Tableof Contents

 

 

** **

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**(MarkOne)**

 

**x****QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES**

**EXCHANGEACT OF 1934.**

 

**FOR THE QUARTERLY PERIOD ENDED JUNE30, 2008**

 

**OR**

 

**o****TRANSITION REPORTPURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES**

**EXCHANGEACT**

 

**FORTHE TRANSITION PERIOD FROM           TO           **

 

**COMMISSION FILE NUMBER 000-30469**

 

**deCODEgenetics, Inc.**

(Exact Name ofRegistrant as Specified in Its Charter)

 

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

 

**STURLUGATA 8, IS-101 REYKJAVIK,ICELAND**

(Address ofPrincipal Executive Offices)

 

**+354-570-1900**

(Registrant’sTelephone Number, Including Area Code)

 

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

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company. See definitions of “largeaccelerated filer”, “accelerated filer” and “smaller reporting company” inRule 12b-2 of the Exchange Act. (Check one): 

 

| Large  accelerated filer o                     |   | Accelerated  filer x         |
|------------------------------------------------|--------|------------------------------|
|                                           |   |                         |
| Non-accelerated  filer o                       |   | Smaller  reporting company o |
| (Do not check if  a smaller reporting company) |   |                         |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).   o Yes     x No

 

The aggregate number ofshares of the registrant’s common stock outstanding on July 31, 2008 was61,849,584,shares of common stock $.001 par value.

 

 

 

----

Tableof Contents

 

**deCODEgenetics, Inc.**

 

**INDEX**

** **
| PART I.       | FINANCIAL INFORMATION                                                                                                   |   |
|--------------------|-------------------------------------------------------------------------------------------------------------------------|--------|
|               |                                                                                                                    |   |
| Item 1.            | Financial Statements (Unaudited)                                                                                        |   |
|               |                                                                                                                    |   |
|               | Condensed Consolidated  Balance Sheets as of June 30, 2008 and December 31, 2007                              |   |
|               |                                                                                                                    |   |
|               | Condensed Consolidated  Statements of Operations for the three and six-month periods ended  June 30, 2008 and 2007 |   |
|               |                                                                                                                    |   |
|               | Condensed Consolidated  Statements of Cash Flows for the six-month periods ended June 30, 2008  and 2007           |   |
|               |                                                                                                                    |   |
|               | 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 4.            | Submission of  Matters to a Vote of Security Holders                                                                    |   |
|               |                                                                                                                    |   |
| Item 6.            | Exhibits                                                                                                                |   |
|               |                                                                                                                    |   |
|               | (a) Exhibits                                                                                                       |   |
|               |                                                                                                                    |   |
| Signatures         |                                                                                                                    |   |
|               |                                                                                                                    |   |
| Index to  Exhibits |                                                                                                                    |

 

1

----

Tableof Contents

 

**PART I. FINANCIAL INFORMATION**

 

**ITEM1. FINANCIAL STATEMENTS**

 

**deCODEgenetics, Inc.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

(Unaudited)

 
| ** **                                                                                                                                                                                                               | ** ** | **June 30,**                                        | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                               | ** ** | **2008**                                                 | ** ** | **2007**              | ** ** |
| ** **                                                                                                                                                                                                               | ** ** | **(In thousands, except  share amounts)** | ** ** |
| ASSETS                                                                                                                                                                                                                   |       |                                                     |       |                  |       |
| Current assets:                                                                                                                                                                                                          |       |                                                     |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                                                               |       | $                                                        | 18,238     |                  | $          | 54,172 |   |
| Investments                                                                                                                                                                                                              |       | 5,505                                                    |       | 10,003                |       |
| Receivables                                                                                                                                                                                                              |       | 11,559                                                   |       | 9,689                 |       |
| Other current  assets                                                                                                                                                                                                    |       | 9,011                                                    |       | 8,782                 |       |
| Total current  assets                                                                                                                                                                                                    |       | 44,313                                                   |       | 82,646                |       |
| Investments,  non-current                                                                                                                                                                                                |       | 20,640                                                   |       | 24,833                |       |
| Restricted cash  equivalents                                                                                                                                                                                             |       | 5,050                                                    |       | 5,050                 |       |
| Property and  equipment, net                                                                                                                                                                                             |       | 21,074                                                   |       | 23,142                |       |
| Goodwill                                                                                                                                                                                                                 |       | 10,055                                                   |       | 10,055                |       |
| Intangible  assets, net                                                                                                                                                                                                  |       | 3,826                                                    |       | 4,008                 |       |
| Other long-term  assets                                                                                                                                                                                                  |       | 5,659                                                    |       | 6,474                 |       |
| Total assets                                                                                                                                                                                                             |       | $                                                        | 110,617    |                  | $          | 156,208 |   |
| LIABILITIES AND  STOCKHOLDERS’ DEFICIT                                                                                                                                                                              |       |                                                     |       |                  |       |
| Current  liabilities:                                                                                                                                                                                                    |       |                                                     |       |                  |       |
| Accounts payable                                                                                                                                                                                                         |       | $                                                        | 5,507      |                  | $          | 8,618 |   |
| Accrued expenses  and other current liabilities                                                                                                                                                                          |       | 11,985                                                   |       | 12,558                |       |
| Deferred revenue                                                                                                                                                                                                         |       | 8,887                                                    |       | 9,133                 |       |
| Current portion  of capital lease obligations                                                                                                                                                                            |       | 3,060                                                    |       | 3,155                 |       |
| Current portion  of finance obligation on sale-leaseback                                                                                                                                                                 |       | 606                                                      |       | 569                   |       |
| Current portion  of long-term debt                                                                                                                                                                                       |       | 236                                                      |       | 224                   |       |
| Total current  liabilities                                                                                                                                                                                               |       | 30,281                                                   |       | 34,257                |       |
| Deferred revenue                                                                                                                                                                                                         |       | 6,219                                                    |       | 6,219                 |       |
| Deferred gain on  sale-leaseback                                                                                                                                                                                         |       | 22,809                                                   |       | 23,778                |       |
| Capital lease  obligations, net of current portion                                                                                                                                                                       |       | 748                                                      |       | 2,202                 |       |
| Finance  obligation on sale-leaseback, net of current portion                                                                                                                                                            |       | 23,837                                                   |       | 24,145                |       |
| Long-term debt,  net of current portion                                                                                                                                                                                  |       | 213,552                                                  |       | 211,257               |       |
| 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 shares; Issued and outstanding:  61,850,584 and 61,849,584, respectively, at June 30, 2008; Issued and  outstanding: 61,745,072, at December 31, 2007 |       | 62                                                       |       | 62                    |       |
| Additional paid-in  capital                                                                                                                                                                                              |       | 491,753                                                  |       | 488,963               |       |
| Notes receivable                                                                                                                                                                                                         |       | (2,456                                                   | )          | (2,536                | )          |
| Accumulated  deficit                                                                                                                                                                                                     |       | (676,233                                                 | )          | (631,214              | )          |
| Accumulated  other comprehensive income (loss)                                                                                                                                                                           |       | 50                                                       |       | (925                  | )          |
| Treasury stock,  1,000 and 0 shares stated at cost at June 30, 2008 and December 31,  2007, respectively                                                                                                       |       | (5                                                       | )          | —                |       |
| Total  stockholders’ deficit                                                                                                                                                                                        |       | (186,829                                                 | )          | (145,650              | )          |
| Total  liabilities and stockholders’ deficit                                                                                                                                                                        |       | $                                                        | 110,617    |                  | $          | 156,208 |   |

 

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

 

2

----

Tableof Contents

 

**deCODEgenetics, Inc.**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

(Unaudited)

 
| ** **                                                     | ** ** | **Three Months Ended  June 30,**                       | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                     | ** ** | **2008**                                                              | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                     | ** ** | **(In thousands, except per share amounts)** | ** ** |
|                                                           |       |                                                                  |       |                                          |       |   |   |   |   |
| Revenue                                                        |       | $                                                                     | 15,026     |                                          | $          | 7,614 |   | $ | 30,004 |   | $ | 16,168 |   |
| Operating expenses:                                            |       |                                                                  |       |                                          |       |   |   |   |   |
| Cost of revenue.                                               |       | 13,432                                                                |       | 9,156                                         |       | 28,146 |   | 20,074 |   |
| Research and  development                                      |       | 7,964                                                                 |       | 14,528                                        |       | 20,617 |   | 27,204 |   |
| Selling, general  and administrative                           |       | 7,146                                                                 |       | 6,795                                         |       | 14,357 |   | 12,325 |   |
| Total operating  expenses                                      |       | 28,542                                                                |       | 30,479                                        |       | 63,120 |   | 59,603 |   |
| Operating loss                                                 |       | (13,516                                                               | )          | (22,865                                       | )          | (33,116 | ) | (43,435 | ) |
| Interest income                                                |       | 452                                                                   |       | 1,518                                         |       | 1,489 |   | 3,509 |   |
| Interest expense                                               |       | (4,120                                                                | )          | (3,803                                        | )          | (8,145 | ) | (7,469 | ) |
| Other non-operating  income and (expense), net                 |       | (1,170                                                                | )          | 8,922                                         |       | (5,247 | ) | 8,542 |   |
| Net loss                                                       |       | $                                                                     | (18,354    | )                                             | $          | (16,228 | ) | $ | (45,019 | ) | $ | (38,853 | ) |
| Basic and  diluted net loss per share                          |       | $                                                                     | (0.30      | )                                             | $          | (0.27 | ) | $ | (0.73 | ) | $ | (0.64 | ) |
| Shares used in  computing basic and diluted net loss per share |       | 61,371                                                                |       | 61,005                                        |       | 61,318 |   | 60,977 |   |

 

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

 

3

----

Tableof Contents

 

**deCODEgenetics, Inc.**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

(Unaudited)

 
| ** **                                                                   | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
| ** **                                                                   | ** ** | **(In thousands)**                           | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                       |       |                                              |       |   |   |
| Net loss                                                                     |       | $                                                 | (45,019    | ) | $ | (38,853 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                                              |       |   |   |
| Depreciation and  amortization                                               |       | 3,020                                             |       | 3,061 |   |
| Amortization of  deferred gain on sale-leaseback of real estate              |       | (969                                              | )          | (969 | ) |
| Stock-based  compensation                                                    |       | 2,029                                             |       | 2,895 |   |
| Loss on  investments                                                         |       | 5,107                                             |       | — |   |
| Foreign currency  translation                                                |       | 59                                                |       | 3 |   |
| Amortization of  debt discount                                               |       | 2,416                                             |       | 2,354 |   |
| Amortization of  deferred financing costs                                    |       | 815                                               |       | 798 |   |
| Changes in  operating assets and liabilities:                                |       |                                              |       |   |   |
| Receivables and  other assets                                                |       | (2,099                                            | )          | (3,899 | ) |
| Accounts  payable, accrued expenses and other current liabilities            |       | (3,095                                            | )          | (1,658 | ) |
| Deferred revenue                                                             |       | (246                                              | )          | 5,320 |   |
| Net cash used in  operating activities                                       |       | (37,982                                           | )          | (30,948 | ) |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                       |       |                                              |       |   |   |
| Purchase of  investments                                                     |       | (5,500                                            | )          | (101,280 | ) |
| Sale of  investments                                                         |       | 10,000                                            |       | 138,188 |   |
| Purchase of  property and equipment                                          |       | (770                                              | )          | (1,156 | ) |
| Change in  restricted cash and investments                                   |       | —                                            |       | (275 | ) |
| Proceeds from  sale of property and equipment                                |       | —                                            |       | 238 |   |
| Net cash  provided by investing activities                                   |       | 3,730                                             |       | 35,715 |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                       |       |                                              |       |   |   |
| Proceeds from  issuance of common stock                                      |       | 172                                               |       | 52 |   |
| Repayment of  notes receivable for common stock                              |       | 75                                                |       | 20 |   |
| Proceeds from  property and equipment financing, net of transaction costs    |       | —                                            |       | 23,830 |   |
| Repayments of  debt, capital lease and finance obligations                   |       | (1,929                                            | )          | (6,793 | ) |
| Net cash (used  in) provided by financing activities                         |       | (1,682                                            | )          | 17,109 |   |
| Net (decrease)  increase in cash and cash equivalents                        |       | (35,934                                           | )          | 21,876 |   |
| Cash and cash  equivalents at beginning of period                            |       | 54,172                                            |       | 21,882 |   |
| Cash and cash  equivalents at end of period                                  |       | $                                                 | 18,238     |   | $ | 43,758 |   |
| Supplemental  cash flow information:                                         |       |                                              |       |   |   |
| Cash paid for  interest                                                      |       | $                                                 | 4,929      |   | $ | 4,342 |   |
| Supplemental  schedule of non-cash transactions:                             |       |                                              |       |   |   |
| Cancellation of  notes receivable and forfeiture of common stock             |       | $                                                 | —     |   | $ | 61 |   |

 

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

 

4

----

Tableof Contents

 

**deCODEgenetics, Inc.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS (UNAUDITED)**

(tabular amountsin thousands, except share and per share amounts)

 

 

**1.       Organization and Business**

 

References in these financial statements to deCODErefer to deCODE genetics, Inc., a Delaware company, and deCODE genetics, Inc.’swholly-owned subsidiary, Islensk erfdagreining ehf., an Icelandic companyregistered in Reykjavik, and its subsidiaries, as well as deCODE genetics, Inc.’swholly-owned subsidiary, MediChem Life Sciences, Inc., a Delawarecorporation, and its subsidiaries.

 

Into 2008, deCODE’s focusremains within the same broad strategic continuity, emphasizing its corecapabilities in human genetics and leveraging those assets to build upon thecommercial opportunities presented by deCODE’s diagnostics work and deCODEme.With near-term value creation in mind, deCODE’s core focus in 2008 is towardsbuilding its genomic services business (which includes diagnostics, deCODEmeand scientific services). At the same time, deCODE aims to advance itstherapeutics programs through partnerships and then advance its earlypreclinical programs both through partnerships and resources it may be able togenerate from its diagnostics business.

 

At June 30, 2008, deCODE had $49.4 million ofcash, cash equivalents and investments, comprised of $18.2 million of cash andcash equivalents, $5.5 million of current investments in U.S. Treasury Bills,$20.6 million of non-current investments in auction rate securities, and $5.1million in restricted cash equivalents. As deCODE advances its genomic servicesbusinesses and therapeutics programs it will require significant furtherfinancial resources. In 2008, management of deCODE has taken steps to slim downelements of deCODE’s broad capabilities to focus its remaining resources.Management of deCODE continues to analyze non-core elements of deCODE’soperations and seek efficiencies throughout the organization. Further, deCODEmanagement is investigating avenues of financing beyond collaborations andlicensing arrangements, such as sales of assets, further public or privateequity offerings, additional debt financing and other forms of financing.However, no assurance can be given that additional financing or collaborationsand licensing arrangements will be available when needed, or that if available,will be obtained on favorable terms. If adequate funds are not available whenneeded, deCODE may have to curtail operations or attempt to raise funds onunattractive terms.

 

**2.       Basis of Presentation**

 

In the opinion of deCODE’smanagement, the accompanying unaudited condensed consolidated financialstatements contain all adjustments (consisting of items of a normal andrecurring nature) necessary to present fairly the financial position as of June 30,2008, the results of operations for the three and six-month periods ended June 30,2008 and 2007 and cash flows for the six-month periods ended June 30, 2008and 2007. The results of operations for the three and six-month periodsended June 30, 2008 are not necessarily indicative of the results to beexpected for the full year. These financial statements should be read inconjunction with deCODE’s Annual Report on Form 10-K for the year ended December 31,2007, which includes consolidated financial statements and notes thereto forthe years ended December 31, 2007, 2006 and 2005.

 

**3.       Revenue**

 

Significant elements of deCODE’s revenue aresummarized as follows:

 
| ** **                                       | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                       | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                       | ** ** | **(In thousands)**                         | ** ** |
| Genomic services                                 |       | $                                               | 5,120      |                                          | $          | 982 |   | $ | 9,996 |   | $ | 2,086 |   |
| Research funding  and other service fees         |       | 4,678                                           |       | 3,816                                         |       | 9,230 |   | 7,326 |   |
| Government  research contracts and grant funding |       | 4,653                                           |       | 2,324                                         |       | 9,528 |   | 5,684 |   |
| Milestone  payments and other                    |       | 575                                             |       | 492                                           |       | 1,250 |   | 1,072 |   |
| Total revenue                                    |       | $                                               | 15,026     |                                          | $          | 7,614 |   | $ | 30,004 |   | $ | 16,168 |   |

 

During the three and six-monthperiods ended June 30, 2008, deCODE performed services totaling $34,000and $129,000 for employers of members of deCODE’s Board of Directors. Duringthe three and six-month periods ended June 30, 2007, deCODE performedservices totaling $3,000 and $124,000 for employers of members of deCODE’sBoard of Directors.

 

5

----

Tableof Contents

 

**4.****       Cost of Revenue**

 

Our cost of revenueconsists of the costs of services provided to customers and collaborators andthe costs of programs under research contracts and grants, including: (i) theentirety of the costs incurred in connection with programs that have beenpartnered and on which we receive research funding; (ii) costs associatedwith other service fee revenues; and (iii) the total amount of those costsincurred in connection with discovery and development work performed underresearch contracts and grants.

 

Significant elements of deCODE’s revenue and cost ofrevenue are summarized as follows:

 
| ** **                                             | ** ** | **Three Months Ended June 30,** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                             | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| ** **                                             | ** ** | **Revenue**                                         | ** ** | **Cost of  Revenue** | ** ** | **Net** | ** ** | **Revenue** | ** ** | **Cost of  Revenue** | ** ** | **Net** | ** ** |
| ** **                                             | ** ** | **(In thousands)**                             | ** ** |
| Genomic  services, research funding and other services |       | $                                                   | 10,373     |   | $ | 7,731 |   | $ | 2,642 |   | $ | 5,290 |   | $ | 5,432 |   | $ | (142 | ) |
| Government  research contracts and grant funding       |       | 4,653                                               |       | 5,701 |   | (1,048 | ) | 2,324 |   | 3,724 |   | (1,400 | ) |
| Total                                                  |       | $                                                   | 15,026     |   | $ | 13,432 |   | $ | 1,594 |   | $ | 7,614 |   | $ | 9,156 |   | $ | (1,542 | ) |

 
| ** **                                             | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                             | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
| ** **                                             | ** ** | **Revenue**                                       | ** ** | **Cost of  Revenue** | ** ** | **Net** | ** ** | **Revenue** | ** ** | **Cost of  Revenue** | ** ** | **Net** | ** ** |
| ** **                                             | ** ** | **(In thousands)**                           | ** ** |
| Genomic  services, research funding and other services |       | $                                                 | 20,476     |   | $ | 15,858 |   | $ | 4,618 |   | $ | 10,484 |   | $ | 11,140 |   | $ | (656 | ) |
| Government  research contracts and grant funding       |       | 9,528                                             |       | 12,288 |   | (2,760 | ) | 5,684 |   | 8,934 |   | (3,250 | ) |
| Total                                                  |       | $                                                 | 30,004     |   | $ | 28,146 |   | $ | 1,858 |   | $ | 16,168 |   | $ | 20,074 |   | $ | (3,906 | ) |

 

**5.****       Research and Development**

 

deCODE’s research anddevelopment expense consists of the costs of its own proprietary programs,comprised of the following:

 
| ** **                                             | ** ** | **Three Months Ended  June 30,** | ** **  | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------|------------|-------------------------------------------------|-------------|-----------------------------------------------|------------|
| ** **                                             | ** ** | **2008**                                        | ** **  | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                             | ** ** | **(In thousands)**                         | ** **  |
| Salaries and other personnel costs |       | $                                               |  3,941 |                                          | $          |  5,138 |   | $ |  8,754 |   | $ |  9,801 |   |
| Materials and  supplies                                |       | 1,142                                           |        | 3,558                                         |       | 4,024 |   | 6,230 |   |
| Contractor  services and other third party costs       |       | 1,084                                           |        | 3,350                                         |       | 3,408 |   | 6,049 |   |
| Overhead expenses                                      |       | 956                                             |        | 1,381                                         |       | 2,346 |   | 2,829 |   |
| Depreciation and  amortization                         |       | 489                                             |        | 626                                           |       | 1,403 |   | 1,348 |   |
| Stock-based  compensation                              |       | 352                                             |        | 475                                           |       | 682 |   | 947 |   |
| Total                                                  |       | $                                               | 7,964       |                                          | $          | 14,528 |   | $ | 20,617 |   | $ | 27,204 |   |

 

**6.****      Stock-Based Compensation**

 

     In May 2008, deCODE amended its 2006Equity Incentive Plan to increase the number of shares of common stock that maybe subject to awards thereunder to 10,000,000 shares.

 

   Stock-based compensation included in deCODE’sresults of operations as follows:

 
| ** **                           | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                           | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                           | ** ** | **(In thousands)**                         | ** ** |
| Operating  Expenses:                 |       |                                            |       |                                          |       |   |   |   |   |
| Cost of revenue                      |       | $                                               | 115        |                                          | $          | 131 |   | $ | 250 |   | $ | 252 |   |
| Research and  development            |       | 352                                             |       | 475                                           |       | 682 |   | 947 |   |
| Selling, general  and administrative |       | 510                                             |       | 827                                           |       | 1,097 |   | 1,696 |   |
| Total                                |       | $                                               | 977        |                                          | $          | 1,433 |   | $ | 2,029 |   | $ | 2,895 |   |

 

6

----

Tableof Contents

 

     As of June 30, 2008 there was approximately$7,571,000 of total unrecognized compensation expense related to nonvestedstock options. This expense is expected to be recognized over aweighted-average period of approximately 2.7 years.

 

     deCODE calculated the fair value of eachoption award on the date of grant using the Black-Scholes option pricing model.The following weighted average assumptions were used:

 
| ** **                | ** ** | **Six-Months Ended June 30,** | ** ** |
|---------------------------|------------|----------------------------------------------|------------|
| ** **                | ** ** | **2008**                                     | ** ** | **2007** | ** ** |
|                      |       |                                         |       |   |   |
| Dividend yield            |       | 0                                            | %          | 0 | % |
| Expected  volatility      |       | 63.6                                         | %          | 64.9 | % |
| Expected term  (in years) |       | 5.4                                          |       | 5.5 |   |
| Risk-free  interest rate  |       | 2.8                                          | %          | 4.5 | % |

 

     deCODE estimates the expected term of theoptions based on historical patterns by employees with respect to exercise andpost vesting employment termination behaviors. deCODE’s expected volatility iscalculated using a weighted average of the volatility over a period equal tothe expected term of the award and the most recent one year volatility. deCODEbases the risk-free interest rate used on the implied rate currently availableon the U.S. Treasury zero-coupon issues with a comparable term. As deCODE doesnot pay dividends, the dividend variable rate is zero.

 

     The following table summarizes stockoption activity for the six-months ended June 30, 2008:

 
| ** **                                         | ** ** | **Number  of Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|----------------------------------------------------|------------|----------------------------|------------|----------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                         | ** ** | ** **                 | ** ** | ** **                             | ** ** | **(In years)**                                 | ** ** | **(In Thousands)**             | ** ** |
| Outstanding at  January 1, 2008               |       | 7,773,559                  |       | $                                      | 6.19       |                                                |       |                                |       |   |
| Granted                                            |       | 1,130,000                  |       | 2.75                                   |       |                                                |       |                                |       |
| Exercised                                          |       | (2,500                     | )          | 2.11                                   |       |                                                |       |                                |       |
| Forfeited/cancelled                                |       | (219,050                   | )          | 6.46                                   |       |                                                |       |                                |       |
| Outstanding at  June 30, 2008                 |       | 8,682,009                  |       | $                                      | 5.74       |                                                | 7.17       |                                | $          | 0 |   |
| Vested and  expected to vest at June 30, 2008 |       | 8,384,548                  |       | $                                      | 5.80       |                                                | 6.70       |                                | $          | 0 |   |
| Exercisable at  June 30, 2008                 |       | 5,288,999                  |       | $                                      | 7.02       |                                                | 6.13       |                                | $          | 0 |   |

 

    deCODE’s Equity Incentive Plans allow forthe issuance of restricted stock awards that may not be sold or otherwisetransferred until certain restrictions have lapsed. The unearned stock-basedcompensation related to these awards is amortized to compensation expense overthe period the restrictions lapse. The stock-based compensation expense forthese awards is determined based on the market price of our stock at the dateof the grant applied to the total numbers of shares that are anticipated tofully vest and then amortized over the vesting period. During the three andsix-months ended June 30, 2008, deCODE recognized expense related torestricted stock grants of $53,000 and $98,000, respectively. During the threeand six-months ended June 30, 2007, deCODE recognized expense related torestricted stock grants of $53,000 and $105,000, respectively. At June 30,2008, deCODE had 85,592 unvested restricted shares with a weighted averagegrant date fair value of $5.98.

 

**7.****       Net Loss Per Share**

 

Basic net loss per share is computed using net lossavailable to common stockholders and the weighted-average number of commonshares outstanding. The weighted-average number of common shares outstandingduring the period is the number of shares determined by relating the portion oftime within a reporting period that common shares have been outstanding to thetotal time in that period.

 

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

 

7

----

Tableof Contents

 
| ** **                                                                                            | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                                                            | ** ** | **2008**          | ** ** | **2007**          | ** ** |
| ** **                                                                                            | ** ** | **(Shares)**      | ** ** | **(Shares)**      | ** ** |
| Warrants to  purchase shares of common stock                                                          |       | 455,965           |       | 856,371           |       |
| Options to  purchase shares of common stock                                                           |       | 8,682,009         |       | 7,492,496         |       |
| Restricted  shares subject to vesting or with an associated outstanding non-recourse  promissory note |       | 471,092           |       | 699,738           |       |
| Convertible  shares issuable upon conversion of 3.5% senior convertible notes                         |       | 16,428,572        |       | 16,428,572        |       |
|                                                                                                  |       | 26,037,638        |       | 25,477,177        |       |

 

**8.****     ****Othernon-operating income and (expense), net**

 

During the three and six month periods ended June 30, 2008, deCODErecognized an other-than-temporary-loss on investments in auction ratesecurities (See Note 10). Although the auction rate securities continue to payinterest according to their stated terms, based on valuation models and ananalysis of other-than-temporary impairment factors, deCODE recorded animpairment charge of $1,072,000 and $5,107,000 for the three and six-monthperiods ended June 30, 2008.

 

In June 2007, deCODE entered into a legal settlement to endongoing litigation regarding certain proprietary and confidential information.Financial terms of the legal settlement stipulated that deCODE would be paid$9,000,000, which was received by deCODE during the year ended December 31,2007. deCODE recognized the $9,000,000 during the three and six-months ended June 30,2007, net of related expenses of $41,000 and $646,000, respectively.

 

**9.****       Comprehensive Income**

 

Comprehensive incomegenerally represents all changes in stockholders’ equity except those resultingfrom investments or contributions by stockholders. Amounts reported in othercomprehensive income include foreign currency translation adjustments,derivative financial instruments designated and effective as hedges ofunderlying foreign currency denominated transactions, and unrealized gains andlosses associated with investments. The following table presents thecalculation of comprehensive income (loss):

 
| ** **                                                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                    | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                    | ** ** | **(In thousands)**                         | ** ** |
| Net loss                                                      |       | $                                               | (18,354    | )                                             | $          | (16,228 | ) | $ | (45,019 | ) | $ | (38,853 | ) |
| Other  comprehensive income (loss):                           |       |                                            |       |                                          |       |   |   |   |   |
| Foreign currency  translation                                 |       | 9                                               |       | (8                                            | )          | 59 |   | (22 | ) |
| Unrealized gain  (loss) associated with marketable securities |       | 4                                               |       | 4                                             |       | 916 |   | 25 |   |
| Total comprehensive  loss                                     |       | $                                               | (18,341    | )                                             | $          | (16,232 | ) | $ | (44,044 | ) | $ | (38,850 | ) |

 

**10.****    Investments**

 

deCODE’s marketablesecurities are classified as available for sale and are as follows:

 
| ** **                                         | ** ** | **Cost**                | ** ** | **Carrying  Value** | ** ** | **Unrealized  Gains (Losses)  In OCI** | ** ** |
|----------------------------------------------------|------------|-------------------------|------------|---------------------|------------|--------------------------------------------------|------------|
| ** **                                         | ** ** | **(In thousands)** | ** ** |
| **June 30,  2008**                            |       |                    |       |                |       |                                             |       |
|                                               |       |                    |       |                |       |                                             |       |
| U.S. Treasury  Bills (cash and cash equivalents)   |       | $                       | 12,163     |                | $          | 12,162                                           |       | $ | (1 | ) |
| U.S. Treasury  Bills (current investments)         |       | 5,500                   |       | 5,505               |       | 5                                                |       |
| Auction rate  securities (non-current investments) |       | 33,500                  |       | 20,640              |       | —                                           |       |
|                                                    |            |                         |            |                     |            |                                                  |            |  |  |  |

 

Gross unrealized holdinggains and gross unrealized holding losses at June 30, 2008 were $5,000 and$1,000, respectively, and at December 31, 2007 were $3,000 and $914,000,respectively, and are included in accumulated other comprehensive income.

 

8

----

Tableof Contents

 
| ** **                                          | ** ** | **June 30,  2008** | ** ** |
|-----------------------------------------------------|------------|-------------------------|------------|
| ** **                                          | ** ** | **(In thousand)**  | ** ** |
| Contractual  maturities of non-current investments: |       |                    |       |
| Maturing after  10 years                            |       | $                       | 13,073     |   |
| No maturity date  (perpetual)                       |       | 7,567                   |       |
|                                                |       | $                       | 20,640     |   |

 

At June 30, 2008,deCODE held investments in Auction Rate Securities (“ARS”) with originalpurchase principal values totaling $33,500,000, all of which are classified asnon-current investments on the balance sheet. As of December 31, 2007,deCODE had $38,500,000 invested in ARS, of which $33,500,000 were classified asnon-current and $5,000,000 as current investments. Through the auction processdeCODE reduced its ARS holdings during the six-months ended June 30, 2008by selling, at par value, the $5,000,000 ARS security classified in currentinvestments at December 31, 2007.

 

The non-currentinvestments in ARS held by deCODE are private placement securities withlong-term nominal maturities for which the interest rates are reset through aDutch auction process at pre-determined calendar intervals, generally eachmonth. This mechanism generally allows existing investors to rollover theirholdings and continue to own their respective securities or liquidate theirholdings by selling their securities at par value. deCODE generally invested inthese securities for short periods of time as part of its cash managementprogram. However, the recent uncertainties in the credit markets have preventeddeCODE and other investors from liquidating holdings of its remaining ARS inrecent auctions because the amount of securities submitted for sale hasexceeded the amount of purchase orders resulting in multiple failed auctions.

 

The estimated market value of deCODE’s non current investments in ARSat June 30, 2008 was $20,640,000, which reflects a $12,860,000 adjustmentto the principal value of $33,500,000. Although the ARS continue to payinterest according to their stated terms, based on valuation models and ananalysis of other-than-temporary impairment factors, deCODE has recorded animpairment charge of $1,072,000 and $5,107,000 for the three and six-monthperiods ended June 30, 2008, respectively, in Other non-operating income(expense), net in the Statements of Operations, reflecting the portion of ARSholdings that deCODE has concluded have an other-than-temporary decline invalue. The $5,107,000 charge for the six-month period ended June 30, 2008includes $914,000 related to ARS which deCODE had previously recognized astemporary and had accounted for as an unrealized loss at December 31,2007.

 

The credit and capitalmarkets have continued to be volatile into 2008. If uncertainties in thesecredit and capital markets continue, these markets deteriorate further or deCODEexperiences additional downgrades on its investments, deCODE may incuradditional impairments (unrealized, even realized) to its investment portfolio,which could negatively affect our financial condition, cash flows and reportedearnings.

 

**11.****    Sale-Leaseback Financing**

 

In June 2007, deCODEcompleted a sale and leaseback of its property (land and building)in Woodridge, Illinois. Pursuant to the agreement, deCODE sold theWoodridge property for $25,000,000 in cash and leased the property back under a17 year lease at an initial rent of $163,000 per month, subject to annual rentincreases of 2.5%. Under the lease, deCODE has two 5-year renewal options withrent at the then prevailing market rate. The lease is an absolute net lease anddeCODE will continue to pay all expenses relating to the property, includingtaxes, utilities, insurance and maintenance. deCODE’s obligations under thelease 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 creditis collateralized by cash equivalents held in a restricted investment account($5,050,000 at June 30, 2008).

 

The sale and leaseback of the Woodridge property isbeing accounted for as a financing, as such, the property remains on thebalance sheet and continues to be depreciated through the lease term. Proceedson the sale have been recorded on the balance sheet as a finance obligation anda portion of the rental payments under the lease will be applied, using theeffective interest method, to reduce the finance obligation over the term ofthe lease, with the remainder of the rental payments being recorded as interestexpense. Transaction costs amounting to $1,170,000 have been deferred andincluded in other long term assets on the condensed consolidated balance sheetsand will be amortized to interest expense over the term of the lease, using theeffective interest method.

 

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

 

**12.****     Litigation**

 

Other than claims and legal proceedings that arisefrom 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 reportedin deCODE’s Annual Report on Form 10-K for the year ended December 31,2007.

 

9

----

Table ofContents

 

In the matter of In re deCODE genetics, Inc.Initial Public Offering, which is described in deCODE’s Annual Report on Form 10-Kfor the year ended December 31, 2007, on June 25, 2007, the UnitedStates District Court for the Southern District of New York entered an orderformally denying the motion for final approval of the settlement agreementbecause the settlement class could not be certified. On August 14, 2007,the plaintiffs filed their second consolidated amended class action complaintsagainst the “focus cases” and on September 27, 2007, again moved for classcertification, seeking certification of three separate classes. The focus casesare a small group of cases that were selected as test cases due to the largenumber of nearly identical actions which were consolidated in the InitialPublic Offering litigation. The court has indicated that the focus cases areintended to provide strong guidance for the other cases. The case involvingdeCODE is not a focus case. On November 12, 2007, certain of thedefendants in the focus cases moved to dismiss the second consolidated amendedclass action complaints. On March 26, 2008, the district court denied themotions to dismiss except as to Section 11 claims raised by thoseplaintiffs who sold their securities for a price in excess of the initialpublic offering price and those who purchased outside the previously certifiedclass period. Briefing on the class certification motion was completed in May 2008.On December 28, 2007, the underwriter defendants moved to strike classallegations in 26 cases in which the Plaintiffs failed to identify proposedclass representatives, and the issuer defendants joined in the motion. On May 13,2008, the District Court granted the motion in part in eight of the 26 cases,striking the class allegations as to one of the three classes because theproposed class representatives were not a member of the proposed classes. Thecase against deCODE is one of these eight cases. Due to the inherentuncertainties of litigation, deCODE cannot accurately predict the ultimateoutcome of the matter.

 

**13.****    Fair Value Measurement**

 

On September 6, 2006, Statement of Financial Standard No. 157*Fair Value Measurement*, (“SFAS 157”),was issued. This Standard defines fair value, establishes a framework formeasuring fair value in generally accepted accounting principles, or GAAP, andexpands disclosures about fair value measurements. This standard is effective January 1,2008 for deCODE. In February 2008, the FASB issued FASB Statement ofPosition, (“FSP”) No. 157-2, *Partial Deferral of theEffective Date of Statement 157*, (“FSP No. 157-2”), whichdelays the effective date of SFAS No. 157 for all non-financial assets andnon-financial liabilities, except those that are recognized or disclosed atfair value in the financials statements on a recurring basis (at leastannually) to fiscal years beginning after November 15, 2008. deCODEadopted SFAS 157 as of January 1, 2008, with the exception of theapplication of the statement to nonfinancial assets and nonfinancial liabilities.The adoption of FAS 157 did not have a material impact on deCODE’s consolidatedfinancial statements. deCODE is evaluating the impact on the non-financialassets and liabilities.

 

**Valuation Hierarchy.** SFAS 157establishes a valuation hierarchy for disclosure of the inputs to valuationused to measure fair value. This hierarchy prioritizes the inputs into threebroad levels as follows. Level 1 inputs are quoted prices (unadjusted) inactive markets for identical assets or liabilities. Level 2 inputs are quotedprices for similar assets and liabilities in active markets or inputs that areobservable for the asset or liability, either directly or indirectly throughmarket corroboration, for substantially the full term of the financialinstrument. Level 3 inputs are unobservable inputs based on assumptions used tomeasure assets and liabilities at fair value. A financial asset or liability’sclassification within the hierarchy is determined based on the lowest levelinput that is significant to the fair value measurement.

 

The following table provides the assets and liabilities carried at fairvalue measured on a recurring basis as of June 30, 2008:

 
| ** **               | ** ** | ** **                                              | ** ** | **Fair Value Measurements  at June 30, 2008 Using:** | ** ** |
|--------------------------|------------|---------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
| ** **               | ** ** | **Total  Carrying  Value at  June 30,  2008** | ** ** | **Quoted  prices in  active  markets  (Level 1)**                        | ** ** | **Significant  other  observable  inputs  (Level 2)** | ** ** | **Significant  unobservable  inputs  (Level 3)** | ** ** |
| ** **               | ** ** | **(In thousands)**                                 | ** ** |
| Auction rate  securities |       | $                                                       | 20,640     |                                                                               | $          | — |   | $ | — |   | $ | 20,640 |   |
| U.S. Treasury  Bills     |       | 17,667                                                  |       | 17,667                                                                             |       | — |   | — |   |
|                          |            |                                                         |            |                                                                                    |            |  |  |  |  |  |  |  |  |

 

The following table presents deCODE’s assets measured at fair value ona recurring basis using significant unobservable inputs (Level 3) at June 30,2008:

 
| ** **                              | ** ** | **Auction Rate Securities**                 | ** ** |
|-----------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                              | ** ** | **Three Months  Ended  June 30, 2008** | ** ** | **Six Months  Ended  June 30, 2008** | ** ** |
| ** **                              | ** ** | **(In thousands)**                               | ** ** |
| Balance at  beginning of period         |       | $                                                     | 21,712     |   | $ | 24,833 |   |
| Transfers to  Level 3                   |       | —                                                |       | — |   |
| Total gains  (losses):                  |       |                                                  |       |   |   |
| Included in  earnings                   |       | (1,072                                                | )          | (5,107 | ) |
| Included in  other comprehensive income |       | —                                                |       | 914 |   |
| Purchase and  settlements (net)         |       | —                                                |       | — |   |
| Balance at  June 30, 2008          |       | $                                                     | 20,640     |   | $ | 20,640 |   |

 

10

----

Tableof Contents

 

**        Valuation Techniques.**deCODE’s investments in auction rate securities at June 30,2008 did not have quoted market prices and are classified within Level 3 of thevaluation hierarchy. The valuation models used to value the ARS include thosethat are based on expected cash flow streams and collateral values, includingassessments of counterparty credit quality, default risk underlying thesecurity, discount rates and overall capital market liquidity. The valuation ofdeCODE’s investments in ARS is subject to uncertainties that are difficult topredict. Factors that may impact the valuation include changes in creditratings of the securities or their guarantors, underlying collateral value,discounts rates, counterparty risk and ongoing strength and quality of marketcredit and liquidity.

 

        Effective January 1, 2008, deCODEadopted, on a prospective basis, Statement of Financial Accounting Standards No. 159,*The Fair Value Option for Financial Assetsand Financial Liabilities*(“SFAS 159”). SFAS 159 permits entities tochoose to measure many financial instruments and certain other items at fairvalue. The objective of the guidance is to improve financial reporting byproviding entities with the opportunity to mitigate volatility in reportedearnings caused by measuring related assets and liabilities differently withouthaving to apply complex hedge accounting provisions. deCODE has not elected thefair value option for any financial instruments. The adoption of SFAS 159 didnot have a material impact on deCODE’s consolidated financial statements.

 

**14.****    Subsequent Event**

 

     On July 1, 2008, deCODE sold itsEncode subsidiary (“Encode”) located in Iceland to a related party (anemployee) for a nominal amount (100,000 ISK or $1,000 at June 30, 2008). The sale of Encode included the remainder of existingcontracts at the date of the sale, immaterial assets and all the employeesassociated with Encode. For the three and six-month periods ended June 30,2008, Encode had revenues of $362,000 and $717,000, respectively, and operatingexpenses of $766,000 and $1,562,000, respectively. For the year ended December 31,2007, Encode had revenues and operating expense of $795,000 and $2,924,000,respectively.

 

11

----

Tableof Contents

 

** ****ITEM 2.****    ****MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

This Management’sDiscussion and Analysis of Financial Condition and Results of Operations as of June 30,2008 and for the three and six-month periods ended June 30, 2008 and 2007should be read in conjunction with the unaudited condensed consolidatedfinancial statements and notes thereto set forth in Item 1 of this report.

 

 This quarterlyreport on Form 10-Q contains forward-looking statements, including ourexpectations of future industry conditions, strategic plans and forecasts ofoperational results. Various risks may cause our actual results to differmaterially. A list and description of some of the risks and uncertainties iscontained below and in the summary of risk factors that follow in Part II,Item 1A.

 

**Overview**

 

Headquartered inReykjavik, Iceland, deCODE is a biopharmaceutical company applying itsdiscoveries in human genetics to DNA-based diagnostic tests, consumer geneticanalysis services, and drugs for common diseases. Our population approach andresources enable us to isolate genes and drug targets directly involved in thedevelopment of many of the diseases which pose the biggest challenges to publichealth. We are turning these discoveries into a growing pipeline of diagnostictests and therapeutics taking aim at the causes of disease, not just the signsand symptoms. As these diseases are common and current therapies are of limitedeffectiveness, we believe that our strategy represents a significantopportunity to create better medicine with major potential — both near- andlonger-term — in the global marketplace.

 

We believe that deCODE’sadvantage derives from our population approach to human genetics and theability to apply this approach directly to diagnostic and drug development. InIceland, we have comprehensive population resources and one of the largestgenotyping facilities in the world, enabling our scientists to isolate keygenes and gene variants contributing to common diseases. The proteins encodedby these genes and other proteins with which they interact in the diseasepathway offer drug targets that we believe are directly involved in the onsetand progression of disease. Our work indicates that these genes confer risk byincreasing or decreasing the activity of common biological pathways, placingindividuals on a spectrum of risk that encompasses the population as a whole.Small-molecule drugs that can modulate the activity of the pathway in questionmay therefore have broad potential utility, not only to those at highest riskbut perhaps also to those at average risk, which in the common diseases may beunacceptably high. Moreover, these pathways often provide biomarkers that canbe used to assess the efficacy of a compound from preclinical to mid-stageclinical testing. Similarly, we can develop diagnostic products for diseases byisolating key genes and gene variants linked to those diseases.

 

*Diagnostics*. We areapplying our discoveries and unique expertise in human genetics and genotypingto our molecular diagnostics. Since April 2007 to date we have launchedfive reference laboratory DNA-based diagnostic tests to detect geneticvariations that we have linked to increased risk of several common diseases:

 

·      *deCODE T2*TM- which detects a gene variant we discovered to be associated with increasedrisk of type 2 diabetes.

·      *deCODE AFTM*- which detects a gene variant we discovered to be associated with increasedrisk of atrial fibrillation and stroke

·      *deCODE MITM*- which detects a gene variant which is associated with early-onset heartattack, (myocardial infarction, or MI)

·      *deCODEProCaTM* - which detects eight genetic variants we have linked toincreased risk of various types of prostate cancer

·      *deCODEGlaucomaTM* -**which detectsthree genetic variants we have linked to increased risk of exfoliation glaucoma

 

Such tests can be employed as an aid in developing more effectivedisease prevention strategies by helping individuals to better understand theirinherited risk of a given condition, as well as to identify patients likely torespond well to a given drug. Beginning in 2008, deCODE initiated billing toinsurance companies and has received reimbursement from several healthinsurance companies. All of our diagnostic tests are offered by deCODE viadirect sales efforts to physicians through our sales force in the UnitedStates; through marketing collaborations with other organizations in the U.S.and other countries; as well as through our dedicated diagnostics website,www.decodediagnostics.com. deCODE also has an alliance with Illumina, Inc.to develop DNA-based diagnostic kits utilizing deCODE’s gene discoveries inheart attack, type 2 diabetes and breast cancer and Illumina’s platform for SNPgenotyping.

 

*deCODEmeTM.* In November 2007,we launched the first consumer genetic analysis service: deCODEmeTM. Thisservice takes advantage of deCODE’s leadership in human genetics and itswhole-genome genotyping capabilities and is CLIA registered for analytical andclinical validation. Through deCODEmeTM, subscribers can put themselves in thecontext of the latest discoveries in genetics, learning what their own DNA saysabout their ancestry, certain physical traits, as well as whether they havegenetic variants that have been associated with higher or lower than averagerisk of a range of common diseases. This information is continually updated asnew discoveries are made, and is presented in subscribers’ secure individualweb pages. deCODEme is offered through a dedicated website, www.decodeme.com.

 

12

----

Tableof Contents

 

*DrugDevelopment*

 

Through our chemistry andstructural biology units, based in the United States, we are able to discovernovel small-molecule therapeutic compounds, take candidate compounds throughpre-clinical testing, and manufacture sufficient quantities for early-stageclinical trials. Our product development group, which has expertise in drug anddisease modeling, designs and implements our Phase 1 and Phase 2 clinicaltrials. We continue to actively explore out-licensing, co-development, andpartnering opportunities, and in certain programs have brought directly intoclinical trials compounds that address targets we have identified through ourgenetics research but which were originally developed by other companies forother indications. deCODE is actively exploring drug development partnershipsin its most advanced therapeutic programs, in order to spread risk and cost,and to focus resources on the advancement of its diagnostic and drug discoverywork and preclinical candidates.

 

Our lead drug developmentprograms include:

 

·      *DG041 for the prevention of arterial thrombosis.*DG041 isour novel, first-in-class antagonist of the EP3 receptor for prostaglandins E2,which we are developing as a next-generation oral anti-platelet therapy aimedat preventing arterial thrombosis without increasing bleeding time. In a PhaseII clinical trial and additional clinical pharmacology studies completed in2007, DG041 was shown to dramatically inhibit platelet aggregation as well asplatelet activation mediated specifically through vasodilator-stimulatedphosphoprotein (VASP), a biomarker useful for measuring platelet activity.These effects were concentration-dependent and were seen irrespective ofwhether patients were receiving concomitant therapy with aspirin. Importantly,we did not see an increase in bleeding time. During the second quarter of 2008,we completed a second clinical pharmacology study examining the impact of DG041on top of aspirin and Plavix TM, the results of which show thatDG041 blocks platelet aggregation and does not increase bleeding time whengiven alone, in combination with Plavix TM, or in combination withPlavixTM and aspirin. We are concurrently working on a controlled releaseformulation for DG041 and also continue to engage in partnering discussions.

 

·      *DG051 and DG031 for the prevention of heart attack.*In 2007we completed Phase I and Phase IIa clinical studies for DG051, our leukotrieneA4 hydrolase inhibitor being developed for the prevention of heart attack. ThePhase IIa study examined safety, tolerability and DG051’s impact on theproduction of leukotriene B4 (LTB4), the pro-inflammatory molecule produced bythe branch of the leukotriene pathway that deCODE’s gene discovery work haslinked to increased risk of heart attack. The results of our Phase I and PhaseIIa trials demonstrated that the compound is well-tolerated at all dose levelstested; has a pharmacokinetic profile suitable for once-a-day dosing; anddelivers dose-dependent reductions in LTB4 production in healthy subjects andheart patients alike. We have also successfully completed our reformulation ofDG031, our Phase III FLAP inhibitor also being developed for the prevention ofheart attack. Given the size and costs associated with pursuing a largecardiovascular indication, we are actively seeking a partner with whom to takethe next step in late stage clinical development of our leukotriene program.

 

·      *PDE4 inhibitors.*deCODE is conducting drug discovery work onits PDE4 program, the most advanced of its preclinical programs. It has beenwell-established that PDE4 inhibitors—a well-accepted target for a broad rangeof common diseases, including asthma, COPD, cognitive disorders and vasculardisease—have been difficult to clinically develop since a common side effect isemesis and nausea. Our platform has led to the development of several leadseries of compounds which demonstrated efficacy in a range of animalexperiments while avoiding the common side effect. We plan to file an IND thisyear on a compound from this program and are investigating partnershipopportunities for clinical development.

 

The goal of our businessstrategy is to maximize the creation of value from our human genetics, drugdiscovery, drug development and diagnostics work and to capture that value forthe company and its stockholders. Executing on our strategy – advancing andcapturing the value of our products while continuing our discovery work in abroad range of common diseases – requires us to spread risk and manage cost. Weare constantly evaluating the optimal balance between proprietary and partneredproduct development, the level of our investment in research and development,the deployment of cash resources for product development, and the financingenvironment.

 

As we invest inproprietary programs, we leverage our capabilities to provide services tofee-paying customers. We also receive contract and grant funding from variousgovernmental agencies. We have formed drug and other product developmentalliances. Our chemistry subsidiary provides drug discovery and contractmanufacturing services to fee-for-service customers, and our other serviceofferings include protein crystallography products and instruments through ourbiosystems subsidiary, as well as protein structure analysis contract servicesthrough our structural biology subsidiary; and DNA analysis services throughour genotyping laboratory in Reykjavik.

 

One of the main issuesconfronting big pharmaceutical companies is their lack of promising new drugsto treat major indications. As many leading brand-name drugs come off patentand face generic competition, developing successful new medicines will becomecritical for filling the gap. We believe that companies such as ours may bewell positioned to play an important role in filling the gap in the pipeline ofnew drugs, either alone or as partners of pharmaceutical companies.

 

We have derived revenuesprimarily from genomic services, research funding and other fees from ourservice customers, as well as 

 

13

----

Tableof Contents

 

from research grants.Milestone payments and upfront, exclusivity, technology-access andtechnology-development fees under our collaboration agreements constituteanother source of our revenues. Our expenses consist primarily of research anddevelopment expenses such as salaries and related employee costs, materials andsupplies, and contractor services.

 

We believe that ourongoing work in genetics, the advancement and marketing of our diagnosticprograms, and the conduct of clinical trials in our therapeutics programs willrequire significant ongoing expenditure. We anticipate incurring additional netlosses at least through the next several years as we work to develop and bringour products to market. We expect that our revenues and losses will fluctuatefrom quarter to quarter and that such fluctuations may be substantial,especially because progress in our scientific work and milestone payments thatare related to progress can fluctuate between quarters. We do not believe thatcomparisons of our quarter-to-quarter performance are a good indication offuture performance.

 

At June 30, 2008, wehad $49.4 million of cash, cash equivalents and investments, comprised of $18.2million of cash and cash equivalents, $5.5 million of current investments inU.S. Treasury bills, $20.6 million of non-current investments in auction ratesecurities, and $5.1 million of restricted cash equivalents. This balance is$44.7 million less than at December 31, 2007. As we advance geneticservices and our drug development pipeline we will require significantadditional capital for product development and so we will continue toinvestigate additional avenues of financing beyond collaborations and licensingarrangements, such as sales of assets, further public or private equityofferings, additional debt financing and other forms of financing. In additionto company-specific factors, our ability to obtain capital in the future willbe affected by conditions in the global financial markets and in thepharmaceutical industry. No assurance can be given that additional financing orcollaborations and licensing arrangements will be available when needed, orthat if available, will be obtained on favorable terms. If adequate funds arenot available when needed, we may have to curtail operations or attempt toraise funds on unattractive terms.

 

**Our product portfolio anddevelopment pipeline**

 

***     DNA-based risk-predictive diagnostic testsand consumer genome analysis***

 

     Wecurrently offer five DNA-based diagnostic tests for gauging individual risk ofseveral common diseases — all launched since the second quarter of 2007 — andhave several more such tests in development. We also offer a personal genomeanalysis service, deCODEmeTM. We are actively marketing these products and areseeking payor reimbursement for our diagnostic tests. These products and otherswe now have in development are listed in the table below. The predicted launchdates for those tests still in development are given only as a guide accordingto our current expectations for each program.

 
| **Indication**                                                           | ** ** | **Product**           | ** ** | **Launch date**          | ** ** | **Milestones / Highlights**                                                                                                                                                                                                                                                                                                               |
|--------------------------------------------------------------------------|------------|-----------------------|------------|--------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Type 2 diabetes                                                          |       | deCODE T2TM       |       | April 2007          |       | ·      High-risk  pre-diabetics receive earlier lifestyle and pharmacologic intervention  

·      Validated in more than 60 populations                                                                                                                                      |
| Atrial fibrillation/stroke                                               |       | deCODE AFTM       |       | July 2007           |       | ·      Post-stroke/TIA patients at risk of AF  to obtain additional cardiac monitoring  

·      Patients with intermittent AF, family  history and CHF to obtain additional cardiac monitoring  

·      Validated in more than 10 populations |
| Early-onset heart attack/abdominal aortic aneurysm/intracranial aneurysm |       | deCODE MITM       |       | October 2007        |       | ·      Risk of early-onset MI to seek CVD  assessment or prevention management  

·      Validated in more than 25 populations                                                                                                                                                |
| Personal genome scan                                                     |       | deCODEmeTM        |       | November 2007       |       | ·      Launched with variants in 18 conditions;  currently 30 conditions                                                                                                                                                                                                                                    |
| Prostate cancer                                                          |       | deCODE ProCaTM    |       | February 2008       |       | ·      Validated common risk variants that are  linked to more than 50% of all prostrate cancer cases  

·      Some variants included identify risk of  aggressive forms of prostrate cancer  

·      Validated in more than 15 populations   |
| Exfoliation glaucoma                                                     |       | deCODE GlaucomaTM |       | February 2008       |       | ·      Risk of exfoliant glaucoma  

·      Validated in more than 10 populations                                                                                                                                                                                             |
| Breast cancer                                                            |       | deCODE BrCaTM     |       | Expect launch by 4Q 2008 |       | ·      Tests 7 genetic risk variants  

·      Validated in more than 10 populations                                                                                                                                                                                          |

 

     Other near-term potential diagnostic testscurrently in development include: melanoma, basal cell cancer, bladder cancerand lung cancer.

 

14

----

Tableof Contents

 

***DrugDevelopment Programs***

 

The following is asummary of the development of our drug candidates. Because of uncertaintiesinvolved in the drug development process as well as costs related to late-stageclinical development, the actual timing for the events described below maydiffer materially from that provided in this summary.

 

*     DG041*. DG041 is beingdeveloped as an anti-platelet compound for the prevention of arterialthrombosis. DG041 is a first-in-class small molecule inhibitor of the EP3receptor for prostaglandin E2, a G-protein coupled receptor (GPCR). It has beendemonstrated by in vitro studies that PGE2 may have additive stimulatoryeffects on platelet aggregation beyond those of other potent agonists such asADP or thromboxane A2, targeted by clopidogrel and aspirin, respectively. Theresults of the Phase I program showed DG041 to be well-tolerated across theentire dose range studied. The compound can effectively inhibit plateletaggregation in a dose-dependent manner without increasing bleeding time. Wecompleted a successful Phase IIa trial of DG041 along with a highly informativeclinical pharmacology study conducted in the presence and absence of aspirin.We also completed key drug-drug interaction studies with DG041that demonstrateda lack of any relevant interaction by DG-041 on two common routes of drugmetabolism. Based on the results of our clinical studies thus far, DG041appears to be well-tolerated, showing little difference in bleeding eventsbetween dosing arms and placebo, and to potentially offer focused means ofpreventing the formation of thrombi by specifically inhibiting plateletaggregation mediated by EP3. Earlier this year, we completed a second clinicalpharmacology study examining the impact of DG041 on top of aspirin and Plavix TM,the results of which show that DG041 blocks platelet aggregation and does notincrease bleeding time when given alone, with Plavix TM, or withPlavixTM and aspirin. We are concurrently on a controlled release formulationfor DG041 and also continue to engage in partnering discussions.

 

*DG051 andDG031.*We have two compounds in development for theprevention of heart attack, DG051 and DG031. These programs come out of ourdiscovery of major risk variants in two genes encoding proteins in theleukotriene pathway. These variants – in the genes that code for leukotriene A4Hydrolase (LTA4H) and 5-lipoxygenase activating protein (FLAP) – appear toconfer risk in the same way: by causing an up regulation in the production ofleukotriene B4, a potent pro-inflammatory molecule that is the end product ofone branch of the pathway. The therapeutic goal of both compounds is to inhibitthe activity of the pathway, lowering the production of LTB4 and therebydecreasing the inflammatory activity in atherosclerotic plaques and reducingthe risk of heart attack. In addition to reducing the risk of heart attack,these drugs may provide benefit in other inflammatory diseases.

 

*    *DG051,discovered internally by deCODE’s chemistry unit, is a small-molecule inhibitorof LTA4H, which is directly involved in the synthesis of LTB4. In 2007, wecompleted our Phase I program, the results of which demonstrated that DG051 wassafe and well tolerated at all doses tested, has a pharmacokinetic profilesuited for potential once-a-day dosing, and significantly reduces LTB4 levelsin a concentration-dependent manner. We also concluded a Phase IIa study inlate 2007, which demonstrated safety and tolerability and a significantreduction in LTB4, even at lower doses than were originally considered. deCODEhas also in-licensed a FLAP inhibitor from Bayer AG, now known as DG031. OurPhase II clinical studies demonstrated that DG031 was well-tolerated andreduced production of LTB4 in a dose-dependent manner. This effect was seen ontop of the effects of the current standard of care, which included statintherapy for a majority of patients in our trials. In 2006 we began a Phase IIIclinical trial for DG031, a trial which we voluntarily suspended because thedrug tablets appeared to dissolve more slowly than anticipated, potentiallyproviding lessening amounts of active drug the longer they were stored. We havesuccessfully reformulated the compound and are currently seeking a partner withwhom to take the next step in development of our leukotriene program.

 

     *PDE4 inhibitors*.deCODE is conducting drug discovery work on its PDE4 program, the most advancedof its preclinical programs. It has been well-established that PDE4inhibitors—a well-accepted target for a broad range of common diseases,including asthma, COPD, cognitive disorders and vascular disease—have beendifficult to clinically develop since a common side effect is emesis and nausea.Our platform has led to the development of several lead series of compoundswhich demonstrated efficacy in a range of animal experiments while avoiding thecommon side effect. We plan to file an IND this year on a compound from thisprogram and are actively pursuing partnership opportunities for clinicaldevelopment.

 

For our most significantresearch and development programs we have cumulatively invested $46.9 million,$24.1 million and $15.8 million in our heart attack (myocardial infarction, orMI), arterial thrombosis and stroke programs, respectively, from the beginningof 2003 to date (June 30, 2008). Inception to-date costs are not availableas these costs were not historically tracked by program.

 

We have not applied foror received marketing approval from the applicable regulatory authorities inany country for any of our drug candidates. In order for us to achievemarketing approval in the United States, the FDA must conclude that ourclinical data establish the safety and efficacy of our drug candidate. Othercountries have similar requirements. Historically, the results frompre-clinical testing and early clinical trials (through Phase II) haveoften not been predictive of success in later clinical trials. Many newcompounds have shown promising results in early clinical trials, butsubsequently failed to establish sufficient safety and efficacy data to obtainnecessary marketing approvals. Additional risks and uncertainties involved inthe development and commercialization of any products are described under Item1A in our reports on Forms 10-K and 10-Q. We expect that it will be severalyears, if ever, before we receive revenues from the commercial sale of ourtherapeutic products.

 

Furthermore, our strategyincludes the option of entering into collaborative arrangements with thirdparties to participate in the 

 

15

----

Tableof Contents

 

development andcommercialization of our products. Entering into collaboration with a partnerat any point in the development or commercialization of a product is a businessdecision. When making this decision we do and will consider, among othermatters, the complexity of the indication, the size, complexity and expense ofnecessary development and/or commercialization efforts, competition in themarket and size of the applicable market, an assessment of our ownresources—financial and operational, and an assessment of the resources of a potentialpartner. In the event that we do collaborate on any of the above programs inthe 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 aresult the completion date of such a partnered program could largely be undercontrol of that third party rather than under our control. We cannot forecastwith any degree of certainty which proprietary drug candidate will be subjectto future collaborative arrangements or how such arrangements would affect ourdevelopment plan or capital requirements.

 

Due to the uncertaintiesdiscussed above, we are unable to determine the duration and completion costsof our research and development projects or when and to what extent we willreceive cash inflows from the commercialization and sale of a product.

 

**Joint Development Programs andIn-licensing**

 

As part of our businessstrategy, we continue to consider joint development programs and merger andacquisition opportunities that may provide us with products in late-stagedevelopment or intellectual property.

 

*Illumina*.  In May 2006, we entered into a strategicalliance with Illumina, Inc. (“Illumina”) to develop and commercializemolecular diagnostic products. Under the terms of the agreement, deCODE andIllumina will share development costs equally and split operating profits fromthe sales of diagnostic products. Our initial focus will be developingdiagnostics for heart attack, breast cancer and type 2 diabetes. Also as part ofthe agreement, we have installed Illumina’s SNP genotyping platform tocarry-out high-density, whole-genome studies utilizing our comprehensivepopulation genetics resources in Iceland, thereby, enabling us to expand ourcontract scientific services business to offer Illumina’s platform and assaytechnologies together with our proprietary analytical services for customers.

 

In certain programs wehave taken advantage of the fact that drug targets we have identified throughour genetics research have already been employed by other companies to makedevelopmental compounds for other indications. By licensing these compounds orentering into co-development arrangements we have been able to leapfrog overseveral steps of drug discovery, entering directly into Phase II clinicaltrials. DG031, our most advanced compound for the prevention of heart attack,was licensed from Bayer HealthCare AG, which was initially developing it forasthma. In 2006, we concluded a Phase II trial in asthma, working with Cephalonon their compound CEP-1347, originally developed for Parkinson’s disease. Wemay consider opportunities like these in the future.

 

16

----

Tableof Contents

 

**Results of Operations for the Three and Six-MonthPeriods Ended June 30, 2008 and 2007**

 

Our results of operationshave fluctuated from period to period and may continue to fluctuate in thefuture based upon, among other things, progress in the development of ourmolecular diagnostics business, the pace and progress of our research andclinical development efforts, the timing and composition of funding undercollaborative agreements, and the progress of our own research and developmentefforts. Results of operations for any period may be unrelated to results ofoperations for any other period. In addition, historical results should not beviewed as indicative of future operating results. We are subject to riskscommon to companies in our industry and at our stage of development, includingrisks inherent in our research and development efforts, reliance uponcollaborative partners, development by us or our competitors of newtechnological innovations, ability to market products or services, dependenceon key personnel, dependence on key suppliers, protection of proprietarytechnology, ability to obtain additional financing, ability to negotiatecollaborative arrangements, and compliance with governmental and otherregulations. 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, obtainregulatory approvals or clearances and enter into manufacturing, distributionand marketing arrangements, as well as obtain market acceptance. We do notexpect to receive revenues or royalties based on therapeutic products for aperiod of years, if at all.

 

Into 2008, our focusremains within the same broad strategic continuity, emphasizing our corecapabilities in human genetics and leveraging those assets to build upon thecommercial opportunities presented by our diagnostics work and deCODEme. Withnear-term value creation in mind, our core focus in 2008 will be towardsbuilding our genomic services business (which includes diagnostics, deCODEmeand our scientific services business). At the same time, we aim to advance ourtherapeutics programs through partnerships and then through resources we areable to generate from our diagnostics business.

 

We have taken and will continue to take steps designedto maintain sustainable operations, slimming down elements of our broadcapabilities to focus our resources. We will continue to analyze non-coreelements of our operations and seek efficiencies throughout the organization.With this, we believe that our overall net use of cash for the fiscal year 2008may be in the range of $60 million to $65 million; excluding any major newalliances or treasury activities. As we advance our genetic services and ourdrug development pipeline we will require significant further financialresources. Given our current financial resources, we are investigating avenuesof financing beyond collaborations and licensing arrangements, such as sales ofassets, further public or private equity offerings, additional debt financingand other forms of financing. However, no assurance can be given thatadditional financing or collaborations and licensing arrangements will beavailable when needed, or that if available, will be obtained on favorableterms. If adequate funds are not available when needed, we may have to curtailoperations or attempt to raise funds on unattractive terms.

 

Financial highlights asof and for the three and six-month periods ended June 30, 2008 include:

 

·At June 30, 2008, we had $49.4 million of cash, cash equivalents andinvestments, comprised of $18.2 million of cash and cash equivalents, $5.5million of current investments in U.S. Treasury Bills, $20.6 million ofnon-current investments in auction rate securities, and $5.1 million inrestricted cash equivalents. This balance is $44.7 million less than at December 31,2007. The net utilization of our cash in these first six months reflectsprincipally the costs associated with the advancement of our diagnostic anddrug development programs as reflected in the $38.0 million of cash we used inoperating activities.

 

·Our revenue was $15.0 million and $30.0 million for the three and six-monthperiods ended June 30, 2008, respectively, as compared to $7.6 million and$16.2 million for the three and six-month periods ended June 30, 2007,respectively. As of June 30, 2008, we had $15.1 million in deferredrevenue that will be recognized over future reporting periods. Theperiod-on-period increase in revenue for the second quarter and the first halfof 2008 was driven principally by growth in our genomic services business,which includes our diagnostics,  deCODEmeTM personal genome analysis, and contract genotyping business. Importantly,our genomic services revenues were $5.1 million and $10.0 million during thethree and six-month periods ended June 30, 2008, respectively, as comparedto $1.0 million and $2.1 million during the three and six-month periods ended June 30,2007, respectively.

 

· Our research and development expense was$8.0 million and $20.6 million for the three and six-month periods ended June 30,2008, respectively, as compared to $14.5 million and $27.2 million for thethree and six-month periods ended June 30, 2007, respectively. Ourresearch and development expense in the three and six-month periods ended June 30,2008 reflect the conclusion of clinical pharmacological studies in our mostadvanced drug development programs, the launch of our prostate cancer andglaucoma diagnostic tests, and the advancement of gene and target discoverywork in a range of major disease areas. We also continue to pursue our PDE4 inhibitor program across severalindications.

 

· Our selling, general and administrativeexpense for the three and six-month periods ended June 30, 2008 was $7.1million and $14.4 million, respectively, as compared to $6.8 million and $12.3million for the three and six-month periods ended June 30, 2007,respectively. The increases in selling, general and administrative expenseyear-on-year reflect principally the build-up of our sales efforts for ourdiagnostics and deCODEmeTMbusinesses.

 

·With continuing developments in the global credit and capital markets into2008, we recognized an other-than-temporary loss on investments in auction ratesecurities (“ARS”), classified as non-current investments on our balance sheet.The estimated market value of our ARS holdings at June 30, 2008 was $20.6million. Although the ARS continue to pay interest according to their statedterms, based on the valuation models and an analysis of other-than-temporaryimpairment factors, we have recorded an impairment charge of $1.1 million and$5.1 million during the three and six-month periods ended June 30, 2008.

 

17

----

Tableof Contents

 

***Revenue***

 
| ** ** | ** ** | **Three Months**                       | ** ** | **Six Months**          | ** ** | **2008 as Compared to 2007** | ** ** |
|------------|------------|---------------------------------------------|------------|------------------------------|------------|--------------------------------------------------|------------|
| ** ** | ** ** | **Ended June 30,**                | ** ** | **Ended June 30,** | ** ** | **Three Months**                            | ** ** | **Six Months** | ** ** |
| ** ** | ** ** | **2008**                                    | ** ** | **2007**                     | ** ** | **2008**                                         | ** ** | **2007** | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** ** | ** ** | **(In thousands, except %)** | ** ** |
| Revenue    |       | $                                           | 15,026     |                         | $          | 7,614                                            |       | $ | 30,004 |   | $ | 16,168 |   | $ | 7,412 |   | 97 | % | $ | 13,836 |   | 86 | % |
|            |            |                                             |            |                              |            |                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

In 2008, our businessstrategy is focused on emphasizing our core capabilities in human genetics andleveraging those strengths to build on opportunities to generate near-termrevenue from products that we already have available; namely our genomicservices comprising diagnostics, our consumer genetics service deCODEme andgenotyping and other scientific services. At the same time, we plan to advanceour early and late stage drug programs through corporate partnerships, and willgenerate revenue from contract and other service fees. Further, we willcontinue to leverage our capabilities to continue with and pursue funding inthe form of research grants. In the majority of our programs we are pursuingdiagnostic and early-stage drug development on our own. Depending on the natureof each prospective business opportunity, the key components of the commercialterms of such arrangements typically include one or more of the following:research funding; up-front, exclusivity, technology access, and technologydevelopment fees; fees for particular services; milestone payments; license orcommercialization fees; and royalties or profit sharing from thecommercialization of products.

 

Significant elements ofour revenue are summarized as follows:

 
| ** **                                       | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                       | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                       | ** ** | **(In thousands)**                         | ** ** |
| Genomic services                                 |       | $                                               | 5,120      |                                          | $          | 982 |   | $ | 9,996 |   | $ | 2,086 |   |
| Research funding  and other service fees         |       | 4,678                                           |       | 3,816                                         |       | 9,230 |   | 7,326 |   |
| Government  research contracts and grant funding |       | 4,653                                           |       | 2,324                                         |       | 9,528 |   | 5,684 |   |
| Milestone  payments and other                    |       | 575                                             |       | 492                                           |       | 1,250 |   | 1,072 |   |
| Total revenue                                    |       | $                                               | 15,026     |                                          | $          | 7,614 |   | $ | 30,004 |   | $ | 16,168 |   |

 

Increases in our revenuefor the three and six-month periods ended June 30, 2008 as compared to thesame periods in 2007 are largely on account of (i) the growth of ourgenomics business, principally our genotyping and other scientific services, (ii) servicesprovided by our chemistry and structural biology units, and also (iii) anincreased amount of discovery and development work performed under ongoingcontracts and grants with the NIH and EC including new grants.

 

We had $15.1 million indeferred revenue at June 30, 2008, compared to $15.4 million at December 31,2007. Of this deferred revenue, $6.2 million relates to our agreement withMerck to conduct information-rich clinical trials in Iceland and, to date,Merck has not selected any compounds for development under the agreement. Weexpect that our revenues will fluctuate from period to period and that suchfluctuations may be substantial especially because progress in our scientificwork, including milestone payments that are related to progress, can fluctuatebetween periods.

 

*Government Research Contracts andGrant Funding.*We have received various research grants fromdivisions of the United States National Institutes of Health (NIH), theCommission of the European Communities (EC) and other government agencies andprivate foundations. Research grants for multiple years are based on approved budgetswith budgeted amounts subject to approval on an annual basis. NIH grantsgenerally provide for 100% reimbursement of allowable expenditures while grantsunder the EC generally provides for fifty percent reimbursement of allowable research and development relatedexpenditures. Our most significant research contract is with the NationalInstitutes of Allergy and Infectious Diseases (NIAID) dating to September 2004,where we were awarded a five-year $23.9 million contract by the NIAID. Underthe contract, we are applying our population approach and resources to discovergenetic factors associated with susceptibility to certain infectious diseasesand with responsiveness to vaccines targeting such diseases. We may receive$6.3 million in additional research funding over the remaining term of theagreement.

 

18

----

Tableof Contents

 

***Cost of Revenue***

 
| ** **      | ** ** | **Three Months**                       | ** ** | **Six Months**          | ** ** | **2008 as Compared to 2007** | ** ** |
|-----------------|------------|---------------------------------------------|------------|------------------------------|------------|--------------------------------------------------|------------|
| ** **      | ** ** | **Ended June 30,**                | ** ** | **Ended June 30,** | ** ** | **Three Months**                            | ** ** | **Six Months** | ** ** |
| ** **      | ** ** | **2008**                                    | ** ** | **2007**                     | ** ** | **2008**                                         | ** ** | **2007** | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** **      | ** ** | **(In thousands, except %)** | ** ** |
| Cost of revenue |       | $                                           | 13,432     |                         | $          | 9,156                                            |       | $ | 28,146 |   | $ | 20,074 |   | $ | 4,276 |   | 47 | % | $ | 8,072 |   | 40 | % |
|                 |            |                                             |            |                              |            |                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Our cost of revenueconsists of the costs of services provided to customers and collaborators andthe costs of programs under research contracts and grants, including: (i) theentirety of the costs incurred in connection with programs that have beenpartnered and on which we receive research funding; (ii) costs associatedwith other service fee revenues; and (iii) the total amount of those costsincurred in connection with discovery and development work performed underresearch contracts and grants. At times, we invest in addition to costs coveredby research funding received in such collaborative programs and in addition tomonies received under research contracts and grants.

 

Significant elements of deCODE’s revenue and cost ofrevenue are summarized as follows:

 
| ** **                                             | ** ** | **Three Months Ended June 30,** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                             | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| ** **                                             | ** ** | **Revenue**                                         | ** ** | **Cost of  Revenue** | ** ** | **Net** | ** ** | **Revenue** | ** ** | **Cost of  Revenue** | ** ** | **Net** | ** ** |
| ** **                                             | ** ** | **(In thousands)**                             | ** ** |
| Genomic  services, research funding and other services |       | $                                                   | 10,373     |   | $ | 7,731 |   | $ | 2,642 |   | $ | 5,290 |   | $ | 5,432 |   | $ | (142 | ) |
| Government  research contracts and grant funding       |       | 4,653                                               |       | 5,701 |   | (1,048 | ) | 2,324 |   | 3,724 |   | (1,400 | ) |
| Total                                                  |       | $                                                   | 15,026     |   | $ | 13,432 |   | $ | 1,594 |   | $ | 7,614 |   | $ | 9,156 |   | $ | (1,542 | ) |

 
| ** **                                             | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                             | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
| ** **                                             | ** ** | **Revenue**                                       | ** ** | **Cost of  Revenue** | ** ** | **Net** | ** ** | **Revenue** | ** ** | **Cost of  Revenue** | ** ** | **Net** | ** ** |
| ** **                                             | ** ** | **(In thousands)**                           | ** ** |
| Genomic  services, research funding and other services |       | $                                                 | 20,476     |   | $ | 15,858 |   | $ | 4,618 |   | $ | 10,484 |   | $ | 11,140 |   | $ | (656 | ) |
| Government  research contracts and grant funding       |       | 9,528                                             |       | 12,288 |   | (2,760 | ) | 5,684 |   | 8,934 |   | (3,250 | ) |
| Total                                                  |       | $                                                 | 30,004     |   | $ | 28,146 |   | $ | 1,858 |   | $ | 16,168 |   | $ | 20,074 |   | $ | (3,906 | ) |

 

Increases in our cost ofrevenue for the three and six-month periods ended June 30, 2008 ascompared to the same periods in 2007 are largely on account of (i) the growthof our genomics business, principally the growth of scientific services, (ii) servicesprovided by our chemistry and structural biology units, and also (iii) anincreased amount of discovery and development work performed under ongoingcontracts and grants with the NIH and EC including new grants. Our cost ofrevenue in the three and six-month periods ended June 30, 2008 as comparedto the same periods in 2007 increased chiefly with regard to our usage ofchemicals and consumables ($4.0 million and $7.3 million, respectively). Also,during the three and six-month periods ended June 30, 2007 we performedwork ($1.5 million and $2.9 million, respectively) under a collaborationagreement with F. Hoffmann-La Roche (Roche) and recognizedrevenue of $0.5 and $1.0 million, respectively under that agreement.

 

***Research and Development***

 
| ** **                | ** ** | **Three Months**                       | ** ** | **Six Months**          | ** ** | **2008 as Compared to 2007** | ** ** |
|---------------------------|------------|---------------------------------------------|------------|------------------------------|------------|--------------------------------------------------|------------|
| ** **                | ** ** | **Ended June 30,**                | ** ** | **Ended June 30,** | ** ** | **Three Months**                            | ** ** | **Six Months** | ** ** |
| ** **                | ** ** | **2008**                                    | ** ** | **2007**                     | ** ** | **2008**                                         | ** ** | **2007** | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** **                | ** ** | **(In thousands, except %)** | ** ** |
| Research and  development |       | $                                           | 7,964      |                         | $          | 14,528                                           |       | $ | 20,617 |   | $ | 27,204 |   | $ | (6,564 | ) | (45 | )% | $ | (6,587 | ) | (24 | )% |
|                           |            |                                             |            |                              |            |                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Our research and development expense consist of thefollowing:

 

19

----

Table ofContents

 
| ** **                                       | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                       | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                       | ** ** | **(In thousands)**                         | ** ** |
| Salaries and  other personnel costs              |       | $                                               | 3,941      |                                          | $          | 5,138 |   | $ | 8,754 |   | $ | 9,801 |   |
| Materials and  supplies                          |       | 1,142                                           |       | 3,558                                         |       | 4,024 |   | 6,230 |   |
| Contractor  services and other third party costs |       | 1,084                                           |       | 3,350                                         |       | 3,408 |   | 6,049 |   |
| Overhead  expenses.                              |       | 956                                             |       | 1,381                                         |       | 2,346 |   | 2,829 |   |
| Depreciation and  amortization                   |       | 489                                             |       | 626                                           |       | 1,403 |   | 1,348 |   |
| Stock-based  compensation                        |       | 352                                             |       | 475                                           |       | 682 |   | 947 |   |
| Total                                            |       | $                                               | 7,964      |                                          | $          | 14,528 |   | $ | 20,617 |   | $ | 27,204 |   |

 

     Our research and development expense forthe second quarter of 2008 and year to date reflects the advancement of ourdrug and diagnostic programs, including costs related to the development andlaunch of our latest DNA-based diagnostic tests for gauging individual risk ofa growing number of common diseases and ongoing gene discovery work that isfeeding our diagnostic pipeline and deCODEme service. We also continue topursue our PDE4 inhibitor program across several indications. With near-termvalue creation in mind, our core focus in 2008 will be towards building ourdiagnostics and deCODEme businesses and our genomic services broadly. At thesame time, we aim to advance our therapeutics programs through partnerships.With this focus, we believe that our overall investment in research anddevelopment for the fiscal year 2008 may be in the range of $35 million.

 

***Selling, General and Administrative Expense***

*** ***
| ** **                           | ** ** | **Three Months**                       | ** ** | **Six Months**          | ** ** | **2008 as Compared to 2007** | ** ** |
|--------------------------------------|------------|---------------------------------------------|------------|------------------------------|------------|--------------------------------------------------|------------|
| ** **                           | ** ** | **Ended June 30,**                | ** ** | **Ended June 30,** | ** ** | **Three Months**                            | ** ** | **Six Months** | ** ** |
| ** **                           | ** ** | **2008**                                    | ** ** | **2007**                     | ** ** | **2008**                                         | ** ** | **2007** | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** **                           | ** ** | **(In thousands, except %)** | ** ** |
| Selling, general  and administrative |       | $                                           | 7,146      |                         | $          | 6,795                                            |       | $ | 14,357 |   | $ | 12,325 |   | $ | 351 |   | 5 | % | $ | 2,032 |   | 16 | % |
|                                      |            |                                             |            |                              |            |                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

     The increase in our selling, general andadministrative expenses for the three and six-month periods ended June 30,2008 compared to the same periods ended June 30, 2007 is primarilyattributable to increased selling expenses and other contractor servicesrelated to our diagnostic and deCODEme offerings ($1.7 million and $2.7million, respectively), but then with decreases represented chiefly by lowersalary and stock-based compensation expense ($0.9 million and $1.3 million,respectively).

 

***Interest Income***

 
| ** **      | ** ** | **Three Months**                       | ** ** | **Six Months**          | ** ** | **2008 as Compared to 2007** | ** ** |
|-----------------|------------|---------------------------------------------|------------|------------------------------|------------|--------------------------------------------------|------------|
| ** **      | ** ** | **Ended June 30,**                | ** ** | **Ended June 30,** | ** ** | **Three Months**                            | ** ** | **Six Months** | ** ** |
| ** **      | ** ** | **2008**                                    | ** ** | **2007**                     | ** ** | **2008**                                         | ** ** | **2007** | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** **      | ** ** | **(In thousands, except %)** | ** ** |
| Interest income |       | $                                           | 452        |                         | $          | 1,518                                            |       | $ | 1,489 |   | $ | 3,509 |   | $ | (1,066 | ) | (70 | )% | $ | (2,020 | ) | (58 | )% |
|                 |            |                                             |            |                              |            |                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Our interest income is afunction of both the balance of our cash and investments (which have beendeclining as resources are deployed in operations) and the rate of return weare able to garner under our investment policy (which average rate of returnhas also been declining of late with prevailing market conditions). We expectto use our cash and investments principally for advancing our moleculardiagnostic business and discovery and development programs. In the meantime, wewill invest the monies received in accordance with our investment policy,having the objective of preserving principal and maintaining a high degree ofliquidity to meet operating needs and obtaining competitive returns subject toprevailing market conditions.

 

***Interest Expense***

 
| ** **       | ** ** | **Three Months**                       | ** ** | **Six Months**          | ** ** | **2008 as Compared to 2007** | ** ** |
|------------------|------------|---------------------------------------------|------------|------------------------------|------------|--------------------------------------------------|------------|
| ** **       | ** ** | **Ended June 30,**                | ** ** | **Ended June 30,** | ** ** | **Three Months**                            | ** ** | **Six Months** | ** ** |
| ** **       | ** ** | **2008**                                    | ** ** | **2007**                     | ** ** | **2008**                                         | ** ** | **2007** | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** **       | ** ** | **(In thousands, except %)** | ** ** |
| Interest expense |       | $                                           | 4,120      |                         | $          | 3,803                                            |       | $ | 8,145 |   | $ | 7,469 |   | $ | 317 |   | 8 | % | $ | 676 |   | 9 | % |
|                  |            |                                             |            |                              |            |                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

     Our interest expense has increased in 2008as compared to 2007 and is primarily attributable to interest on our 3.5%Senior Convertible Notes due in 2011 for which our cash interest payments areapproximately $8.1 million on an annual basis. Taking into account also theaccretion of the discount of the notes and the amortization of offering costs,our total interest expense related to the Senior Convertible Notes is expectedto be approximately $14.6 million for the year ending December 31, 2008.

 

20

----

Tableof Contents

 

The June 2007 sale and leaseback of our Woodridgeproperty is being accounted for as a financing and, as such, a portion of ourrent payments are charged to interest expense ($0.4 million and $0.7 millionduring the three and six months ended June 30, 2008).

 

**Other non-operating income and(expense), net**

 

 
| ** **                                     | ** ** | **Three Months**                       | ** ** | **Six Months**          | ** ** | **2008 as Compared to 2007** | ** ** |
|------------------------------------------------|------------|---------------------------------------------|------------|------------------------------|------------|--------------------------------------------------|------------|
| ** **                                     | ** ** | **Ended June 30,**                | ** ** | **Ended June 30,** | ** ** | **Three Months**                            | ** ** | **Six Months** | ** ** |
| ** **                                     | ** ** | **2008**                                    | ** ** | **2007**                     | ** ** | **2008**                                         | ** ** | **2007** | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** **                                     | ** ** | **(In thousands, except %)** | ** ** |
| Other  non-operating income and (expense), net |       | $                                           | (1,170     | )                            | $          | 8,922                                            |       | $ | (5,247 | ) | $ | 8,542 |   | $ | (10,092 | ) | (113 | )% | $ | (13,789 | ) | (161 | )% |
|                                                |            |                                             |            |                              |            |                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

     Our other non-operating income and expense,net, during the three and six-month periods ended June 30, 2008 and 2007is principally comprised of other-than-temporary losses on investments inauction rate securities in 2008 and a legal settlement in 2007.

 

     With continuing developments in the globalcredit and capital markets into 2008, we recognized an other-than-temporaryloss on investments in auction rate securities (“ARS”), classified asnon-current investments on our balance sheet at June 30, 2008. Theestimated market value of our ARS at June 30, 2008 was $20.6 million.Although the ARS continue to pay interest according to their stated terms,based on the valuation models and an analysis of other-than-temporaryimpairment factors, we have recorded an impairment charge of $1.1 million and$5.1 million during the three and six-months ended June 30, 2008,respectively. The credit and capital markets have continued to deteriorate in2008. If uncertainties in these credit and capital markets continue, thesemarkets deteriorate further or we experience additional downgrades on ourinvestments, we may incur additional impairments to our investment portfolio,which could negatively affect our financial condition, cash flows and reportedearnings.

 

    We entered into a legal settlement in June 2007to end ongoing litigation regarding certain proprietary and confidentialinformation. Financial terms of the legal settlement stipulated that we wouldbe paid $9.0 million which we recognized during the three and six-months ended June 30,2007, net of litigation expenses incurred of $0.04 million and $0.7 million,respectively.

 

**Liquidityand Capital Resources**

 

Into 2008, our focusremains within the same broad strategic continuity, emphasizing our corecapabilities in human genetics and leveraging those assets to build upon thecommercial opportunities presented by our diagnostics work and deCODEme. Withnear-term value creation in mind, our core focus in 2008 will be towardsbuilding our genomic services business (which includes diagnostics, deCODEmeand our scientific services business). At the same time, we aim to advance ourtherapeutics programs through partnerships and then through resources we areable to generate from our diagnostics business.

 

We have taken and will continue to take steps toensure that we have sustainable operations, slimming down elements of our broadcapabilities to focus our resources. We will continue to analyze non-coreelements of our operations as well as are continuing to seek efficienciesthroughout the organization. With this, we believe that our overall net use ofcash for the fiscal year 2008 may be in the range of $60 million to $65million; excluding any major new alliances or treasury activities. As weadvance our genetic services and our drug development pipeline we will requiresignificant further financial resources. Given our current financial resources,we are investigating avenues of financing beyond collaborations and licensingarrangements, such as sales of assets, further public or private equityofferings, additional debt financing and other forms of financing. However, noassurance can be given that additional financing or collaborations andlicensing arrangements will be available when needed, or that if available,will be obtained on favorable terms. If adequate funds are not available whenneeded, we may have to curtail operations or attempt to raise funds onunattractive terms.

 

We have financed ouroperations primarily through funding from research and developmentcollaborative agreements, and the issuance of equity securities and long-termfinancing instruments ($1,048 million from the beginning of 1999 to-date).At June 30, 2008, future funding under terms of our existing agreements isapproximately $46.4 million excluding milestone payments, royalties and otherpayments that we may earn under such collaborations. Of the $46.4 million,approximately $27.7 million is expected to be received during the year ended December 31,2008, with the remaining amount due through 2012.

 

We make significantinvestments in proprietary research and development and we incur the costs ofsuch activities. In the near term, this requires us to devote resources to ourin-house drug and diagnostic development which we believe will better positionus to capture the most value to us in our discoveries. As we identify promisingdiscoveries for further development, we may choose to continue the developmentourselves into and through clinical trials, regulatory approvals,manufacturing, distribution and marketing. In other cases we are or will beworking to varying degrees with partners. The decisions we make as to thesematters will affect our cash requirements.

 

Our cash requirementsdepend on numerous factors, including the level and timing of our research anddevelopment expenditures; our ability: to access the capital markets; to obtainnew research and development collaboration agreements; to obtain and maintaincontract service agreements in our pharmaceuticals, biostructures, clinicalresearch trials and genomic service groups; expenditures in connection withalliances, license agreements and acquisitions of and investments incomplementary technologies and businesses; 

 

21

----

Tableof Contents

 

competing technologicaland market developments; the cost of filing, prosecuting, defending andenforcing patent claims and other intellectual property rights; the purchase ofadditional capital equipment; and capital expenditures at our facilities.Changes in our research and development plans, notably the entry into clinicaltrials of drugs based on our discoveries, development of our genetic servicesand marketing thereof or other changes affecting our operating expenses mayresult in changes in the timing and amount of expenditures of our capitalresources.

 

At June 30, 2008, wehad $49.4 million of cash, cash equivalents and investments, comprised of $18.2million of cash and cash equivalents, $5.5 million of current investments inU.S. Treasury bills, $20.6 million of non-current investments in auction ratesecurities, and $5.1 million in restricted cash equivalents.

 

*AuctionRate Securities.* The non-current investments in ARS held byus are private placement securities with long-term nominal maturities for whichthe interest rates are reset through a Dutch auction process at pre-determinedcalendar intervals, generally each month. This mechanism generally allowsexisting investors to rollover their holdings and continue to own their respectivesecurities or liquidate their holdings by selling their securities at parvalue. We generally invest in these securities for short periods of time aspart of our cash management program. However, the recent uncertainties in thecredit markets have prevented us and other investors from liquidating holdingsof our remaining ARS in recent auctions for these securities because the amountof securities submitted for sale has exceeded the amount of purchase orders andthis has resulted in multiple failed auctions.

 

Our non currentinvestments in ARS represent interests in debt obligations, namely lifeinsurance wrapped issues, of companies offering credit derivatives, and ofentities on which monoline insurers retain capital put rights. The remainingARS investments are generally collateralized by pools of commercial paper,investment-grade corporate debt, asset and mortgage-backed securities,government and money-market issues and other ARS. Consistent with ourinvestment policy guidelines, all of the ARS investments were rated asinvestment grade (at least A or better) at the time of purchase and subsequentto year end remain rated as investment grade.

 

The estimated market value of our non current investments in ARS at June 30,2008 was $20.6 million. Although the ARS continue to pay interest according totheir stated terms, based on the valuation models and an analysis ofother-than-temporary impairment factors, we have recorded an impairment chargeof $5.1 million during the six-months ended June 20, 2008, reflecting theportion of ARS holdings that we have concluded have an other-than-temporarydecline in value and this charge is included in Other non-operating income and(expense), net in our Statements of Operations. This $5.1 million impairmentcharged includes $0.9 million related to ARS for which deCODE had previouslydetermined to be temporary and accounted for as an unrealized loss at December 31,2007.

 

There is a present lackof observable market quotes on the non-current investments in ARS. The valuationmodels used to value the securities include those that are based on expectedcash flow streams and collateral values, including assessments of counterpartycredit quality, default risk underlying the security, discount rates andoverall capital market liquidity. The valuation of our investments in ARS is subjectto uncertainties that are difficult to predict. Factors that may impact thevaluation include changes in credit ratings of the securities or theirguarantors, underlying collateral value, discounts rates, counterparty risk andongoing strength and quality of market credit and liquidity.

 

The credit and capital markets have continued to be volatile in 2008.If uncertainties in these credit and capital markets continue, these marketsdeteriorate further or we experience additional downgrades on our investments,we may incur additional impairments (unrealized and/or realized) to ourinvestment portfolio, which could negatively affect our financial condition,cash flows and reported earnings. While the current lack of liquidity in thecredit and capital markets is impacting our financial flexibility, we do notbelieve the conditions will have a material impact on our cash flows or ourability to fund our operations during the fiscal year 2008.

 

Our cash was provided by and used as follows:

 
| ** **                                   | ** ** | **Six-Month Periods Ended  June 30,** | ** ** |
|----------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                   | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| ** **                                   | ** ** | **(In thousands)**                              | ** ** |
| **Cash  provided by (used in):**             |       |                                                 |       |   |   |
| Operating  activities                        |       | $                                                    | (37,982    | ) | $ | (30,948 | ) |
| Investing  activities                        |       | 3,730                                                |       | 35,715 |   |
| Financing  activities                        |       | (1,682                                               | )          | 17,109 |   |
| Cash and cash  equivalents, at end of period |       | 18,238                                               |       | 43,758 |   |
|                                              |            |                                                      |            |  |  |  |  |

 

*Cashand Cash Equivalents.*  At June 30, 2008, we had$18.2 million in cash and cash equivalents. Together with our currentinvestments in U.S. Treasury Bills ($5.5 million), non-current investments inauction rate securities ($20.6 million) and restricted cash equivalents($5.1 million), this balance ($49.4 million) is $44.7 million less than atDecember 31, 2007. The net utilization of our cash in 2008 is principallyowing to cash used in product development, research and general operations asreflected in the $38.0 million cash we used in operations.

 

22

----

Tableof Contents

 

Available cash isinvested in accordance with our investment policy having primary objectives ofliquidity and safety of principal while generating income from our investmentswithout significantly increasing risk. Our cash is deposited only withfinancial institutions in the United States and Iceland having a creditstanding of A-/A3 or better. We expect to maintain our portfolio of cashequivalents and current investments in accordance with our policy, having theobjective of preserving principal and maintaining a high degree of liquidity tomeet operating needs and obtaining returns subject to prevailing marketconditions. At June 30, 2008, our cash and cash equivalents are in U.S.Treasury Bills and money market funds, our current investments are in U.S.Treasury Bills and our non-current investments are in auction rate securities.At present, we expect to maintain our portfolio of cash equivalents and currentinvestments in government debt securities and money market funds, and toliquidate our remaining holdings of non-current investments in auction ratesecurities if and when auctions on them begin to clear or when secondarymarkets for the auction rate securities begin to present themselves. At June 30,2008, our cash and cash equivalents are largely invested in U.S. dollardenominated U.S. Treasury Bills, money market and checking accounts and also inIcelandic krona denominated accounts.

 

*OperatingActivities.* Net cash used in operating activities increasedto $38.0 million for the six-months ended June 30, 2008 as compared to$30.9 million for the six-months ended June 30, 2007, the difference isprincipally due to working capital changes. Cash used in our operations isprincipally owing to cash used in diagnostic and therapeutic productdevelopment, research and general operations as more fully described above.

 

*InvestingActivities.*Our investing activities have consisted ofcapital expenditures and the sale of investments in marketable securities.Capital expenditures have been principally replacement capital expendituresduring the six-months ended June 30, 2008 and 2007, and we anticipatemaking only necessary replacement capital expenditures in the near term. Netcash used in investing activities may in the future fluctuate significantlyfrom period to period due to timing of our capital expenditures and otherinvestments as well as changing business needs.

 

*Financing Activities.*Net cash of $1.7 million was used in financing activities during the six-monthsended June 30, 2008, as compared to $17.1 million that was provided duringthe six-months ended June 30, 2007. Financing activities for the six-monthperiods ended June 30, 2008 consisted primarily of ongoing repayment ofand installment payments on debt, capital lease and finance obligations. Ourmost significant financing activity for the six-month period ended June 30,2007 was the sale and leaseback of our property in Woodridge, Illinois (nettingus $18.4 million after the payment of transaction costs and the repayment ofour existing property mortgage).

 

*ContractualCommitments and Off-Balance Sheet Arrangements.*  The following summarizes our contractualobligations at June 30, 2008 and the effects such obligations are expectedto have on our liquidity and cash flows in future periods:

 
| ** **                                         | ** ** | **Payments Due by Period** | ** ** |
|----------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                         | ** ** | **Total**                                 | ** ** | **Less Than  1 Year** | ** ** | **1 – 2 Years** | ** ** | **2 – 3 Years** | ** ** | **3 – 4 Years** | ** ** | **4 – 5 Years** | ** ** | **More Than  5 Years** | ** ** |
| ** **                                         | ** ** | **(In thousands)**                   | ** ** |
| 3.5% Senior  convertible notes, including interest |       | $                                         | 254,150    |   | $ | 8,050 |   | $ | 8,050 |   | $ | 238,050 |   | $ | — |   | $ | — |   | $ | — |   |
| Long-term debt,  including interest                |       | 485                                       |       | 272 |   | 213 |   | — |   | — |   | — |   | — |   |
| Capital lease  obligations, including interest     |       | 3,909                                     |       | 3,161 |   | 748 |   | — |   | — |   | — |   | — |   |
| Finance  obligation, including interests           |       | 38,741                                    |       | 2,009 |   | 2,059 |   | 2,111 |   | 2,164 |   | 2,218 |   | 28,180 |   |
| Operating leases  (1)                              |       | 59,392                                    |       | 5,384 |   | 5,220 |   | 5,135 |   | 5,135 |   | 5,035 |   | 33,483 |   |
| Total                                              |       | $                                         | 356,677    |   | $ | 18,876 |   | $ | 16,290 |   | $ | 245,296 |   | $ | 7,299 |   | $ | 7,253 |   | $ | 61,663 |   |

 

----

 (1) Balance includes $58.2 million ofIcelandic krona (ISK) denominated lease obligations which are variable based onthe exchange rate of the ISK versus the U.S. dollar and also this amount issubject to periodic adjustments based on the Icelandic Consumer Price Index(ICPI). A hypothetical 10% increase or decrease in the ISK and U.S. dollarexchange rate would result in an increase or decrease of our annual leasepayments of $0.5 million. A hypothetical 100 basis point increase of the ICPIwould result in an increase or decrease of our annual lease payments of $0.1million.

 

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

 

In November 2007, deCODE adopted a Change In Control Benefits Planthat provides for, among other things, upon a change in control, alloutstanding stock options, restricted stock and stock appreciation rights, andany similar awards under any equity compensation plan of deCODE, shall vest,become immediately exercisable or payable and have all restrictions lifted. Inthe event of a change in control, the Plan also requires deCODE to make a lumpsum payment to the CEO and executive officers based on their most recent salaryand bonus history. Also, the Plan requires other benefits to be paid, toinclude life, disability, accident and health insurance for these employees fora period of 24 to 36 months depending on employment. deCODE believes that it isunlikely that these circumstances will transpire, as such no charge has been recognizedin its Statements of Operations. Further, these potential payments are notincluded in the above table. As of June 30, 2008, the potential minimumlump sum payment (salary and bonus 

 

23

----

Tableof Contents

 

amounts only)under these change in control provisions would have totaled approximately $6.5million (calculated as of June 20, 2008).

 

All material intercompany balances and transactionshave been eliminated. We do not have any other significant relationships withunconsolidated entities or financial partnerships, such as entities oftenreferred to as structured finance or special purpose entities, which would havebeen established for the purpose of facilitating off-balance sheet arrangementsor other contractually narrow or limited purposes. As such, we are not exposedto any financing, liquidity, market or credit risk that could arise if we hadengaged in such relationships. Additionally, holders of our 3.5% seniorconvertible notes may elect to convert their notes into shares of our commonstock at any time at a price of $14.00 per share.

 

**CriticalAccounting Policies**

 

 The preparation offinancial statements in conformity with generally accepted accountingprinciples requires us to make certain estimates and assumptions that affectthe reported amounts of assets and liabilities, the disclosure of contingentassets and liabilities at the date of the financial statements, and thereported amounts of revenues and expenses during the reported period. On anongoing basis we evaluate our estimates, which include, among others, thoserelated to collaborative arrangements, long-lived assets, and litigation andother commitments and contingencies. We base our estimates on historicalexperience and on various other assumptions that we believe to be reasonableunder the circumstances, the results of which form our basis for makingjudgments about carrying values of assets and liabilities that are not readilyapparent from other sources. The impact and any associated risks related tothese and our other accounting policies on our business or operations isdiscussed throughout Management’s Discussion and Analysis of Financial Conditionand Results of Operations where such policies affect our reported and expectedfinancial results. For a detailed discussion on the application of these andother accounting policies, please refer to our notes to the CondensedConsolidated Financial Statements in this quarterly report on Form 10-Qand 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 estimatesreferred to above.

 

**FORWARD-LOOKING STATEMENTS AND CAUTIONARYFACTORS**

**THAT MAY AFFECT FUTURE RESULTS**

 

This Quarterly Report on Form 10-Qcontains forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934. These statements relate to future events or our futurefinancial performance. In some cases, forward-looking statements can beidentified by terminology such as “may,” “should,” “could,” “expect,” “plan,” “anticipate,”“believe,” “estimate,” “predict,” “intend,” “potential” or “continue” or thenegative of such terms or other comparable terminology. These statements areonly expectations. We cannot assure you that our expectations and assumptionswill prove to be correct. We do not intend to update or revise anyforward-looking statements, whether as a result of future events, newinformation or otherwise, except to the extent that the reports we are requiredto file under the Securities Exchange Act of 1934, as amended, (the “ExchangeAct”) contain such updates or revisions. Actual events or results may differmaterially from the forward- looking statements due to a number of factors,including. but not limited to, those set forth in Item 1A of our AnnualReport on Form 10-K for the year ended December 31, 2007 as updatedby Item 1A of Part II of this Quarterly Report on Form 10-Q andelsewhere in this Quarterly Report on Form 10-Q and in the reports we fileunder the Exchange Act.

 

** ITEM 3. QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

The primary objectives ofour investment activities are to preserve principal, maintain a high degree ofliquidity to meet operating needs, and obtain competitive returns subject toprevailing market conditions. At June 30, 2008, our cash and cashequivalents are in U.S. Treasury Bills and money market funds, our currentinvestments are in U.S. Treasury Bills and our non-current investments are inauction rate securities. At present, we expect to maintain our portfolio ofcash equivalents and current investments in government debt securities andmoney market funds, and to liquidate our remaining holdings of non-currentinvestments in auction rate securities if and when auctions on them begin toclear or when secondary markets for the auction rate securities begin to presentthemselves. At June 30, 2008, our cash and cash equivalents are largelyinvested in U.S. dollar denominated U.S. Treasury Bills, money market andchecking accounts and also in Icelandic krona denominated accounts. Ourinvestments are subject to risk of default, changes in credit rating andchanges in market value. These investments are also subject to interest raterisk and will decrease in value if market interest rates increase. Ahypothetical 100 basis point increase in interest rates would result in anapproximate $0.1 million decrease in the fair value of our investments asof June 30, 2008. Changes in interest rates do not affect interest expenseincurred on deCODE’s Convertible Notes, because they bear interest at a fixedrate. Using the price in the latest trade in June 2008, the market valueof the Convertible Notes was approximately $102.1 million on June 30,2008.

 

As a consequence of thenature our business and operations our reported financial results and cashflows are exposed to the risks associated with fluctuations in the exchangerates of the U.S. dollar, the Icelandic krona and other world currencies. Wecontinue to monitor our exposure to currency risk. A hypothetical 10.0%decrease in value of the US dollar against the Icelandic krona would result ina loss of approximately $0.2 million on our Icelandic krona denominated nonU.S. dollar assets and liabilities. We have historically purchased instrumentsto hedge these general risks through the use of derivative financialinstruments.

 

24

----

Tableof Contents

 

** ITEM 4. CONTROLS AND PROCEDURES**

 

a)*Evaluation of disclosure controls and procedures.*Our Chief Executive Officer and our Chief Financial Officer evaluated theeffectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) underthe Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of theend of the fiscal quarter covered by this Quarterly Report on Form 10-Q.Based upon that evaluation, the Chief Executive Officer and the Chief FinancialOfficer have concluded that as of the end of such fiscal quarter deCODE’sdisclosure controls and procedures are adequate and effective to ensure thatinformation required to be disclosed in the reports deCODE files under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in the Securities and Exchange Commission’s rules andforms. Disclosure controls and procedures include without limitation, controlsand procedures designed to ensure that information required to be disclosed byan issuer in the reports that it files or submits under the Act is accumulatedand communicated to the issuer’s management including its principal executiveand principal financial officers or persons performing similar functions asappropriate to allow timely decisions regarding required disclosures.

 

In designing andevaluating our disclosure controls and procedures, our management recognizesthat any controls and procedures, no matter how well designed and operated, canprovide only reasonable assurance that the desired objectives of the controlsystem will be met. In addition, the design of any control system is based inpart upon certain assumptions about the likelihood of future events and theapplication of judgment in evaluating the cost-benefit relationship of possiblecontrols and procedures. Because of these and other inherent limitations ofcontrol systems, there is only reasonable assurance that our controls willsucceed in achieving their goals under all potential future conditions.

 

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

 

** PART II OTHER INFORMATION**

 

** ITEM 1. LEGAL PROCEEDINGS**

 

Other than claims and legal proceedings that arisefrom 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 reportedin our Annual Report on Form 10-K for the year ended December 31,2007.

 

In the matter of In redeCODE genetics, Inc. Initial Public Offering, which is described indeCODE’s Annual Report onForm 10-K for the year ended December 31, 2007, on June 25, 2007, theUnited States District Court for the Southern District of New York entered anorder formally denying the motion for final approval of the settlementagreement because the settlement class could not be certified. On August 14,2007, the plaintiffs filed their second consolidated amended class actioncomplaints against the “focus cases” and on September 27, 2007, againmoved for class certification, seeking certification of three separate classes.The focus cases are a small group of cases that were selected as test cases dueto the large number of nearly identical actions which were consolidated in theInitial Public Offering litigation. The court has indicated that the focuscases are intended to provide strong guidance for the other cases. The caseinvolving deCODE is not a focus case. On November 12, 2007, certain of thedefendants in the focus cases moved to dismiss the second consolidated amendedclass action complaints. On March 26, 2008, the district court denied themotions to dismiss except as to Section 11 claims raised by thoseplaintiffs who sold their securities for a price in excess of the initialpublic offering price and those who purchased outside the previously certifiedclass period. Briefing on the class certification motion was completed in May 2008.On December 28, 2007, the underwriter defendants moved to strike classallegations in 26 cases in which the Plaintiffs failed to identify proposedclass representatives, and the issuer defendants joined in the motion. On May 13,2008, the District Court granted the motion in part in eight of the 26 cases,striking the class allegations as to one of the three classes because theproposed class representatives were not a member of the proposed classes. Thecase against deCODE is one of these eight cases. Due to the inherentuncertainties of litigation, deCODE cannot accurately predict the ultimateoutcome of the matter.

 

**ITEM1A. RISK FACTORS**

 

Other than with respectto the risk factors set forth below, there have been no material changes fromthe risk factors disclosed in Item 1A of our Annual Report on Form 10-Kfor the year ended December 31, 2007. The risk factors set forth belowhave been updated to provide data for and as of the quarter ended June 30,2008.

 

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

 

We incurred a net loss of$18.4 million and $45.0 million for the six-months ended June 30, 2008 and2007, respectively, and $95.5 million for the year ended December 31,2007, and had an accumulated deficit of $676.2 million at June 30, 2008.We have 

 

25

----

Tableof Contents

 

never generated a profitand we have not generated significant revenues except for payments received inconnection with our research and development collaborations with Roche, Merckand others, from contract services, Emerald BioSystems products andinstruments, and under grants. Our research and development expenditures andgeneral and administrative costs have exceeded our revenue to date, and weexpect to spend significant additional amounts to develop our diagnostics anddeCODEmeTM products and services, fund research and development inorder to enhance our core technologies and undertake product development(including drug development and related clinical trials). We do not expect toreceive royalties or other revenues from commercial sales of products developedusing our technology in the near term. It may be several years beforeproduct revenues materialize, if they do at all. As a result, we expect toincur net losses for several years. If the time required to generate productrevenues and achieve profitability is longer than we currently anticipate orthe level of losses is greater than we currently anticipate, we may not beable to continue our operations.

 

***If we are not able to obtain sufficient additional fundingto meet our capital requirements, we may be forced to reduce or terminateour research and product development programs.***

 

We have spent substantialamounts of cash to fund our research and development activities and expect tocontinue to spend substantial amounts for these activities over the nextseveral years. We expect to use cash to collect, generate and analyze genotypicand disease data from volunteers in our disease-gene research programs; toconduct drug discovery and development activities; and to continue otherresearch and development activities. Many factors will influence our futurecapital needs, including:

 

·                                       the number, breadth and progress of ourdiscovery and research programs;

 

·                                       our ability to attract customers;

 

·                                       our ability to commercialize ourdiscoveries and the resources we devote to commercialization;

 

·                                       the amount we spend to enforce patentclaims and other intellectual property rights; and

 

·                                       the costs and timing of regulatoryapprovals.

 

We have relied on, andmay continue to rely on, revenues generated by our corporate alliances andfee-paying customers for significant funding of our research efforts.Historically, a substantial portion of our revenue has been derived fromcontracts with a limited number of significant customers.

 

In addition, wemay seek additional funding through public or private equity offerings anddebt financings. We may not be able to obtain additional financing when weneed it or the financing may not be on terms favorable to us or ourstockholders. Stockholders’ ownership will be diluted if we raise additionalcapital by issuing equity securities.

 

If we raise additionalfunds through collaborations and licensing arrangements, we may have torelinquish rights to some of our technologies or product candidates, or grantlicenses on unfavorable terms. If adequate funds are not available, we wouldhave to scale back or terminate our discovery and research programs and productdevelopment.

 

***We may be adversely impacted by economic factors beyond ourcontrol and may incur additional impairment charges to our investment portfolio***

 

As of June 30, 2008, we had $33.5 million of principal invested inauction rate securities (“ARS”), all of which are classified as non-currentinvestments on our balance sheet. These investments represent interestsin debt obligations, namely life insurance wrapped issues, of companiesoffering credit derivatives, and of entities on which monoline insurers retaincapital put rights. The remaining ARS investments are generally collateralizedby pools of commercial paper, investment-grade corporate debt, asset andmortgage-backed securities, government and money-market issues and other ARS.Consistent with our investment policy guidelines, all of the ARS investmentswere rated as investment grade (at least A or better) at the time of purchaseand subsequent to year end remain rated as investment grade. The estimatedmarket value of our non-current ARS holdings at June 30, 2008 was $20.6million, which reflects a $12.9 million adjustment to the principal value of$33.5 million. Although the ARS continue to pay interest according to theirstated terms, based on valuation models and an analysis of other-than-temporaryimpairment factors, we have recorded a further impairment charge of $5.1million in the six months ended June 30, 2008, which includes $0.9 millionrelated to ARS impairments previously recorded as a temporary or unrealizedloss at December 31, 2007.

 

The credit and capital markets have continued to be volatile in 2008.If uncertainties in these credit and capital markets continue, these marketsdeteriorate further or we experience additional downgrades on our investments,we may incur additional impairments, realized or unrealized, to our investmentportfolio, which could negatively affect our financial condition, cash flowsand reported earnings. While the current lack of liquidity in the credit andcapital markets is impacting our financial flexibility, we do not believe theconditions will have a material impact on our cash flows or our ability to fundour operations during the fiscal year 2008.

 

26

----

Tableof Contents

 

**ITEM4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.**

 

     On May 29, 2008, we held our annualmeeting of stockholders. The results of the voting on the proposals submittedto the stockholders at this meeting were as follows:

 

1.  Election of two Class I Directors

 
| **NAME**                  | ** ** | **FOR**    | ** ** | **WITHHELD** | ** ** |
|---------------------------|------------|------------|------------|--------------|------------|
| Linda Buck                |       | 33,571,851 |       | 19,586,401   |       |
| Birgit Stattin  Norinder, |       | 33,679,101 |       | 19,479,151   |       |

 

2.  To approve an amendment of our 2006 EquityIncentive Plan to increase the number of shares of common stock that may besubject to awards thereunder to ten million (10,000,000);

 
| **FOR**    | ** ** | **AGAINST** | ** ** | **ABSTAIN** | ** ** | **BROKER NON-VOTES** | ** ** |
|------------|------------|-------------|------------|-------------|------------|---------------------------|------------|
| 16,449,130 |       | 14,389,427  |       | 63,467      |       | 22,256,228                |       |

 

3.  Ratification of the appointment of Deloitte &Touche LLP as our independent registered public accounting firm for the fiscalyear ending December 31, 2008

 
| **FOR**    | ** ** | **AGAINST** | ** ** | **ABSTAIN** | ** ** |
|------------|------------|-------------|------------|-------------|------------|
| 52,114,262 |       | 96,211      |       | 81,879      |       |

 

27

----

Tableof Contents

 

**ITEM6. EXHIBITS**

 

The following is a listof 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).                                                                          |
|                |       |                                                                                                                                                                                                                                                                                         |
| 10.1                |       | 2006 Equity Incentive  Plan, as amended (Incorporated by reference to Exhibit 10.1 to the  Company’s Current Report on Form 8-K filed June 2, 2008).*                                                                                                                    |
|                |       |                                                                                                                                                                                                                                                                                         |
| 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.                                                                                                                                                                                                               |

 

----

*                    Constitutesa management contract or compensatory plan or arrangement.

 

Note: Unless otherwisenoted, the SEC File number of each of the above referenced documents is000-30469.

 

28

----

Tableof Contents

 

**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

Dated:  August 11,2008

 
|   | deCODE  genetics, Inc.            |
|--------|----------------------------------------|
|   |                                   |
|   |                                   |
|   | /s/ Kari Stefansson                    |
|   | Kari Stefansson                        |
|   | Chairman,  President,                  |
|   | and Chief  Executive Officer           |
|   |                                   |
|   |                                   |
|   | /s/ Lance Thibault                     |
|   | Lance Thibault                         |
|   | Chief Financial  Officer and Treasurer |
|        |                                        |  |

 

29

----

Tableof Contents

 
| **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).                                                                          |
|                |       |                                                                                                                                                                                                                                                                                         |
| 10.1                |       | 2006 Equity Incentive  Plan, as amended (Incorporated by reference to Exhibit 10.1 to the  Company’s Current Report on Form 8-K filed June 2, 2008).*                                                                                                                    |
|                |       |                                                                                                                                                                                                                                                                                         |
| 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.                                                                                                                                                                                                               |

 

----

*                    Constitutesa management contract or compensatory plan or arrangement.

 

Note: Unless otherwisenoted, the SEC File number of each of the above referenced documents is000-30469.

 

30

----