI, a laboratory reference test which detects a gene variant
which is associated with early-onset heart attack, (myocardial infarction, or MI). All of these tests are offered by deCODE via direct sales efforts to physicians and a dedicated website
(www.decodediagnostics.com). deCODE T2 is also marketed through DNA Direct Inc. (www.dnadirect.com).

Through
our chemistry and structural biology units, based in the United States, we are able to discover novel small-molecule therapeutic compounds, take candidate compounds through
pre-clinical testing, and manufacture sufficient quantities for early-stage clinical trials. Our product development group, which has expertise in drug and disease modeling, designs and
implements our clinical trials. We

11

---



also
actively explore in-licensing, co-development, and partnering opportunities, and in certain programs have brought directly into clinical trials compounds that address
targets we have identified through our genetics research but which were originally developed by other companies for other indications.

In
June of this year, we announced the top line results of a Phase IIa clinical trial and a placebo-controlled clinical pharmacology study for DG041, our developmental
anti-platelet compound for arterial thrombosis. The Phase IIa and clinical pharmacology studies examined safety, tolerability, dosing, and the effect of various dose levels on biomarkers
of platelet activation. In these studies, DG-041 demonstrated a dose-related impact on inflammatory biomarkers and, importantly, showed a clear concentration-dependent effect
on both platelet aggregation response and p-selection expression. In addition, data from the clinical pharmacology trial clearly demonstrated the ability of DG-041 to attenuate
platelet activation beyond that afforded by ASA. During the last quarter, two drug-drug interaction studies were conducted and the results of these studies supported the continued
development of DG-041 in large scale patient studies. Further clinical pharmacology studies will be conducted to assess the potential benefits of DG-041 when combined with
clopidogrel (Plavix®) and the combination of clopidogrel with aspirin (ASA). We will also be evaluating the biomarker data on p-VASP (vasodlilator-stimulated
phosphoprotein) and continue to monitor bleeding time. Based on the results of these studies we anticipate launching a larger Phase II study in patients in the second half of next year.

deCODE
has two compounds in clinical development targeting the leukotriene pathway for the prevention of heart attack. The Phase I multiple dose ranging study for
DG-051 was completed earlier this year. DG-051 was found to be safe and well-tolerated at the doses tested; to have a pharmacokinetic profile that supports
once-a-day dosing; and to lower, in a dose-dependent manner, production of leukotriene B4, the pro-inflammatory biomarker that deCODE believes
confers an increased risk of heart attack through this pathway. A Phase IIa study was recently started to provide necessary data to support our larger Phase IIb study which we expect to
launch this study in the first quarter of 2008. We are currently reformulating the tablets for DG031, our Phase III compound for the prevention of heart attack. We completed an accelerated
3 month stability study with our lead candidate and recently concluded the clinical portion of our bioequivalence study. We anticipate completing the bioequivalence analysis of results from
this study during Q4 and this information as well as other factors, such as the status of partnering negotiations, will form our next steps for DG031.

deCODE
has a partnership with Roche focused on the discovery and development of PDE4 inhibitors for vascular disease. deCODE and Illumina, Inc. are working together to develop
DNA-based diagnostic kits utilizing deCODE's gene discoveries in heart attack, type 2 diabetes and breast cancer and Illumina's platform for SNP genotyping. deCODE is also actively
exploring drug development partnerships in its most advanced therapeutic programs, in order to spread risk and cost, and to focus resources on the advancement of its drug discovery work and
preclinical candidates.

The
goal of our business strategy is to maximize the creation of value from our human genetics, drug discovery, drug development and diagnostics work and to capture that value for the
company and its stockholders. Our product development pipeline now includes drug development programs in heart attack and arterial thrombosis, and following the launch of three reference lab tests, we
are advancing the development of DNA-based risk predisposition tests in glaucoma and prostate and breast cancer. Executing on our strategyadvancing these programs swiftly
while continuing our discovery work in a broad range of common diseasesrequires us to spread risk and manage cost. We are constantly evaluating the optimal balance between proprietary and
partnered product development, the level of our investment in research and development, the deployment of cash resources for product development, and the financing environment.

As
we invest in proprietary programs, we leverage our capabilities to form corporate alliances and to provide services to fee-paying customers. We also receive contract and
grant funding from various

12

---



governmental
agencies. We have formed drug and other product development alliances with Roche and Illumina, among others. Our chemistry subsidiary provides drug discovery and contract manufacturing
services to fee-for-service customers, and our other service offerings include protein crystallography products and instruments through our biosystems subsidiary, as well as
protein structure analysis contract services through our structural biology subsidiary; clinical trials services through our Encode CRO; and DNA analysis services through our genotyping laboratory in
Reykjavik.

We
derive revenues primarily from research funding and other fees from our service customers and collaborative partners, as well as from research grants. Milestone payments and upfront,
exclusivity, technology-access and technology-development fees under our collaboration agreements constitute another source of our revenues. Our expenses consist primarily of research and development
expenses such as salaries and related employee costs, materials and supplies, and contractor services.

We
believe that our ongoing work in genetics, the advancement of our drug and diagnostic programs, and the conduct of clinical trials will require significant ongoing expenditure. In the
first nine months of 2007 we continued to advance our drug development programs, completing a successful Phase I multiple dose ranging study of DG051 including a 28 day extension of the
multiple dose study, conducted various drug-drug interaction studies and a food effect study, and initiated a Phase IIa trial. We completed a successful Phase IIa trial of
DG041 along with a highly informative clinical pharmacology study conducted in the presence and absence of aspirin and we are currently planning a study that will assess the pharmacology of
DG-041 in the presence of clopidogrel and clopidogrel plus aspirin. We also completed two important drug-drug interaction studies that significantly de-risked the
further development of DG-041. We have established a Clinical Laboratory Improvement Amendments (CLIA) certified reference laboratory for offering DNA-based tests, and expect
to follow our recent launches with several other tests we now have in development. We anticipate incurring additional net losses at least through the next several years, due to, in addition to the
above-mentioned factors, depreciation and amortization, as well as stock-based compensation and other non-cash charges. We expect that our revenues and losses will fluctuate from quarter
to quarter and that such fluctuations may be substantial, especially because progress in our scientific work and milestone payments that are related to progress can fluctuate between quarters. We do
not believe that comparisons of our quarter-to-quarter performance are a good indication of future performance.

At
September 30, 2007, we had $118.6 million in cash, cash equivalents and investments, including restricted cash equivalents and investments and as we advance discovery
work and broaden our drug development pipeline we will require significant additional capital for product development and so we will continue to investigate additional avenues of financing. Our
ability to obtain capital in the future will be affected by conditions in the global financial markets and in the pharmaceutical industry. We
expect that more favorable conditions in those markets will present opportunities for us, while downturns in the market valuations of biotechnology companies and of the equity markets more generally
will restrict our ability to raise additional capital on attractive terms.

One
of the main issues confronting big pharmaceutical companies is their lack of promising new drugs to treat major indications. As many leading brand-name drugs come off
patent and face generic competition, developing successful new medicines will become critical for filling the gap. We believe that companies such as ours may be well positioned to play an important
role in filling the gap in the pipeline of new drugs, either alone or as partners of pharmaceutical companies.

Drug Development Programs

The following is a summary of the development of our drug candidates in late pre-clinical or clinical development. Because of uncertainties involved
in the drug development process, the actual timing for the events described below may differ materially from that provided in this summary.



13

---







We
use many of our employee and infrastructure resources across several programs, and many of our research and development costs are indirectly attributable to an individually named
program or are

14

---



directed
broadly to applicable research programs. However, taking into account costs that are specifically attributable to individual programs and allocations of our research and development program
costs based upon those direct costs, we have cumulatively invested $43.7 million, $20.9 million and $13.9 million in our heart attack (myocardial infarction, or MI), arterial
thrombosis and stroke programs, respectively, from the beginning of 2003 to date (September 30, 2007). Inception to-date costs are not available as these costs were not historically
tracked by program.

We
have not applied for or received marketing approval from the applicable regulatory authorities in any country for any of our drug candidates. In order for us to achieve marketing
approval in the United States, the FDA must conclude that our clinical data establish the safety and efficacy of our drug candidate. Other countries have similar requirements. Historically, the
results from pre-clinical testing and early clinical trials (through Phase II) have often not been predictive of success in later clinical trials. Many new compounds have shown
promising results in early clinical trials, but subsequently failed to establish sufficient safety and efficacy data to obtain necessary marketing approvals. Additional risks and uncertainties
involved in the development and commercialization of any products are described under Item 1A in our reports on Forms 10-K and 10-Q. We expect that it will be
several years, if ever, before we receive revenues from the commercial sale of our therapeutic products.

Furthermore,
our strategy includes the option of entering into collaborative arrangements with third parties to participate in the development and commercialization of our products.
Entering into collaboration with a partner at any point in the development or commercialization of a product is a business decision. When making this decision we do and will consider, among other
matters, the complexity of the indication, the size, complexity and expense of necessary development and/or commercialization efforts, competition in the market and size of the applicable market, an
assessment of our own resourcesfinancial and operational, and an assessment of the resources of a potential partner. In the event that we do collaborate on any of the above programs in
the future, a partner will have a level of control, which may be significant, over the pre-clinical development or clinical trial process for a product. As a result the completion date of
such a partnered program could largely be under control of that third party rather than under our control. We cannot forecast with any degree of certainty which proprietary drug candidate will be
subject to future collaborative arrangements or how such arrangements would affect our development plan or capital requirements.

As
a result of the uncertainties discussed above, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will
receive cash inflows from the commercialization and sale of a product.

Acquisitions, Joint Development Programs and In-licensing

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

Illumina.In May 2006, we entered into a strategic alliance with Illumina, Inc. ("Illumina") to develop and
commercialize molecular diagnostic products. Under the terms of the agreement, deCODE and Illumina will share development costs equally and split operating profits from the sales of diagnostic
products. Our initial focus will be developing diagnostics for heart attack, breast cancer and type 2 diabetes. Also as part of the agreement, we have installed Illumina's SNP genotyping
platform to carry-out high-density, whole-genome studies utilizing our comprehensive population genetics resources in Iceland, thereby, enabling us to expand our contract
genotyping business to offer Illumina's platform and assay technologies together with our proprietary analytical services for customers.

15

---



In
certain programs we have taken advantage of the fact that drug targets we have identified through our genetics research have already been employed by other companies to make
developmental compounds for other indications. By licensing these compounds or entering into co-development arrangements we have been able to leapfrog over several steps of drug discovery,
entering directly into Phase II clinical trials. DG031, our most advanced compound for the prevention of heart attack, was licensed from Bayer HealthCare AG, which was initially developing it
for asthma. In 2006, we concluded a Phase II trial in asthma, working with Cephalon on their compound CEP-1347, originally developed for Parkinson's disease. We continue to
investigate additional such possibilities for co-development of promising existing compounds that may effectively act against targets we have identified through our gene discovery work.

Results of Operations for the Three and Nine-Month Periods Ended September 30, 2007 and 2006

Our results of operations have fluctuated from period to period and may continue to fluctuate in the future based upon, among other things, the pace and progress
of our proprietary research and clinical development efforts, the timing and composition of funding under our various collaborative agreements, and the progress of our own research and development
efforts. Results of operations for any period may be unrelated to results of operations for any other period. In addition, historical results should not be viewed as indicative of future operating
results. We are subject to risks common to
companies in our industry and at our stage of development, including ability to obtain additional financing, risks inherent in our research and development efforts, reliance upon collaborative
partners, development by us or our competitors of new technological innovations, ability to market products or services, dependence on key personnel, dependence on key suppliers, protection of
proprietary technology, ability to negotiate collaborative arrangements, and compliance with governmental and other regulations. In order for a product to be commercialized based on our research, we
and our collaborators must conduct pre-clinical tests and clinical trials, demonstrate the efficacy and safety of our product candidates, obtain regulatory approvals or clearances and
enter into manufacturing, distribution and marketing arrangements, as well as obtain market acceptance. We do not expect to receive considerable revenues or royalties based on therapeutic or
diagnostic products for a period of years, if at all.

Financial
highlights as of and for the three and nine-month periods ended September 30, 2007 include:



16

---





Revenue

Revenue for the three and nine-month periods ended September 30, 2007 and 2006 is as follows:

|        |  |   |        |  |   |       |  |   |        | 2007 as Compared to 2006 |  
|------- |  | - | ------ |  | - | ----- |  | - | ------ | ------------------------ | -
|
|
|
|
|Revenue |  | $ | 10,892 |  | $ | 8,566 |  | $ | 27,060 |                          | $

Our business strategy is focused on turning our discoveries into new drugs and diagnostics for the treatment of common diseases. At the same time,
we leverage our capabilities to generate revenue through corporate alliances, through service contracts and through research grants. In the majority of our programs we are pursuing drug development on
our own. We have also sought and received research grant funding. We have entered into research, development, commercialization, and fee for service alliances and contracts across our business.
Depending on the nature of each prospective business opportunity, the key components of the commercial terms of such arrangements typically include one or more of the following: research funding;
up-front, exclusivity, technology access, and technology development fees; fees for particular services; milestone payments; license or commercialization fees; and royalties or profit
sharing from the commercialization of products.

Collaborations
with our most significant partners include:

F. Hoffmann-La Roche (Roche)

Therapeutics.In November 2004, we signed a three-year agreement with Roche to co-develop
inhibitors of PDE4 for the prevention and treatment of vascular disease, including stroke. This agreement continues work advanced under a completed 2002 agreement (completed in 2005), and we will
focus on optimizing lead compounds identified under the previous agreement and beginning clinical development. Under this agreement, as of September 30, 2007, we have received
$6.0 million of research funding, of which $2.0 million was received in the nine-months ended September 30, 2007. We will share drug discovery and clinical trials
costs under this agreement, and we may also receive milestone payments and royalties based on drug sales.

Diagnostics.In June 2001, we signed a five-year alliance with Roche's diagnostics division and through
June 2006 we collaborated to develop and market DNA-based diagnostics for major diseases. During the term of this alliance, which expired in 2006, we received $44.3 million
in research funding, up-front fees and milestone payments under the agreement and we may receive additional milestone payments upon the achievement of research and development milestones
by Roche and royalties on the sales of diagnostic products developed by Roche.

For
the three-months ended September 30, 2007 and 2006, we recognized revenue of $0.5 million and $0.8 million, respectively, and incurred costs of $0 and
$1.2 million, respectively. For the

17

---



nine-months
ended September 30, 2007 and 2006, we recognized revenue of $1.5 million and $6.2 million, respectively, and incurred costs of $0 and $5.2 million,
respectively.

Government Research Contracts and Grant Funding

We have received various research grants from divisions of the United States National Institutes of Health (NIH), the Commission of the European Communities (EC)
and other government agencies and private foundations. Research grants for multiple years are based on approved budgets with budgeted amounts subject to approval on an annual basis. NIH grants
generally provide for 100% reimbursement of allowable expenditures while grants under the EC generally provides for fifty percent reimbursement of allowable research and development related
expenditures. Our significant research contracts include:

National Institutes of Allergy and Infectious Diseases (NIAID).In September 2004, deCODE was awarded a
five-year $23.9 million contract by the NIAID, a division of NIH. Under the contract, deCODE will apply its population approach and resources to discover genetic factors associated
with susceptibility to certain infectious diseases and with responsiveness to vaccines targeting such diseases. deCODE may receive $10.1 million in additional research funding over the
remaining term of the agreement.

For
the three-months ended September 30, 2007 and 2006, we recognized revenue of $3.5 million and $3.9 million, respectively, and incurred costs of
$4.9 million and $6.8 million, respectively, from government research contracts and grants. For the nine-months ended September 30, 2007 and 2006, we recognized
revenue of $9.2 million and $10.8 million, respectively, and incurred costs of $13.6 million and $14.7 million, respectively, from government research contracts and grants.

Significant
elements of our revenue are summarized as follows:

For the Three Months
Ended September 30,

For the Nine Months
Ended September 30,2007

2006

2007

2006(In thousands)Service fees and research funding

$
5,941

$
4,096

$
15,353

$
15,009Milestone payments


182


215


773


514Up-front, exclusivity, technology access, and technology development fees


1,000





1,000


1,000Government research contracts and grant funding


3,510


3,878


9,194


10,804Other


259


377


740


1,732Total

$
10,892

$
8,566

$
27,060

$
29,059


Our
revenue for the periods presented generally reflects our strategic focus on proprietary drug discovery and development. Revenue in the three-month period ended September 30,
2007 was greater than that of the comparable period in 2006 principally on account of the growth in our genotyping service business and the receipt of a $1.0 million final technology access fee
received from Merck which was not received until Q4 in 2006. The decline in revenue in the nine-months ended September 30, 2007 compared to the same period in 2006 is due
principally to the conclusion of our diagnostics alliance with Roche in mid-2006 but then also is attributed to a lower amount of government research contract and grant funding recognized
in the 2007 period. Revenue deferred on our balance sheet (i.e., received but not recognized) grew to $15.2 million as of September 30, 2007 as compared to $9.8 million as of
December 31, 2006 largely on account of the development of our genotyping services and an increase in backlog thereof. Of the amount of revenue deferred as of September 30, 2007, we

18

---



believe
approximately $9.0 million will be recognized within the following twelve months. We expect that our revenues will fluctuate from period to period and that such fluctuations may be
substantial especially because progress in our scientific work, including milestone payments that are related to progress, can fluctuate between periods.

Cost of Revenue

Cost of revenue, including costs incurred in connection with collaborative programs for the three and nine-month periods ended September 30,
2007 and 2006 is as follows:

|                |  |   |        |  |   |        |  |   |        | 2007 as Compared to 2006 |  
|--------------- |  | - | ------ |  | - | ------ |  | - | ------ | ------------------------ | -
|
|
|
|
|Cost of revenue |  | $ | 11,976 |  | $ | 11,357 |  | $ | 32,050 |                          | $

Our cost of revenue consists of the costs of services provided to customers and collaborators and the costs of programs under research contracts
and grants, including: (i) the entirety of the costs incurred in connection with programs that have been partnered and on which we receive research funding; (ii) costs associated with
other service fee revenues; and (iii) the total amount of those costs incurred in connection with discovery and development work performed under research contracts and grants. At times, we
invest in addition to costs covered by research funding received in such collaborative programs and in addition to monies received under research contracts and grants.

Our
cost of revenue for the three and nine-month periods ended September 30, 2007 is slightly increased as compared to the same periods in 2006 and the components
thereof are changing consistent with the changes in the elements in revenue as described above. Our cost of revenue in the three month period ended September 30, 2007 as compared to the
three-month period ended September 30, 2006 increased chiefly with regard to salaries ($0.4 million), and usage of chemicals and consumables ($0.5 million), offset by decreased
depreciation ($0.2 million). The overall increase in the cost of revenue for the nine-month period ended September 30, 2007 as compared to the nine-month period
ended September 30, 2006 is was primarily due to greater expense for chemicals and consumables ($1.0 million) and contractor services ($0.2 million), offset by a decrease of
depreciation and amortization ($0.6 million).

Research and Development

Research and development expense for the three and nine-month periods ended September 30, 2007 and 2006 is as follows:

|                         |  |   |        |  |   |        |  |   |        | 2007 as Compared to 2006 |  
|------------------------ |  | - | ------ |  | - | ------ |  | - | ------ | ------------------------ | -
|
|
|
|
|Research and development |  | $ | 14,069 |  | $ | 14,178 |  | $ | 41,273 |                          | $

Our research and development expense for the three and nine-months ended September 30, 2007 reflects the advancement of our
drug and diagnostic programs, the launch of our first DNA-based tests for gauging individual risk of common disease, and the acceleration of our gene and target discovery work. As we
continue our high-density, whole genome studies utilizing the Illumina SNP genotyping platform we have seen increases in related materials and supplies as well as the attendant salary and
related costs in both the three and nine-month periods ended September 30, 2007 versus the

19

---



comparable
periods in 2006. The decrease in contractor services and other third party costs for the three and nine-months ended September 30, 2007 relative to the comparable periods
in 2006 is largely on account of the clinical development of DG031, in which we voluntarily suspended our Phase III trial late last year. With our advancements and based upon the range of our current
research and development activities but excluding any significant new collaborations, we believe that our overall investment in research and development for the fiscal year 2007 may be in the range of
$55 to $60 million.

Our
research and development expense for the three and nine-month periods ended September 30, 2007 and 2006 consist of the following:

For the Three Months
Ended September 30,

For the Nine Months
Ended September 30,2007

2006

2007

2006(In thousands)Salaries and other personnel costs

$
4,615

$
4,044

$
14,486

$
13,740Materials and supplies


2,961


2,006


9,191


4,765Contractor services and other third party costs


4,083


5,758


10,132


16,724Overhead expenses


1,420


1,086


4,247


3,909Depreciation and amortization


586


885


1,934


2,648Stock-based compensation


404


399


1,283


1,116Total

$
14,069

$
14,178

$
41,273

$
42,902


During
the year ended December 31, 2006 and now into 2007, we have generally experienced increasing research and development costs and we believe that, within financial
constraints, further increases may continue, particularly as we continue wide-ranging work in genetics, notably our high-density, whole-genome studies utilizing the Illumina
SNP genotyping platform, and advance our clinical development and proprietary drug development programs.

Selling, General and Administrative Expense

Selling, general and administrative expense for the three and nine-month periods ended September 30, 2007 and 2006 is as follows:

|                                    |  |   |       |  |   |       |  |   |        | 2007 as Compared to 2006 |  
|----------------------------------- |  | - | ----- |  | - | ----- |  | - | ------ | ------------------------ | -
|
|
|
|
|Selling, general and administrative |  | $ | 7,070 |  | $ | 6,938 |  | $ | 19,395 |                          | $

The increase in our selling, general and administrative expenses for the three and nine-month periods ended September 30, 2007
compared to the same periods ended September 30, 2006 is primarily attributable to increased compensation (salary and stock) ($0.9 million and $2.2 million, respectively) and
increased contractor services related to the selling and marketing of our diagnostic offerings ($1.0 million and $1.6 million, respectively). We believe that further increases may
continue, particularly as we continue to develop and launch further DNA-based diagnostic tests. Cost increases during the reporting periods were offset during the three and
nine-months ended September 30, 2007 by decreased legal expenses ($1.9 million and $1.8 million, respectively) primarily due to litigation regarding certain
proprietary and confidential information in the 2006 reporting periods. Further, our

20

---



selling,
general and administrative expense in the nine-month period ended September 30, 2006 includes a $0.8 million gain on the sale of property.

Interest Income

Interest income for the three and nine-month periods ended September 30, 2007 and 2006 is as follows:

|                |  |   |       |  |   |       |  |   |       | 2007 as Compared to 2006 |  
|--------------- |  | - | ----- |  | - | ----- |  | - | ----- | ------------------------ | -
|
|
|
|
|Interest income |  | $ | 1,646 |  | $ | 1,834 |  | $ | 5,155 |                          | $

Our interest income is a function of both the balance of our cash and investments (which generally have been declining as resources are deployed
in operations) and the rate of return we are able to garner under our investment policy (which average rate of return has, in general, been increasing). We expect to use our cash and investments
principally for advancing our discovery and development programs. In the meantime, we will invest the monies received in accordance with our policy, having the objective of preserving principal and
maintaining a high degree of liquidity to meet operating needs and obtaining competitive returns subject to prevailing market conditions. We expect to maintain our portfolio of cash equivalents and
investments in a variety of securities, including auction rate securities, commercial paper, money market funds, mutual fund investments and government and non-government debt securities.

Interest Expense

Interest expense for the three and nine-month periods ended September 30, 2007 and 2006 is as follows:

|                 |  |   |       |  |   |       |  |   |        | 2007 as Compared to 2006 |  
|---------------- |  | - | ----- |  | - | ----- |  | - | ------ | ------------------------ | -
|
|
|
|
|Interest expense |  | $ | 4,019 |  | $ | 1,728 |  | $ | 11,488 |                          | $

Our interest expense has increased in the three and nine-month periods ended September 30, 2007 as compared to the same periods
in 2006. Our interest expense is primarily attributable to interest on our 3.5% Senior Convertible Notes due in 2011 that we issued in April 2004 ($150 million of principal at a full par
price) and then again in November 2006 (a further $80 million of principal at a price of 70% of par). With the additional $80 million of notes added in 2006, our future cash
interest payments will be approximately $8.1 million on an annual basis for the Senior Convertible Notes. Taking into account also the accretion of the discount of the notes and the
amortization of offering costs, our total interest expense related to the Senior Convertible Notes is expected to be approximately $14.0 million for the year ending December 31, 2007. In
June 2007, as a result of our sale and leaseback of Woodridge being treated as a financing, a portion of our rent payments are charged to interest expense, which will serve to increase our
annual interest expense by approximately $1.4 million per annum.

21

---



Other non-operating income, net

Other non-operating income, net for the three and nine-month periods ended September 30, 2007 and 2006 is as follows:

|                                |  |   |     |  |   |     |  |   |       | 2007 as Compared to 2006 |  
|------------------------------- |  | - | --- |  | - | --- |  | - | ----- | ------------------------ | -
|
|
|
|
|Other non-operating income, net |  | $ | 348 |  | $ | 169 |  | $ | 8,890 |                          | $

The increase during the nine-months ended September 30, 2007 is due to a legal settlement we entered into in June 2007
to end ongoing litigation regarding certain proprietary and confidential information. Financial terms of the legal settlement stipulated that we would be paid $9.0 million, in two installments.
The first installment of $4.0 million was received in June 2007 and the second payment of $5.0 million is due to be paid prior to December 31, 2007. We recognized the
$9.0 million during the nine-months ended September 30, 2007, net of litigation expenses incurred of $0.7 million.

22

---





Liquidity and Capital Resources

We have financed our operations primarily through funding from research and development collaborative agreements, and the issuance of equity securities and
long-term financing instruments ($1,009 million from the beginning of 1999 to-date). At September 30, 2007, future funding under terms of our existing agreements
is approximately $42.1 million excluding milestone payments, royalties and other payments that we may earn under such collaborations. Of the $42.1 million, approximately
$11.5 million is expected to be received during the year ended December 31, 2007 and $22.6 million during the year ended December 31, 2008, with the remaining amount due
through 2010.

We
make significant investments in proprietary research and development and we incur the costs of such activities. In the near term, this requires us to devote resources to our
in-house drug and clinical development which we believe will better position us to capture the most value to us in our discoveries. As we identify promising discoveries for further
development, we may choose to continue the development ourselves into and through clinical trials, regulatory approvals, manufacturing, distribution and marketing. In other cases we are or will be
working to varying degrees with partners. The decisions we make as to these matters will affect our cash requirements.

Our
cash requirements depend on numerous factors, including the level and timing of our research and development expenditures; our ability: to access the capital markets; to obtain new
research and development collaboration agreements; to obtain and maintain contract service agreements in our pharmaceuticals, biostructures, clinical research trials and genotyping service groups;
expenditures in connection with alliances, license agreements and acquisitions of and investments in complementary technologies and businesses; competing technological and market developments; the
cost of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights; the purchase of additional capital equipment; and capital expenditures at our facilities.
Changes in our research and development plans, notably the entry into clinical trials of drugs based on our discoveries, or other changes affecting our operating expenses may result in changes in the
timing and amount of expenditures of our capital resources.

At
September 30, 2007, we had $118.6 million in cash, cash equivalents and investments, including restricted cash equivalents and investments of $5.1 million. In
light of our steady progress as well as proceeds from both the sale and leaseback of our Woodridge property and the recent settlement of litigation, we believe that our overall use of cash resources
in fiscal year 2007 may be in the range of $60 to $65 million. As we advance and broaden our drug development pipeline we will require significant additional capital for product development and
so we will continue to investigate additional
avenues of financing, such as further public or private equity offerings, additional debt financing, other forms of financing or added collaborations and licensing arrangements. However, no assurance
can be given that additional financing or collaborations and licensing arrangements will be available when needed, or that if available, will be obtained on favorable terms. If adequate funds are not
available when needed, we may have to curtail operations or attempt to raise funds on unattractive terms.

For the Nine-Month
Periods Ended
September 30,2007

2006(In thousands)Cash provided by (used in):Operating activities

$
(49,613
)
$
(58,041
)Investing activities


55,019


(14,326
)Financing activities


18,551


33,273Cash and cash equivalents, at end of period


45,839


26,849


23

---



Cash and Cash Equivalents.At September 30, 2007, we had $45.8 million in cash and cash equivalents. Together
with our investments ($67.8 million) and restricted cash equivalents ($5.1 million), this balance ($118.6 million) is $33.4 million less than at December 31, 2006.
The net utilization of our cash in these first nine months is principally owing to cash used in product development, research and general operations as reflected in the $49.6 million cash we
used in operations, together with the net proceeds from the sale and leaseback of our property in Woodridge, Illinois ($18.4 million).

Available
cash is invested in accordance with our investment policy having primary objectives of liquidity and safety of principal while maximizing the income we receive from our
investments without
significantly increasing risk. Our cash is deposited only with financial institutions in Iceland, the United Kingdom and the United States having a high credit standing (A-/A3 or better).
We expect to maintain our portfolio of cash equivalents and investments in a variety of securities, including auction rate securities, commercial paper, money market funds, mutual fund investments and
government and non-government debt securities.

At
September 30, 2007, our cash is largely invested in U.S. dollar denominated money market and checking accounts and also in Icelandic krona denominated accounts. At
September 30, 2007, our investments are in auction rate securities and municipal and agency bonds.

Operating Activities.Net cash used in operating activities was $49.6 million for the nine-month period
ended September 30, 2007 as compared to $58.0 million having been used in the same period in 2006. Cash used in our operations is principally owing to cash used in therapeutic and
diagnostic product development, research and general operations as reflected in the $49.6 million cash we used in operations, as more fully described above.

Investing Activities.Our investing activities have consisted of short-term investments in marketable securities
(mainly investments in auction rate securities and municipal and agency bonds) and capital expenditures. During the nine-months ended September 30, 2007 our restricted cash
equivalents increased by $5.1 million in connection with the leaseback of our Woodridge property. In the nine-months ended September 30, 2006, we acquired $1.3 million
of cash in our purchase of UVS, money used to fund the acquired liabilities of UVS. We principally made replacement capital expenditures during the nine-month periods ended
September 30, 2007 and 2006. We have experienced the pace of necessary capital expenditures increase somewhat of late and this trend may continue.

Financing Activities.Net cash of $18.6 million was provided by financing activities in the nine-month
period ended September 30, 2007, as compared to $33.3 million that was provided in the nine-month period ended September 30, 2006. Our most significant financing
activity for the nine-month period ended September 30, 2007 was the sale and leaseback of our property in Woodridge, Illinois (netting us $18.4 million after the payment of
transaction costs and the repayment of our existing property mortgage). Additionally, in September 2007, we entered into a sale-and-leaseback of certain laboratory
equipment amounting to $2.1 million. Further, we had ongoing repayment of and installment payments on debt, capital lease and finance obligations amounting to $7.5 million in the
nine-month period ended September 30, 2007. Financing activities for the nine-month period ended September 30, 2006 largely consisted of equity proceeds on the
issuance of common stock ($25.9 million), financing of property and certain equipment ($5.9 million) and installment payments on debt and capital lease obligations ($1.8 million).

In
June 2007, we completed the sale and leaseback of our property (land and building) in Woodridge, Illinois. Pursuant to the agreement, we sold the Woodridge property for
$25.0 million in cash and leased the property back under a 17 year lease at an initial rent of $163,000 per month, subject to annual rent increases of 2.5%. Our obligations under the
lease are collateralized by a letter of credit in an initial amount of $5.0 million that may be reduced upon certain conditions. The letter of credit is collateralized by restricted cash
equivalents ($5.1 million at September 30, 2007).

24

---



We
are accounting for the sale and leaseback of the Woodridge as a financing. As such, the property will remain on the balance sheet and continue to be depreciated through the lease
term. Proceeds on the sale have been recorded on the balance sheet as a finance obligation and a portion of the rental payments under the lease will be applied, using the effective interest method, to
reduce the finance obligation with the remainder of the rental payments recorded as interest expense. Transaction costs amounting to $1.2 million have been deferred and will be recorded as
interest expense over the term of the lease, using the effective interest method.

Concurrent
with the Woodridge sale-leaseback financing, we paid the existing mortgage loan ($5.4 million) which had been collateralized by the Woodridge property.

Contractual Commitments and Off-Balance Sheet Arrangements.The following summarizes our contractual obligations
at September 30, 2007, and the effects such obligations are expected to have on our liquidity and cash flows in future periods:

|                                                  |  |   |         | Payments Due by Period
|------------------------------------------------- |  | - | ------- | ----------------------
|
|
|3.5% Senior convertible notes, including interest |  | $ | 262,200 |                       
|Long-term debt, including interest                |  |   | 691     |                       
|Capital lease obligations, including interest     |  |   | 6,603   |                       
|Finance obligation (sale-leaseback)               |  |   | 40,217  |                       
|Operating leases(1)                               |  |   | 71,182  |                       
|                                                  |  |   |         |                       
|Total                                             |  | $ | 380,893 |                       
|                                                  |  |   |         |                       

---

Under the terms of certain technology licensing agreements, deCODE is obligated to make payments upon the achievement of established milestones
leading to the discovery of defined products. These payments could total $5.0 million, with the timing of payments not determinable at the current time. These payments are not included in the
above table.

In
November 2007, deCODE adopted a Change In Control Benefits Plan that provides for, among other things, upon a change in control, all outstanding stock options, restricted stock
and stock appreciation rights, and any similar awards under any equity compensation plan of deCODE, shall vest, become immediately exercisable or payable and have all restrictions lifted. In the event
of a change in control, the Plan also requires deCODE to make a lump sum payment to the CEO and reporting officers based on their most recent salary and bonus history. Also, the Plan requires other
benefits to be paid, to include life, disability, accident and health insurance for these employees for a period of 24 to 36 months depending on employment. deCODE believes that it is unlikely
that these circumstances will transpire, as such no charge has been recognized in its Statements of Operations. Further, these potential payments are not included in the above table. As of
September 30, 2007, the potential minimum lump sum payment (salary and bonus amounts only) under these change in control provisions would have been approximately $7.2 million (calculated
as of September 30, 2007).

25

---



All
material intercompany balances and transactions have been eliminated. We do not have any other significant relationships with unconsolidated entities or financial partnerships, such
as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships. Additionally, holders
of our 3.5% senior convertible notes may elect to convert their notes into shares of our common stock at any time at a price of $14.00 per share.

Critical Accounting Policies

The preparation of financial statements in conformity with generally accepted accounting principles requires us to make certain estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses
during the reported period. On an ongoing basis we evaluate our estimates, which include, among others, those related to collaborative arrangements, long-lived assets, and litigation and
other commitments and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form
our basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. The impact and any associated risks related to these and our other
accounting policies on our business or operations is discussed throughout Management's Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported
and expected financial results. For a detailed discussion on the application of these and other accounting policies, please refer to our notes to the Condensed Consolidated Financial Statements in
this quarterly report on Form 10-Q and the Consolidated Financial Statements in the Annual Report on Form 10-K. There can be no assurance that actual results may
not differ from the estimates referred to above.

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

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934. 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," "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 expectations. We cannot assure you that our expectations and assumptions will prove to be correct. We do not intend to update or revise any
forward-looking statements, whether as a result of future events, new information or otherwise, except to the extent that the reports we are required to file under the Securities Exchange Act of 1934,
as amended, (the "Exchange Act") contain such updates or revisions. Actual events or results may differ materially from the forward-looking statements due to a number of factors, including. but not
limited to, those set forth in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2006 as updated by Item A of this Quarterly Report on
Form 10-Q and elsewhere in this Quarterly Report on Form 10-Q and in the reports we file under the Exchange Act.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The primary objectives of our investment activities are to preserve principal, maintain a high degree of liquidity to meet operating needs, and obtain competitive
returns subject to prevailing market conditions. Investments are made primarily in high-grade corporate bonds, asset-backed debt securities and U.S. government agency debt securities.
These investments are subject to risk of default, changes

26

---



in
credit rating and changes in market value. These investments are also subject to interest rate risk and will decrease in value if market interest rates increase. A hypothetical 100 basis point
increase in interest rates would result in an approximate $0.1 million decrease in the fair value of our investments as of September 30, 2007. Due to the nature of our investments and
relatively short effective maturities of debt instruments, interest rate risk is mitigated. Changes in interest rates do not affect interest expense incurred on the Company's Convertible Notes,
because they bear interest at a fixed rate. Using the prices of the latest trades in September 2007, the market value of the Convertible Notes was approximately $157.3 million.

As
a consequence of the nature our business and operations our reported financial results and cash flows are exposed to the risks associated with fluctuations in the exchange rates of
the U.S. dollar, the Icelandic krona and other world currencies. We continue to monitor our exposure to currency risk. A hypothetical 10.0% decrease in value of the US dollar against the Icelandic
krona would result in a loss of approximately $0.1 million on our Icelandic krona denominated non U.S. dollar assets and liabilities. We have historically purchased instruments to hedge these
general risks through the use of derivative financial instruments.

ITEM 4. CONTROLS AND PROCEDURES

a)Evaluation of disclosure controls and procedures.Our Chief Executive Officer and our Chief Financial Officer
evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of
the end of the fiscal quarter covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded
that as of the end of such fiscal quarter deCODE's disclosure controls and procedures are adequate and effective to ensure that information required to be disclosed in the reports deCODE files under
the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures
include without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and
communicated to the issuer's management including its principal executive and principal financial officers or persons performing similar functions as appropriate to allow timely decisions regarding
required disclosures.

In
designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only
reasonable assurance that the desired objectives of the control system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of
future events and the application of judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of these and other inherent limitations of control
systems, there is only reasonable assurance that our controls will succeed in achieving their goals under all potential future conditions.

b)Changes in Internal Controls.We are continuously seeking to improve the efficiency and effectiveness of our
internal controls. This results in periodic refinements to internal control processes throughout the company. However, there was no change in our internal control over financial reporting (as defined
in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.

27

---



PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Other than claims and legal proceedings that arise from time to time in the ordinary course of business which are not material, and matters described below, there
has been no change in the matters reported in our Annual Report on Form 10-K for the year ended December 31, 2006 and our Quarterly Reports on Form 10-Q
for the quarters ended March 31, 2007 and June 30, 2007.

In
the matter of In re deCODE genetics, Inc. Initial Public Offering, which is described in deCODE's Annual Report on Form 10-K for the year ended
December 31, 2006 and deCODE's Quarterly Reports on Form 10-Q for the quarters ended March 31, 2007 and June 30, 2007, on June 25, 2007, the United
States District Court for the Southern District of New York entered an order formally denying the motion for final approval of the settlement agreement because the settlement class could not be
certified. On August 14, 2007, the plaintiffs filed their second consolidated amended class action complaints against the "focus cases" and on September 27, 2007, again moved for class
certification. The focus cases are a small group of cases that were selected as test cases due to the large number of nearly identical actions which were consolidated in the Initial Public Offering
litigation. The court has indicated that the focus cases are intended to provide strong guidance for the other cases. The case involving deCODE is not a focus case. Due to the inherent uncertainties
of litigation, deCODE cannot accurately predict the ultimate outcome of the matter.

On
August 9, 2007, deCODE received a letter dated July 31, 2007, written on behalf of a purported stockholder (the "Demand Letter"), requesting that our board of directors
initiate a claim against the underwriters of our initial public offering, in addition to certain unnamed officers, directors and principal stockholders as identified in our IPO prospectus, for
violations of Section 16(b) of the Securities Exchange Act of 1934, as amended. The Demand Letter alleges that the combined number of shares of our common stock beneficially owned by the
entities and individuals identified in the Demand Letter exceeded ten percent of our outstanding common stock from the date of our initial public offering on July 18, 2000, through
July 17, 2001. It further alleges that those entities and individuals were thus subject to the reporting requirements of Section 16(a) and the short-swing trading prohibition of
Section 16(b) and failed to comply with those provisions. Under Section 16(b), we had 60 days from the date of the Demand Letter to bring a claim against the individuals and
entities named therein. In the absence of any such action, a claim may be brought in our name and on our behalf by any stockholder. After considering the basis for the claims articulated in the Demand
Letter, we determined that it would not be appropriate for us to take any action in response to it. As of the date of this filing, we are not aware of any suits filed by a stockholder arising from
this Demand Letter.

ITEM 1A. RISK FACTORS

Other than with respect to the risk factors set forth below, there have been no material changes from the risk factors disclosed in Item 1A of our Annual Report
on Form 10-K for the year ended December 31, 2006. The risk factors set forth below have been updated to provide data for and as of the quarter ended September 30,
2007.

If we continue to incur operating losses longer than anticipated, or in amounts greater than anticipated, we may be unable to continue our operations.

We
incurred a net loss of $63.1 million and $62.2 million for the nine-months ended September 30, 2007 and 2006, respectively, and $85.5 million
for the year ended December 31, 2006, and had an accumulated deficit of $598.8 million at September 30, 2007. We have never generated a profit and we have not generated revenues
except for payments received in connection with our research and development collaborations with Roche, Merck and others, from contract services, Emerald BioSystems products and instruments, and under
grants. Our research and development expenditures and general

28

---



and
administrative costs have exceeded our revenue to date, and we expect to spend significant additional amounts to fund research and development in order to enhance our core technologies and
undertake product development (including drug development and related clinical trials). We do not expect to receive considerable royalties or other revenues from commercial sales of products developed
using our technology in the near term. It may be several years before product revenues materialize, if they do at all. As a result, we expect to incur net 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 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 capital requirements, we may be forced to reduce or terminate our research and product development
programs.

We
have spent substantial amounts of cash to fund our research and development activities and expect to continue to spend substantial amounts for these activities over the next several
years. We expect to use cash to collect, generate and analyze genotypic and disease data from volunteers in our disease-gene research programs; to conduct drug discovery and development
activities (including clinical trials); and to continue other research and development activities. Many factors will influence our future capital needs, including:



We
have relied on, and may continue to rely on, revenues generated by our corporate alliances and fee-paying customers for significant funding of our research efforts.
Historically, a substantial portion of our revenue has been derived from contracts with a limited number of significant customers. Roche accounted for approximately 5% and 10% of our consolidated
revenue for the three-months ended September 30, 2007 and 2006, respectively, and 6% and 21% of our consolidated revenue for the nine-months ended September 30, 2007 and
2006, respectively. The NIH accounted for approximately 24% and 40% of our consolidated revenue for the three-months ended September 30, 2007 and 2006, respectively, and 22% and 32% of our
consolidated revenue for the nine-months ended September 30, 2007 and 2006, respectively.

In
addition, we may seek additional funding through public or private equity offerings and debt financings. We may not be able to obtain additional financing when we need it or the
financing may not be on terms favorable to us or our stockholders. Stockholders' ownership will be diluted if we raise additional capital by issuing equity securities.

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

29

---



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

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

|EXHIBIT
NUMBER |  | DESCRIPTION OF EXHIBIT                                                                                                                                                                                                                                    
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1            |  | Amended and Restated Certificate of Incorporation, as further amended (Incorporated by reference to Exhibit 3.1 and Exhibit 3.3 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which
became effective on July 17, 2000).
|3.2            |  | Certificate of Amendment to Amended and Restated Certificate of Incorporation dated August 30, 2002 (Incorporated by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q filed on November 14, 2002).                                 
|3.3            |  | Certificate of Amendment to Amended and Restated Certificate of Incorporation dated May 11, 2007 (Incorporated by reference to Exhibit 3.3 to the Company's Quarterly Report on Form 10-Q filed August 9, 2007).                                          
|3.4            |  | Bylaws, as amended (Incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000).                                                                   
|31.1           |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                  
|31.2           |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                  
|32.1           |  | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                  

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

30

---



SIGNATURES

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

Dated:
November 8, 2007

| |  | deCODE genetics, Inc.
| |  | ---------------------
| |  |                      
| |  |                      
| |  |                      
| |  |                      

31

---



|EXHIBIT
NUMBER |  | DESCRIPTION OF EXHIBIT                                                                                                                                                                                                                                    
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1            |  | Amended and Restated Certificate of Incorporation, as further amended (Incorporated by reference to Exhibit 3.1 and Exhibit 3.3 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which
became effective on July 17, 2000).
|3.2            |  | Certificate of Amendment to Amended and Restated Certificate of Incorporation dated August 30, 2002 (Incorporated by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q filed on November 14, 2002).                                 
|3.3            |  | Certificate of Amendment to Amended and Restated Certificate of Incorporation dated May 11, 2007 (Incorporated by reference to Exhibit 3.3 to the Company's Quarterly Report on Form 10-Q filed August 9, 2007).                                          
|3.4            |  | Bylaws, as amended (Incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000).                                                                   
|31.1           |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                  
|31.2           |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                  
|32.1           |  | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                  

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

---