**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**(MarkOne)**

 

**x****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIESEXCHANGE ACT OF 1934.**

 

**FOR THE QUARTERLY PERIOD ENDED MARCH 31,2008**

 

**OR**

 

**o****TRANSITION REPORT PURSUANTTO SECTION 13 OR 15 (d) OF THE SECURITIESEXCHANGE ACT**

 

**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“large accelerated filer,” “accelerated filer,” and “smaller reporting company”in Rule 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 April 30, 2008 was 61,802,127 shares of common stock $.001 parvalue.

 

 

----

 

**deCODEgenetics, Inc.**

 

**INDEX**

** **
| PART I.       |   | FINANCIAL INFORMATION                                                                                     |
|--------------------|--------|-----------------------------------------------------------------------------------------------------------|
|               |   |                                                                                                      |
| Item 1.            |   | Financial Statements (Unaudited)                                                                          |
|               |   |                                                                                                      |
|               |   | Condensed  Consolidated Balance Sheets as of March 31, 2008 and December 31,  2007              |
|               |   |                                                                                                      |
|               |   | Condensed  Consolidated Statements of Operations for the three-months ended  March 31, 2008 and 2007 |
|               |   |                                                                                                      |
|               |   | Condensed  Consolidated Statements of Cash Flows for the three-months ended  March 31, 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 6.            |   | Exhibits                                                                                                  |
|               |   |                                                                                                      |
|               |   | (a) Exhibits                                                                                         |
|               |   |                                                                                                      |
| Signatures         |
|               |   |                                                                                                      |
| Index  to Exhibits |
|                    |        |                                                                                                           |  |

 

1

----

 

**PART I. FINANCIAL INFORMATION**

 

**ITEM1. FINANCIAL STATEMENTS**

 

**deCODEgenetics, Inc.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

(Unaudited)

 
| ** **                                                                                                                                                                                                                | ** ** | **March 31,**                                       | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                | ** ** | **2008**                                                 | ** ** | **2007**              | ** ** |
| ** **                                                                                                                                                                                                                | ** ** | **(In thousands, except  share amounts)** | ** ** |
| ASSETS                                                                                                                                                                                                                    |       |                                                     |       |                  |       |
| Current assets:                                                                                                                                                                                                           |       |                                                     |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                                                                |       | $                                                        | 42,728     |                  | $          | 54,172 |   |
| Investments                                                                                                                                                                                                               |       | —                                                   |       | 10,003                |       |
| Receivables                                                                                                                                                                                                               |       | 12,850                                                   |       | 9,689                 |       |
| Other current  assets                                                                                                                                                                                                     |       | 9,608                                                    |       | 8,782                 |       |
| Total current  assets                                                                                                                                                                                                     |       | 65,186                                                   |       | 82,646                |       |
| Investments,  non-current                                                                                                                                                                                                 |       | 21,712                                                   |       | 24,833                |       |
| Restricted cash  equivalents                                                                                                                                                                                              |       | 5,050                                                    |       | 5,050                 |       |
| Property and  equipment, net                                                                                                                                                                                              |       | 22,065                                                   |       | 23,142                |       |
| Goodwill                                                                                                                                                                                                                  |       | 10,055                                                   |       | 10,055                |       |
| Intangible  assets, net                                                                                                                                                                                                   |       | 3,918                                                    |       | 4,008                 |       |
| Other long-term  assets                                                                                                                                                                                                   |       | 6,069                                                    |       | 6,474                 |       |
| Total assets                                                                                                                                                                                                              |       | $                                                        | 134,055    |                  | $          | 156,208 |   |
| LIABILITIES AND  STOCKHOLDERS’ DEFICIT                                                                                                                                                                               |       |                                                     |       |                  |       |
| Current  liabilities:                                                                                                                                                                                                     |       |                                                     |       |                  |       |
| Accounts payable                                                                                                                                                                                                          |       | $                                                        | 8,320      |                  | $          | 8,618 |   |
| Accrued expenses  and other current liabilities                                                                                                                                                                           |       | 13,897                                                   |       | 12,558                |       |
| Deferred revenue                                                                                                                                                                                                          |       | 10,001                                                   |       | 9,133                 |       |
| Current portion  of capital lease obligations                                                                                                                                                                             |       | 3,108                                                    |       | 3,155                 |       |
| Current portion  of finance obligation on sale-leaseback                                                                                                                                                                  |       | 590                                                      |       | 569                   |       |
| Current portion  of long-term debt                                                                                                                                                                                        |       | 229                                                      |       | 224                   |       |
| Total current  liabilities                                                                                                                                                                                                |       | 36,145                                                   |       | 34,257                |       |
| Deferred revenue                                                                                                                                                                                                          |       | 6,219                                                    |       | 6,219                 |       |
| Deferred gain on  sale-leaseback                                                                                                                                                                                          |       | 23,293                                                   |       | 23,778                |       |
| Capital lease  obligations, net of current portion                                                                                                                                                                        |       | 1,482                                                    |       | 2,202                 |       |
| Finance  obligation on sale-leaseback, net of current portion                                                                                                                                                             |       | 23,994                                                   |       | 24,145                |       |
| Long-term debt,  net of current portion                                                                                                                                                                                   |       | 212,387                                                  |       | 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:  61,803,127 and 61,802,127, respectively, at March 31, 2008; Issued and  outstanding: 61,745,072, at December 31, 2007 |       | 62                                                       |       | 62                    |       |
| Additional  paid-in capital                                                                                                                                                                                               |       | 490,776                                                  |       | 488,963               |       |
| Notes receivable                                                                                                                                                                                                          |       | (2,456                                                   | )          | (2,536                | )          |
| Accumulated  deficit                                                                                                                                                                                                      |       | (657,879                                                 | )          | (631,214              | )          |
| Accumulated  other comprehensive income                                                                                                                                                                                   |       | 37                                                       |       | (925                  | )          |
| Treasury stock,  1,000 and 0 shares stated at cost at March 31, 2008 and  December 31, 2007, respectively                                                                                                       |       | (5                                                       | )          | —                |       |
| Total  stockholders’ deficit                                                                                                                                                                                         |       | (169,465                                                 | )          | (145,650              | )          |
| Total  liabilities and stockholders’ deficit                                                                                                                                                                         |       | $                                                        | 134,055    |                  | $          | 156,208 |   |

 

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

 

2

----

 

**deCODEgenetics, Inc.**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

(Unaudited)

 
| ** **                                                     | ** ** | **Three Months Ended  March 31,**                  | ** ** |
|----------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                     | ** ** | **2008**                                                          | ** ** | **2007** | ** ** |
| ** **                                                     | ** ** | **(In thousands, except  per share amounts)** | ** ** |
| ** **                                                     | ** ** | ** **                                                        | ** ** | ** ** | ** ** |
| Revenue                                                        |       | $                                                                 | 14,978     |   | $ | 8,554 |   |
| Operating  expenses:                                           |       |                                                              |       |   |   |
| Cost of revenue                                                |       | 14,714                                                            |       | 10,918 |   |
| Research and  development                                      |       | 12,653                                                            |       | 12,676 |   |
| Selling, general  and administrative                           |       | 7,211                                                             |       | 5,530 |   |
| Total operating  expenses                                      |       | 34,578                                                            |       | 29,124 |   |
| Operating loss                                                 |       | (19,600                                                           | )          | (20,570 | ) |
| Interest income                                                |       | 1,037                                                             |       | 1,991 |   |
| Interest expense                                               |       | (4,025                                                            | )          | (3,666 | ) |
| Other  non-operating income (expense), net                     |       | (4,077                                                            | )          | (380 | ) |
| Net loss                                                       |       | $                                                                 | (26,665    | ) | $ | (22,625 | ) |
|                                                           |       |                                                              |       |   |   |
| Basic and  diluted net loss per share                          |       | $                                                                 | (0.44      | ) | $ | (0.37 | ) |
| Shares used in  computing basic and diluted net loss per share |       | 61,266                                                            |       | 60,949 |   |

 

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

 

3

----

 

**deCODEgenetics, Inc.**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

(Unaudited)

 
| ** **                                                                   | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| ** **                                                                   | ** ** | **(In thousands)**                          | ** ** |
| **Cash flows from operating activities:**                | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Net loss                                                                     |       | $                                                | (26,665    | ) | $ | (22,625 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                                             |       |   |   |
| Depreciation and  amortization                                               |       | 1,876                                            |       | 1,754 |   |
| Amortization of  deferred gain on sale-leaseback of real estate              |       | (485                                             | )          | (485 | ) |
| Stock-based  compensation                                                    |       | 1,052                                            |       | 1,462 |   |
| Loss on  investments                                                         |       | 4,035                                            |       | — |   |
| Foreign currency  translation                                                |       | 50                                               |       | (15 | ) |
| Amortization of  debt discount                                               |       | 1,190                                            |       | 1,266 |   |
| Amortization of  deferred financing costs                                    |       | 405                                              |       | 381 |   |
| Other                                                                        |       | —                                           |       | (2 | ) |
| Changes in  operating assets and liabilities:                                |       |                                             |       |   |   |
| Receivables and  other assets                                                |       | (3,987                                           | )          | (335 | ) |
| Accounts  payable, accrued expenses and other current liabilities            |       | 1,630                                            |       | 456 |   |
| Deferred revenue                                                             |       | 868                                              |       | 1,838 |   |
| Net cash used in  operating activities                                       |       | (20,031                                          | )          | (16,305 | ) |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                       |       |                                             |       |   |   |
| Purchase of  investments                                                     |       | —                                           |       | (25,334 | ) |
| Sale of  investments                                                         |       | 10,000                                           |       | 37,587 |   |
| Purchase of  property and equipment                                          |       | (709                                             | )          | (237 | ) |
| Proceeds from  sale of property                                              |       | —                                           |       | 238 |   |
| Net cash  provided by investing activities                                   |       | 9,291                                            |       | 12,254 |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                       |       |                                             |       |   |   |
| Proceeds from  issuance of common stock                                      |       | 172                                              |       | 18 |   |
| Repayment of  notes receivable for common stock                              |       | 75                                               |       | 14 |   |
| Repayments of  debt and capital lease obligations                            |       | (951                                             | )          | (657 | ) |
| Net cash used in  financing activities                                       |       | (704                                             | )          | (625 | ) |
| Net decrease in  cash and cash equivalents                                   |       | (11,444                                          | )          | (4,676 | ) |
| Cash and cash  equivalents at beginning of period                            |       | 54,172                                           |       | 21,882 |   |
| Cash and cash  equivalents at end of period                                  |       | $                                                | 42,728     |   | $ | 17,206 |   |
| Supplemental  cash flow information:                                         |       |                                             |       |   |   |
| Cash paid for  interest                                                      |       | $                                                | 462        |   | $ | 224 |   |

 

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

 

4

----

 

**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.

 

As deCODE advances its genomic services and drugdevelopment pipeline it will require significant financial resources.Management 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 and recurringnature) necessary to present fairly the financial position as of March 31,2008, the results of operations for the three-month periods ended March 31,2008 and 2007 and cash flows for the three-month periods ended March 31,2008 and 2007. The results of operations for the three-month period ended March 31,2008 are not necessarily indicative of the results to be expected for the fullyear. These financial statements should be read in conjunction with deCODE’sAnnual Report on Form 10-K for the year ended December 31, 2007,which includes consolidated financial statements and notes thereto for theyears ended December 31, 2007, 2006 and 2005.

 
| **3.** | ** ** | **Revenue** |
|--------|------------|-------------|

 

Significant elements ofdeCODE’s revenue are summarized as follows:

 
| ** **                                       | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                       | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| ** **                                       | ** ** | **(In thousands)**                          | ** ** |
| Genomic services                                 |       | $                                                | 4,876      |   | $ | 1,104 |   |
| Research funding  and other service fees         |       | 4,552                                            |       | 3,510 |   |
| Government  research contracts and grant funding |       | 4,875                                            |       | 3,360 |   |
| Milestone  payments and other                    |       | 675                                              |       | 580 |   |
| Total revenue                                    |       | $                                                | 14,978     |   | $ | 8,554 |   |

 

For the three months ended March 31, 2008 and2007, government research contract and grant revenue from divisions of theUnited States National Institutes of Health (NIH) constituted 24% and 26%,respectively, of consolidated revenue and grant revenue from the EuropeanCommunity (EC) constituted, 8% and 13%, respectively, of consolidated revenue.

 

During the three-months ended March 31, 2008 and2007, deCODE performed services totaling $95,000 and $121,000, respectively,for employers of members of deCODE’s Board of Directors.

 

5

----

 
| **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  March 31, 2008** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                             | ** ** | **Revenue**                                                | ** ** | **Cost of  Revenue** | ** ** | **Net** | ** ** |
| ** **                                             | ** ** | **(In thousands)**                                    | ** ** |
| Genomic  services, research funding and other services |       | $                                                          | 10,103     |   | $ | 8,127 |   | $ | 1,976 |   |
| Government  research contracts and grant funding       |       | 4,875                                                      |       | 6,587 |   | (1,712 | ) |
| Total cost of  revenue                                 |       | $                                                          | 14,978     |   | $ | 14,714 |   | $ | 264 |   |

 
| ** **                                             | ** ** | **Three Months Ended  March 31, 2007** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                             | ** ** | **Revenue**                                                | ** ** | **Cost of  Revenue** | ** ** | **Net** | ** ** |
| ** **                                             | ** ** | **(In thousands)**                                    | ** ** |
| Genomic  services, research funding and other services |       | $                                                          | 5,194      |   | $ | 5,893 |   | $ | (699 | ) |
| Government  research contracts and grant funding       |       | 3,360                                                      |       | 5,025 |   | (1,665 | ) |
| Total cost of  revenue                                 |       | $                                                          | 8,554      |   | $ | 10,918 |   | $ | (2,364 | ) |

 
| **5.** | ** ** | **Research  and Development** |
|--------|------------|-------------------------------|

 

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

 
| ** **                                       | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                       | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| ** **                                       | ** ** | **(In thousands)**                          | ** ** |
| Salaries and  other personnel costs              |       | $                                                | 4,813      |   | $ | 4,663 |   |
| Materials and  supplies                          |       | 2,882                                            |       | 2,672 |   |
| Contractor  services and other third party costs |       | 2,324                                            |       | 2,699 |   |
| Overhead  expenses                               |       | 1,390                                            |       | 1,448 |   |
| Depreciation and  amortization                   |       | 914                                              |       | 722 |   |
| Stock-based  compensation                        |       | 330                                              |       | 472 |   |
|                                             |       | $                                                | 12,653     |   | $ | 12,676 |   |

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

 

Stock-based compensationis included in deCODE’s results of operations as follows:

 
| ** **                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------|------------|--------------------------------------------------|------------|
| ** **                           | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| ** **                           | ** ** | **(In thousands)**                          | ** ** |
| Operating  Expenses:                 |       |                                             |       |   |   |
| Cost of revenue                      |       | $                                                | 135        |   | $ | 131 |   |
| Research and  development            |       | 330                                              |       | 472 |   |
| Selling, general  and administrative |       | 587                                              |       | 859 |   |
| Total                                |       | $                                                | 1,052      |   | $ | 1,462 |   |

 

6

----

 

As of March 31, 2008there was approximately $8,461,000 of total unrecognized compensation expenserelated to nonvested stock options. This expense is expected to berecognized over a weighted-average period of approximately 2.8 years.

 

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

 
| ** **                | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------|------------|--------------------------------------------------|------------|
| ** **                | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
|                      |       |                                             |       |   |   |
| Dividend yield            |       | 0                                                | %          | 0 | % |
| Expected  volatility      |       | 63.0                                             | %          | 64.8 | % |
| Expected term  (in years) |       | 5.3                                              |       | 5.4 |   |
| Risk-free  interest rate  |       | 2.7                                              | %          | 4.5 | % |

 

deCODE estimates theexpected term of the options based on historical patterns by employees withrespect to exercise and post vesting employment termination behaviors. deCODE’sexpected volatility is calculated using a weighted average of the volatilityover a period equal to the expected term of the award and the most recent oneyear volatility. deCODE bases the risk-free interest rate used on the impliedrate available on the U.S. Treasury zero-coupon issues with a comparable term.As deCODE does not pay dividends, the dividend variable rate is zero.

 

The following tablesummarizes stock option activity for the three-months ended March 31,2008:

 
| ** **                                          | ** ** | **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                                             |       | 958,000                    |       | 3.02                                   |       |                                                |       |                                |       |
| Exercised                                           |       | (2,500                     | )          | 2.11                                   |       |                                                |       |                                |       |
| Forfeited/cancelled                                 |       | (88,362                    | )          | 5.98                                   |       |                                                |       |                                |       |
| Outstanding at  March 31, 2008                 |       | 8,640,697                  |       | $                                      | 5.85       |                                                | 7.32       |                                | $          | 0 |   |
| Vested and  expected to vest at March 31, 2008 |       | 8,331,997                  |       | $                                      | 5.91       |                                                | 7.27       |                                | $          | 0 |   |
| Exercisable at  March 31, 2008                 |       | 4,940,470                  |       | $                                      | 7.22       |                                                | 6.11       |                                | $          | 0 |   |

 

deCODE’s Equity Incentive Plans allow for the issuanceof restricted stock awards that may not be sold or otherwise transferred untilcertain restrictions have lapsed. The unearned stock-based compensation relatedto these awards is amortized to compensation expense over the period therestrictions lapse. The stock-based compensation expense for these awards isdetermined based on the market price of our stock at the date of the grantapplied to the total numbers of shares that are anticipated to fully vest and thenamortized over the vesting period. During the three-months ended March 31,2008 and 2007, deCODE recognized expense related to restricted stock grants of$54,000 and $53,000, respectively. At March 31, 2008, deCODE had 50,000unvested restricted shares with a weighted average grant date fair value of$9.40.

 
| **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 lossper share 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

----

 
| ** **                                                                                            | ** ** | **March 31,** | ** ** | **March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                                                                            | ** ** | **2008**           | ** ** | **2007**           | ** ** |
| ** **                                                                                            | ** ** | **(Shares)**       | ** ** |
| Warrants to  purchase shares of common stock                                                          |       | 455,965            |       | 856,371            |       |
| Options to  purchase shares of common stock                                                           |       | 8,640,697          |       | 7,278,750          |       |
| Restricted  shares subject to vesting or with an associated outstanding non-recourse  promissory note |       | 435,500            |       | 705,497            |       |
| Convertible  shares issuable upon conversion of 3.5% senior convertible notes                         |       | 16,428,572         |       | 16,428,572         |       |
| Total shares                                                                                          |       | 25,960,734         |       | 25,269,190         |       |

** **

**8.      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 andunrealized gains and losses associated with investments. The following tablepresents the calculation of comprehensive income (loss):

 
| ** **                                                                              | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                              | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| ** **                                                                              | ** ** | **(In thousands)**                          | ** ** |
|                                                                                    |       |                                             |       |   |   |
| Net loss                                                                                |       | $                                                | (26,665    | ) | $ | (22,625 | ) |
| Other  comprehensive income (loss):                                                     |       |                                             |       |   |   |
| Foreign currency  translation                                                           |       | 50                                               |       | (15 | ) |
| Recognition of  unrealized loss on auction rate securities as other-than-temporary loss |       | 914                                              |       | — |   |
| Unrealized gain  (loss) associated with investments                                     |       | (3                                               | )          | 21 |   |
| Total  comprehensive loss                                                               |       | $                                                | (25,704    | ) | $ | (22,619 | ) |

 

**9.      Investments**

 

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

 
| ** **                             | ** ** | **Cost**                | ** ** | **Carrying  Value** | ** ** | **Unrealized  Gains (Losses)  In OCI** | ** ** |
|----------------------------------------|------------|-------------------------|------------|---------------------|------------|--------------------------------------------------|------------|
| ** **                             | ** ** | **(In thousands)** | ** ** |
| **March 31,  2008**               |       |                    |       |                |       |                                             |       |
| Auction rate  securities (non-current) |       | $                       | 33,500     |                | $          | 21,712                                           |       | $ | — |   |
|                                        |            |                         |            |                     |            |                                                  |            |  |  |  |

 

Gross unrealized holdinggains and gross unrealized holding losses at March 31, 2008 were $0 and$0, respectively, and at December 31, 2007 were $3,000 and $914,000,respectively, and are included in accumulated other comprehensive income.

 
| ** **                            | ** ** | **March 31,  2008** | ** ** |
|---------------------------------------|------------|--------------------------|------------|
| ** **                            | ** ** | **(In thousand)**   | ** ** |
| Contractual  maturity of investments: |       |                     |       |
| Maturing after  10 years              |       | $                        | 13,454     |   |
| No maturity date  (perpetual)         |       | 8,258                    |       |
|                                  |       | $                        | 21,712     |   |

 

At March 31, 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 three-months ended March 31,2008 by selling, at par value, the $5,000,000 ARS security classified incurrent investments 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 

 

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their holdings by sellingtheir securities at par value. deCODE generally invested in these securitiesfor short periods of time as part of its cash management program. However, therecent uncertainties in the credit markets have prevented deCODE and otherinvestors from liquidating holdings of its remaining ARS in recent auctionsbecause the amount of securities submitted for sale has exceeded the amount ofpurchase orders resulting in multiple failed auctions.

 

The estimated market value of deCODE’s non current investments in ARSat March 31, 2008 was $21,712,000, which reflects an $11,788,000adjustment to the principal value of $33,500,000. Although the ARS continue topay interest according to their stated terms, based on valuation models and ananalysis of other-than-temporary impairment factors, deCODE has recorded an impairmentcharge of $4,035,000 in Other non-operating income (expense), net in theStatements of Operations for the three-months ended March 31, 2008,reflecting the portion of ARS holdings that deCODE has concluded have another-than-temporary decline in value. This $4,035,000 charge includes $914,000related to ARS which deCODE had previously believed to be temporary andaccounted 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 ordeCODE experiences 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.

 

**10.    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 our Annual Report on Form 10-K for the year ended December 31,2007.

 

In the matter of In re deCODE genetics, Inc. InitialPublic Offering, which is described in deCODE’s Annual Report on Form 10-K forthe year ended December 31, 2007, on June 25, 2007, the United StatesDistrict Court for the Southern District of New York entered an order formallydenying the motion for final approval of the settlement agreement because thesettlement class could not be certified. On August 14, 2007, theplaintiffs filed their second consolidated amended class action complaintsagainst the “focus cases” and on September 27, 2007, again moved for classcertification. The focus cases are a small group of cases that were selected astest cases due to the large number of nearly identical actions which wereconsolidated in the Initial Public Offering litigation. The court has indicatedthat the focus cases are intended to provide strong guidance for the othercases. The case involving deCODE is not a focus case. On November 12,2007, certain of the defendants in the focus cases moved to dismiss the secondconsolidated amended class action complaints. On March 26, 2008, thedistrict court denied the motions to dismiss except as to Section 11claims raised by those plaintiffs who sold their securities for a price inexcess of the initial public offering price and those who purchased outside thepreviously certified class period. Briefing on the class certification motion wascompleted in April 2008. Due to the inherent uncertainties of litigation,deCODE cannot accurately predict the ultimate outcome of the matter.

 

**11.    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 nonfinancialliabilities. The adoption of FAS 157 did not have a material impact on deCODE’sconsolidated financial statements. deCODE is evaluating the impact on thenon-financial assets and liabilities.

 

**Valuation Hierarchy.** SFAS 157 establishes a valuationhierarchy for disclosure of the inputs to valuation used to measure fair value.This hierarchy prioritizes the inputs into three broad levels as follows. Level1 inputs are quoted prices (unadjusted) in active 

 

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markets foridentical assets or liabilities. Level 2 inputs are quoted prices for similarassets and liabilities in active markets or inputs that are observable for theasset or liability, either directly or indirectly through market corroboration,for substantially the full term of the financial instrument. Level 3 inputs areunobservable inputs based on assumptions used to measure assets and liabilitiesat fair value. A financial asset or liability’s classification within thehierarchy is determined based on the lowest level input that is significant tothe fair value measurement.

 

The following table provides the assets and liabilities carried at fairvalue measured on a recurring basis as of March 31, 2008:

 
| ** **               | ** ** | ** **                                               | ** ** | **Fair Value Measurements  at March 31, 2008 Using:** | ** ** |
|--------------------------|------------|----------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **               | ** ** | **Total  Carrying  Value at  March 31,  2008** | ** ** | **Quoted  prices in  active  markets  (Level 1)**                         | ** ** | **Significant  other  observable  inputs  (Level 2)** | ** ** | **Significant  unobservable  inputs  (Level 3)** | ** ** |
| ** **               | ** ** | **(In thousands)**                                  | ** ** |
| Auction rate  securities |       | $                                                        | 21,712     |                                                                                | $          | — |   | $ | — |   | $ | 21,712 |   |
|                          |            |                                                          |            |                                                                                     |            |  |  |  |  |  |  |  |  |

 

The following table presents deCODE’s assets measured at fair value ona recurring basis using significant unobservable inputs (Level 3) at March 31,2008:

 
| ** **                              | ** ** | **Auction Rate  Securities** | ** ** |
|-----------------------------------------|------------|-----------------------------------|------------|
| ** **                              | ** ** | **(In thousands)**           | ** ** |
| Balance at  December 31, 2007      |       | $                                 | 24,833     |   |
| Transfers to  Level 3                   |       | —                            |       |
| Total gains  (losses):                  |       |                              |       |
| Included in  earnings                   |       | (4,035                            | )          |
| Included in  other comprehensive income |       | 914                               |       |
| Purchase and  settlements (net)         |       | —                            |       |
| Balance at  March 31, 2008         |       | $                                 | 21,712     |   |

 

**ValuationTechniques.**deCODE’s investments in auction rate securities at March 31,2008 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, deCODE adopted, on a prospective basis, Statement of Financial AccountingStandards No. 159, *The Fair ValueOption for Financial Assets and Financial Liabilities*(“SFAS 159”).SFAS 159 permits entities to choose to measure many financial instruments andcertain other items at fair value. The objective of the guidance is to improvefinancial reporting by providing entities with the opportunity to mitigate volatilityin reported earnings caused by measuring related assets and liabilitiesdifferently without having to apply complex hedge accounting provisions. Theadoption of SFAS 159 did not have a material impact on deCODE’s consolidatedfinancial statements.

 

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**ITEM 2.           MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

This Management’s Discussion and Analysis of FinancialCondition and Results of Operations as of March 31, 2008 and for thethree-month periods ended March 31, 2008 and 2007 should be read inconjunction with the unaudited condensed consolidated financial statements andnotes thereto set forth in Item 1 of this report.

 

 This quarterly report on Form 10-Q containsforward-looking statements, including our expectations of future industryconditions, strategic plans and forecasts of operational results. Various risksmay cause our actual results to differ materially. A list and description ofsome of the risks and uncertainties is contained below and in the summary ofrisk 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.

 

In order to optimize our resources and develop products to generaterevenue in the near term, we are applying our discoveries and unique expertisein human genetics and genotyping to our molecular diagnostics. Since thebeginning of 2007, we have launched five reference laboratory DNA-based diagnostictests to detect genetic variations that we have linked to increased risk ofseveral common diseases. Such tests can be employed as an aid in developingmore effective disease prevention strategies by helping individuals to betterunderstand their inherited risk of a given condition, as well as to identifypatients likely to respond well to a given drug. In April 2007,  we began offering deCODE T2TM, our firstDNA-based diagnostic test, which detects a gene variant we discovered to beassociated with increased risk of type 2 diabetes. In July, we introduced oursecond reference laboratory DNA-based diagnostic test, deCODE AFTM, for a genevariant we discovered to be associated with increased risk of atrialfibrillation and stroke. In October, we began offering deCODE MITM, a DNA-baseddiagnostic test which detects a gene variant which is associated withearly-onset heart attack, (myocardial infarction, or MI). Most recently, welaunched deCODE ProCaTM, which detects eight genetic variants we have linked toincreased risk of various types of prostate cancer and deCODE GlaucomaTM, whichdetects three genetic variants we have linked to increased risk of exfoliationglaucoma. All of these tests are offered by deCODE via direct sales efforts tophysicians and a dedicated website (www.decodediagnostics.com).

 

In November 2007, we also launched the firstconsumer genetic analysis service: deCODEmeTM. The service takes advantage ofdeCODE’s leadership in human genetics and its whole-genome genotypingcapabilities. Through deCODEmeTM,subscribers can put themselves in the context of the latest discoveries ingenetics, learning what their own DNA says about their ancestry, body —traitssuch as hair and eye color— as well as whether they have genetic variants thathave been associated with higher or lower than average risk of a range ofcommon diseases. This information is continually updated as new discoveries aremade, and is presented in subscribers’ secure individual web pages.

 

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 clinical trials.We also actively explore out-licensing, co-development, and partneringopportunities, and in certain programs have brought directly into clinicaltrials compounds that address targets we have identified through our geneticsresearch but which were originally developed by other companies for otherindications.

 

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Over the past year wehave also made significant progress in our drug development programs. 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.

 

DG041 is our novel,first-in-class antagonist of the EP3 receptor for prostaglandins E2, which weare developing as a next-generation oral anti-platelet therapy aimed atpreventing arterial thrombosis without increasing bleeding time. In a Phase IIclinical trial and additional clinical pharmacology studies completed in 2007,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. We are conducting a secondclinical pharmacology study examining the impact of DG041 on top of aspirin andPlavix TM. We expect to release top-line data from this study in thesecond quarter of 2008. We are concurrently working on a once-daily formulationfor DG041, and continue to engage in partnering discussions.

 

In addition, deCODE isconducting drug discovery work on its PDE4 program, the most advanced of itspreclinical programs. It has been well-established that PDE4 inhibitors—awell-accepted target for a broad range of common diseases, including asthma,COPD, cognitive disorders and vascular disease—have been difficult toclinically develop since a common side effect is emesis and nausea. Ourplatform has led to the development of several lead series of compounds whichdemonstrated 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.

 

deCODE and Illumina, Inc.are working together to develop DNA-based diagnostic kits utilizing deCODE’sgene discoveries in heart attack, type 2 diabetes and breast cancer andIllumina’s platform for SNP genotyping. We expect that the first diagnostic kitto be ready in the first half of 2009. deCODE is also actively exploring drugdevelopment partnerships in its most advanced therapeutic programs, in order tospread risk and cost, and to focus resources on the advancement of itsdiagnostic and drug discovery work and preclinical candidates.

 

 The goal of our business strategy is tomaximize the creation of value from our human genetics, drug discovery, drugdevelopment and diagnostics work and to capture that value for the company andits stockholders. Our product development pipeline now includes drugdevelopment programs in heart attack and arterial thrombosis, and following thelaunch of five reference lab tests, we are advancing the development ofDNA-based diagnostic tests in breast cancer and deep vein thrombosis amongother conditions. Executing on our strategy – advancing and capturing the valueof these products while continuing our discovery work in a broad range ofcommon diseases – requires us to spread risk and manage cost. We are constantlyevaluating the optimal balance between proprietary and partnered productdevelopment, the level of our investment in research and development, thedeployment of cash resources for product development, and the financingenvironment.

 

As we invest in proprietary programs, we leverage ourcapabilities to provide services to fee-paying customers. We also receivecontract and grant funding from various governmental agencies. We have formeddrug and other product development alliances. Our chemistry subsidiary providesdrug discovery and contract manufacturing services to fee-for-service customers,and our other service offerings include protein crystallography products andinstruments through our biosystems subsidiary, as well as protein structureanalysis contract services through our structural biology subsidiary; and DNAanalysis services through our genotyping laboratory in Reykjavik.

 

We have derived revenuesprimarily from research funding and other fees from our service customers, aswell as from research grants. Milestone payments and upfront, exclusivity,technology-access and technology-development fees under our collaborationagreements constitute another source of our revenues. Our expenses consistprimarily of research and development expenses such as salaries and relatedemployee costs, materials and supplies, 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. In 2007 we continued to advance ourdrug development programs, successfully completing with DG051 a successfulPhase I multiple dose ranging study; a 28 day extension of the multiple dosestudy; various drug-drug interaction studies and a food effect study, and aPhase IIa trial. We completed a successful Phase IIa trial of DG041 along witha highly informative clinical pharmacology study conducted in the presence andabsence of aspirin and we are currently conducting a study that will assess thepharmacology of DG-041 in the presence of clopidogrel and clopidogrel plusaspirin. We also completed two important drug-drug interaction studies thatsignificantly de-risked the further development of DG-041. We have establisheda Clinical Laboratory Improvement Amendments (CLIA) registered reference laboratoryfor offering DNA-based diagnostic tests, and expect to follow our recentlaunches with several other tests we now have in 

 

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development. Weanticipate incurring additional net losses at least through the next severalyears, due to, in addition to the above-mentioned factors, depreciation andamortization, as well as stock-based compensation and other non-cash charges.We expect that our revenues and losses will fluctuate from quarter to quarterand that such fluctuations may be substantial, especially because progress inour scientific work and milestone payments that are related to progress canfluctuate between quarters. We do not believe that comparisons of ourquarter-to-quarter performance are a good indication of future performance.

 

At March 31, 2008,we had $42.7 million in cash and cash equivalents. Together with ourinvestments ($21.7 million) and restricted cash equivalents ($5.1 million),this balance ($69.5 million) is $24.6 million less than at December 31,2007. As we advance genetic services and our drug development pipeline we willrequire significant additional capital for product development and so we willcontinue to investigate additional 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. Inaddition to company-specific factors, our ability to obtain capital in thefuture will be affected by conditions in the global financial markets and inthe pharmaceutical industry. No assurance can be given that additionalfinancing or collaborations and licensing arrangements will be available whenneeded, or that if available, will be obtained on favorable terms. If adequatefunds are not available when needed, we may have to curtail operations orattempt to raise funds on unattractive terms.

 

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.

 

**Our product portfolio anddevelopment pipeline**

 

**DNA-baseddiagnostic tests and consumer genetic analysis**

 

We currently offer fiveDNA-based diagnostic tests for gauging individual risk of several commondiseases — all launched since the beginning of 2007 — and have several moresuch tests in development. We also offer a personal genome analysis service,deCODEmeTM. We are actively marketing these products and are seeking payorreimbursement for our diagnostic tests. These products and others we now havein development are listed in the table below. The predicted launch dates forthose tests still in development are given only as a guide according to ourcurrent expectations for each program.

 
| **Therapeutic  area**                                                     | ** ** | **Name of product**   | ** ** | **Launch date**    |
|---------------------------------------------------------------------------|------------|-----------------------|------------|--------------------|
| Type 2 diabetes                                                           |       | deCODE T2TM       |       | April 2007    |
| Atrial fibrillation/stroke                                                |       | deCODE AFTM       |       | July 2007     |
| Early-onset heart attack/abdominal aortic  aneurysm/intracranial aneurysm |       | deCODE MITM       |       | October 2007  |
| Consumer genetic analysis                                                 |       | deCODEmeTM        |       | November 2007 |
| Prostate cancer                                                           |       | deCODE ProCaTM    |       | February 2008 |
| Exfoliation glaucoma                                                      |       | deCODE GlaucomaTM |       | February 2008 |
| Breast cancer                                                             |       | deCODE BrCaTM     |       | Q4 2008            |

 

**Drug Development 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.

 

·                  We have two compounds in development for theprevention of heart attack. These programs come out of our discovery of majorrisk variants in two genes encoding proteins in the leukotriene pathway. Thesevariants – in the genes that code for leukotriene A4 Hydrolase (LTA4H) and5-lipoxygenase activating protein (FLAP) – appear to confer risk in the sameway: by causing an up regulation in the production of leukotriene B4, a potentpro-inflammatory molecule that is the end product of one branch of the pathway.The therapeutic goal of both compounds is to inhibit the activity of thepathway, lowering the production of LTB4 and thereby decreasing theinflammatory activity in atherosclerotic plaques and reducing the risk of heartattack. In addition to reducing the risk of heart attack, these drugs mayprovide benefit in other inflammatory diseases.

 

DG051, discovered internally by deCODE’schemistry unit, is a small-molecule inhibitor of LTA4H, which is directlyinvolved in the synthesis of LTB4. In 2007, we completed our Phase I program,the results of which demonstrated that DG051 was safe and well tolerated at alldoses tested, has a pharmacokinetic profile suited for potential once-a-daydosing, and significantly reduces LTB4 levels in a concentration-dependentmanner. We also concluded a Phase IIa study in late 2007, which demonstratedsafety and tolerability and a significant reduction in LTB4, even at lowerdoses 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 

 

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effects of the current standardof care, which included statin therapy for a majority of patients in ourtrials. In 2006 webegan a Phase III clinical trial for DG031, a trial which we voluntarilysuspended because the drug tablets appeared to dissolve more slowly thananticipated, potentially providing lessening amounts of active drug the longerthey were stored. We have successfully reformulated the compound. We arecurrently seeking a partner with whom to take the next step in development ofour leukotriene program.

 

·  DG041 is being developed as ananti-platelet compound for the prevention of arterial thrombosis. DG041 is afirst-in-class small molecule inhibitor of the EP3 receptor for prostaglandinE2, a G-protein coupled receptor (GPCR). It has been demonstrated by in vitrostudies that PGE2 may have additive stimulatory effects on platelet aggregationbeyond those of other potent agonists such as ADP or thromboxane A2, targetedby clopidogrel and aspirin, respectively.The results 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 DG-041thatdemonstrated a lack of any relevant interaction by DG-041 on two common routesof drug metabolism. Based on the results ofour clinical studies thus far, DG041 appears to be well-tolerated, showinglittle difference in bleeding events between dosing arms and placebo, and topotentially offer focused means of preventing the formation of thrombi byspecifically inhibiting platelet aggregation mediated by EP3. We are currently workingon a once-daily formulation. We are conducting a study to assess thepharmacology of DG-041 in the presence of clopidogrel and clopidogrel plusaspirin. We expect to release top-line results from this study in the secondquarter of 2008.

 

·  Among our most advanced preclinicalprograms, we are pursuing a PDE4 inhibitor program across several indications,a program begun pursuant to our 2004 agreement with Roche.

 

For our most significantresearch and development programs we have cumulatively invested $46.4 million,$23.4 million and $15.7 million in our heart attack (myocardial infarction, orMI), arterial thrombosis and stroke programs, respectively, from the beginningof 2003 to date (March 31, 2008). Inception to-date costs are notavailable as 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 development and commercialization of ourproducts. Entering into collaboration with a partner at any point in thedevelopment or commercialization of a product is a business decision. Whenmaking this decision we do and will consider, among other matters, thecomplexity of the indication, the size, complexity and expense of necessary developmentand/or commercialization efforts, competition in the market and size of theapplicable market, an assessment of our own resources–financial andoperational, and an assessment of the resources of a potential partner. In theevent that we do collaborate on any of the above programs in the future, apartner will have a level of control, which may be significant, over thepre-clinical development or clinical trial process for a product. As a resultthe completion date of such a partnered program could largely be under controlof that third party rather than under our control. We cannot forecast with anydegree of certainty which proprietary drug candidate will be subject to futurecollaborative arrangements or how such arrangements would affect our developmentplan or capital requirements.

 

As a result of theuncertainties discussed above, we are unable to determine the duration andcompletion costs of our research and development projects or when and to whatextent we will receive cash inflows from the commercialization and sale of aproduct.

 

**Acquisitions, Joint DevelopmentPrograms and In-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, intellectual property.

 

*Illumina*. In May 2006, we entered into a strategic alliance with Illumina, Inc.(“Illumina”) to develop and commercialize molecular diagnostic products. Underthe terms of the agreement, deCODE and Illumina will share development costsequally and split operating profits from the sales of diagnostic products. Ourinitial focus will be developing diagnostics for heart attack, breast cancerand type 2 diabetes. Also as part of the agreement, we have installed Illumina’sSNP genotyping platform to carry-out high-density, whole-genome studiesutilizing our comprehensive population genetics resources in Iceland, thereby,enabling us to expand our contract scientific services business to offerIllumina’s platform and assay technologies together with our proprietaryanalytical services for customers.

 

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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.

 

**Results of Operations for the Three-Month PeriodsEnded March 31, 2008 and 2007**

 

Our results of operationshave fluctuated from period to period and may continue to fluctuate in thefuture based upon, among other things, the pace and progress of our proprietaryresearch and clinical development efforts, the timing and composition offunding under our various collaborative agreements, and the progress of our ownresearch and development efforts. Results of operations for any period may beunrelated to results of operations for any other period. In addition,historical results should not be viewed as indicative of future operatingresults. We are subject to risks common to companies in our industry and at ourstage of development, including risks inherent in our research and developmentefforts, reliance upon collaborative partners, development by us or our competitorsof new technological innovations, ability to market products or services,dependence on key personnel, dependence on key suppliers, protection ofproprietary technology, ability to obtain additional financing, ability tonegotiate collaborative arrangements, and compliance with governmental andother regulations. In order for a product to be commercialized based on ourresearch, we and our collaborators must conduct pre-clinical tests and clinicaltrials, 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 or diagnostic productsfor a period of years, if at all.

 

Financial highlights asof and for the three-month period ended March 31, 2008 include:

 

· At March 31, 2008, we had $42.7million in cash and cash equivalents. Together with our investments ($21.7million) and restricted cash equivalents ($5.1 million), this balance ($69.5million) is $24.6 million less than at December 31, 2007. The netutilization of our cash in these first three months reflects principally thecosts associated with the advancement of our diagnostic and drug developmentprograms as reflected in the $20.0 million of cash we used in operatingactivities.

 

·Our research and development expense was $12.7 million for the three-monthperiod ended March 31, 2008 as compared to $12.7 million for thethree-month period ended March 31, 2007. Our research and developmentexpense for the quarter reflects the advancement of our drug and diagnosticprograms, including costs related to the development and launchof our latest DNA-based diagnostic tests for gauging individual risk of agrowing number of common diseases and ongoing gene discovery work that isfeeding our diagnostic pipleline and deCODEme services. We also continue topursue our PDE4 inhibitor program across several indications.

 

· Our revenue for the three-month periodended March 31, 2008 was $15.0 million as compared to $8.6 million for thethree-month period ended March 31, 2007, and increased principally inrespect to our genomic services, other research services and in grant fundedwork. Importantly, our genomic services revenues were $4.9 million in the firstquarter of 2008 as compared to $1.1 million in the first quarter of 2007.

 

·Withcontinuing developments in the global credit and capital markets into 2008, werecognized a further other-than-temporary loss on investments in auction ratesecurities (“ARS”), classified as non-current investments on our balance sheetat March 31, 2008. The estimated market value of our ARS holdingsat March 31, 2008 was $21.7 million. Although the ARS continue to payinterest according to their stated terms, based on the valuation models and ananalysis of other-than-temporary impairment factors, we have recorded animpairment charge of $4.0 million during the three-months ended March 31,2008. This impairment charge includes $0.9 million of impairment determined tobe temporary at December 31, 2007.

 

***Revenue***

 
| ** ** | ** ** | **Three Months Ended  March 31,** | ** ** | **2008 as Compared to 2007** | ** ** |
|------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** ** | ** ** | **2008**                                         | ** ** | **2007**                                         | ** ** | **$  Change** | ** ** | **% Change** | ** ** |
| ** ** | ** ** | **(In thousands, except %)**      | ** ** |
| Revenue    |       | $                                                | 14,978     |                                             | $          | 8,554 |   | $ | 6,424 |   | 75 | % |
|            |            |                                                  |            |                                                  |            |  |  |  |  |  |  |  |

 

In 2008, our businessstrategy is focused on emphasizing our core capabilities in human genetics andleveraging those strengths to

 

15

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build on opportunities togenerate near-term revenue from products that we already have available; namelyour genomic services comprising diagnostics, our consumer genetics servicedeCODEme and genotyping and other scientific services. At the same time, weplan to advance our early and late stage drug programs through corporatepartnerships, and will generate revenue from contract and other service fees.Further, we will continue to leverage our capabilities to continue with andpursue funding in the form of research grants. In the majority of our programswe are pursuing diagnostic and early-stage drug development on our own.Depending on the nature of each prospective business opportunity, the keycomponents of the commercial terms of such arrangements typically include oneor more of the following: research funding; up-front, exclusivity, technologyaccess, and technology development fees; fees for particular services;milestone payments; license or commercialization fees; and royalties or profitsharing from the commercialization of products.

 

Significant elements ofour revenue are summarized as follows:

 
| ** **                                       | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                       | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| ** **                                       | ** ** | **(In thousands)**                          | ** ** |
| Genomic services                                 |       | $                                                | 4,876      |   | $ | 1,104 |   |
| Research funding  and other service fees         |       | 4,552                                            |       | 3,510 |   |
| Government  research contracts and grant funding |       | 4,875                                            |       | 3,360 |   |
| Milestone  payments and other                    |       | 675                                              |       | 580 |   |
|                                             |       | $                                                | 14,978     |   | $ | 8,554 |   |

 

Increases in our revenuefor the three-months ended March 31, 2008 as compared to the same periodin 2007 are largely on account of (i) the growth of our genomics 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.

 

At March 31,2008 we had $16.2 million in deferred revenue, compared to $15.4 millionat December 31, 2007. Of this deferred revenue, $6.2 million relates toour agreement with Merck to conduct information-rich clinical trials in Icelandand, to date, Merck has not selected any compounds for development under theagreement. We expect that our revenues will fluctuate from period to period andthat such fluctuations may be substantial especially because progress in ourscientific work, including milestone payments that are related to progress, canfluctuate between periods.

 

Collaborations with ourmost significant partners include:

 

*GovernmentResearch Contracts and Grant 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 approvedbudgets with budgeted amounts subject to approval on an annual basis. NIHgrants generally provide for 100% reimbursement of allowable expenditures whilegrants under the EC generally provides for fifty percent reimbursement of allowable research and development relatedexpenditures. Our significant research contracts include:

 

*NationalInstitutes of Allergy and Infectious Diseases (NIAID).*In September 2004, deCODE wasawarded a five-year $23.9 million contract by the NIAID, a division of NIH.Under the contract, deCODE will apply its population approach and resources todiscover genetic factors associated with susceptibility to certain infectiousdiseases and with responsiveness to vaccines targeting such diseases. deCODE mayreceive $9.0 million in additional research funding over the remaining term ofthe agreement.

 

***Cost of Revenue***

 
| ** **      | ** ** | **Three Months Ended  March 31,** | ** ** | **2008 as Compared to 2007** | ** ** |
|-----------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **      | ** ** | **2008**                                         | ** ** | **2007**                                         | ** ** | **$  Change** | ** ** | **% Change** | ** ** |
| ** **      | ** ** | **(In thousands, except %)**      | ** ** |
| Cost of revenue |       | $                                                | 14,714     |                                             | $          | 10,918 |   | $ | 3,796 |   | 35 | % |
|                 |            |                                                  |            |                                                  |            |  |  |  |  |  |  |  |

 

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

 

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on which we receiveresearch funding; (ii) costs associated with other service fee revenues;and (iii) the total amount of those costs incurred in connection withdiscovery and development work performed under research contracts and grants.At times, we invest in addition to costs covered by research funding receivedin such collaborative programs and in addition to monies received underresearch contracts and grants.

 

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

 
| ** **                                             | ** ** | **Three Months Ended   March 31, 2008** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                             | ** ** | **Revenue**                                                      | ** ** | **Cost of  Revenue** | ** ** | **Net** | ** ** |
| ** **                                             | ** ** | **(In thousands)**                                          | ** ** |
| Genomic  services, research funding and other services |       | $                                                                | 10,103     |   | $ | 8,127 |   | $ | 1,976 |   |
| Government  research contracts and grant funding       |       | 4,875                                                            |       | 6,587 |   | (1,712 | ) |
| Total cost of  revenue                                 |       | $                                                                | 14,978     |   | $ | 14,714 |   | $ | 264 |   |

 
| ** **                                             | ** ** | **Three Months Ended   March 31, 2007** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                             | ** ** | **Revenue**                                                      | ** ** | **Cost of  Revenue** | ** ** | **Net** | ** ** |
| ** **                                             | ** ** | **(In thousands)**                                          | ** ** |
| Genomic  services, research funding and other services |       | $                                                                | 5,194      |   | $ | 5,893 |   | $ | (699 | ) |
| Government  research contracts and grant funding       |       | 3,360                                                            |       | 5,025 |   | (1,665 | ) |
| Total cost of  revenue                                 |       | $                                                                | 8,554      |   | $ | 10,918 |   | $ | (2,364 | ) |

 

Increases in our cost ofrevenue for the three-months ended March 31, 2008 as compared to the sameperiod in 2007 are largely on account of (i) the growth of our genomicsbusiness, 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-month period ended March 31, 2008 as compared to thesame period in 2007 increased chiefly with regard to our usage of chemicals andconsumables ($3.3 million). Also, during the three-month period ended March 31,2007 we performed work ($1.4 million) under a collaboration agreement with F. Hoffmann-LaRoche (Roche) and recognized revenue of $0.5 million under thatagreement.

 
| ***Research and Development*** |
|--------------------------------|

 
| ** **                | ** ** | **Three Months Ended   March 31,** | ** ** | **2008 as Compared to 2007** | ** ** |
|---------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                | ** ** | **2008**                                               | ** ** | **2007**                                         | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** **                | ** ** | **(In thousands, except %)**            | ** ** |
| Research and  development |       | $                                                      | 12,653     |                                             | $          | 12,676 |   | $ | (23 | ) | 0 | % |
|                           |            |                                                        |            |                                                  |            |  |  |  |  |  |  |  |

 

Our research anddevelopment expense consist of the following:

 
| ** **                                       | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                       | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| ** **                                       | ** ** | **(In thousands)**                          | ** ** |
| Salaries and  other personnel costs              |       | $                                                | 4,813      |   | $ | 4,663 |   |
| Materials and  supplies                          |       | 2,882                                            |       | 2,672 |   |
| Contractor  services and other third party costs |       | 2,324                                            |       | 2,699 |   |
| Overhead  expenses                               |       | 1,390                                            |       | 1,448 |   |
| Depreciation and  amortization                   |       | 914                                              |       | 722 |   |
| Stock-based  compensation                        |       | 330                                              |       | 472 |   |
|                                             |       | $                                                | 12,653     |   | $ | 12,676 |   |

 

Our research and development expense for the firstquarter of 2008 reflects the advancement of our drug and diagnostic programs,including costs related to the development and launch of our latest DNA-baseddiagnostic tests for gauging individual risk of a growing 

 

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number of common diseases and ongoing gene discoverywork that is feeding our diagnostic pipeline and deCODEme service. We alsocontinue to pursue our PDE4 inhibitor program across several indications. Withnear-term value creation in mind, our core focus in 2008 will be towardsbuilding our diagnostics and deCODEme businesses and our genomic services broadly.At the same time, we aim to advance our therapeutics programs throughpartnerships. With this focus, we believe that our overall investment inresearch and development for the fiscal year 2008 may be in the range of $35 to$40 million.

 
| ***Selling, General and Administrative Expense*** |
|---------------------------------------------------|

 
| ** **                                    | ** ** | **Three Months Ended   March 31,** | ** ** | **2008 as Compared to 2007** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                    | ** ** | **2008**                                               | ** ** | **2007**                                         | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** **                                    | ** ** | **(In thousands, except %)**            | ** ** |
| Selling,  general, and administrative expense |       | $                                                      | 7,211      |                                             | $          | 5,530 |   | $ | 1,681 |   | 30 | % |
|                                               |            |                                                        |            |                                                  |            |  |  |  |  |  |  |  |

 

     The increase in our selling, general andadministrative expense for the three-month period ended March 31, 2008compared to the three-month period ended March 31, 2007 is principallyattributable to contractor costs ($1.1 million) associated with the launch andbuild-up of our marketing efforts for our diagnostic and deCODEme businessesand legal fees ($0.4 million).

 
| ***Interest Income*** |
|-----------------------|

 
| ** **      | ** ** | **Three Months Ended  March 31,** | ** ** | **2008 as Compared to 2007** | ** ** |
|-----------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **      | ** ** | **2008**                                         | ** ** | **2007**                                         | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** **      | ** ** | **(In thousands, except %)**      | ** ** |
| Interest income |       | $                                                | 1,037      |                                             | $          | 1,991 |   | $ | (954 | ) | (48 | )% |
|                 |            |                                                  |            |                                                  |            |  |  |  |  |  |  |  |

 

Our interest income is afunction of both the balance of our cash and investments (which generally havebeen declining as resources are deployed in operations) and the rate of returnwe are 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 discovery anddevelopment programs. In the meantime, we will invest the monies received inaccordance with our investment policy, having the objective of preservingprincipal and maintaining a high degree of liquidity to meet operating needsand obtaining competitive returns subject to prevailing market conditions. At presentwe plan to maintain our portfolio of cash equivalents and investments ingovernment debt securities and money market funds, and to liquidate ourholdings of auction rate securities if and when auctions on them begin toclear.

 
| ***Interest Expense*** |
|------------------------|

 
| ** **       | ** ** | **Three Months Ended  March 31,** | ** ** | **2008 as Compared to 2007** | ** ** |
|------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **       | ** ** | **2008**                                         | ** ** | **2007**                                         | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** **       | ** ** | **(In thousands, except %)**      | ** ** |
| Interest expense |       | $                                                | 4,025      |                                             | $          | 3,666 |   | $ | 359 |   | 10 | % |
|                  |            |                                                  |            |                                                  |            |  |  |  |  |  |  |  |

 

Our interest expense hasincreased in 2008 as compared to 2007. Our interest expense is primarilyattributable to interest on our 3.5% Senior Convertible Notes due in 2011 forwhich our cash interest payments are approximately $8.1 million on an annualbasis. Taking into account also the accretion of the discount of the notes andthe amortization of offering costs, our total interest expense related to theSenior Convertible Notes is expected to be approximately $14.6 million for theyear ending December 31, 2008.

 

The June 2007 saleand leaseback of our Woodridge property is being accounted for as a financingand, as such, a portion of our rent payments are charged to interest expense($0.4 million in Q1 2008).

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

 
| ** **                                 | ** ** | **Three Months  Ended March 31,** | ** ** | **2008 as Compared to 2007** | ** ** |
|--------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                 | ** ** | **2008**                                         | ** ** | **2007**                                         | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** **                                 | ** ** | **(In thousands, except %)**      | ** ** |
| Other  non-operating income (expense), net |       | $                                                | (4,077     | )                                                | $          | (380 | ) | $ | (3,697 | ) | (973 | )% |
|                                            |            |                                                  |            |                                                  |            |  |  |  |  |  |  |  |

 

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Withcontinuing developments in the global credit and capital markets into 2008, werecognized an other-than-temporary loss on investments in auction ratesecurities (“ARS”), classified as non-current investments on our balance sheetat March 31, 2008. The estimated market value of our ARS at March 31,2008 was $21.7 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 $4.0 million during the three-months ended March 31, 2008. Thisimpairment charge includes $0.9 million of impairment determined to betemporary at December 31, 2007. The credit and capital markets havecontinued to deteriorate in 2008. If uncertainties in these credit and capitalmarkets continue, these markets deteriorate further or we experience additionaldowngrades on our investments, we may incur additional impairments to ourinvestment portfolio, which could negatively affect our financial condition,cash flows and reported earnings.

 

**Liquidityand Capital Resources**

 

We have financed ouroperations primarily through funding from research and developmentcollaborative agreements, and the issuance of equity securities and long-termfinancing instruments ($1,032 million from the beginning of 1999 to March 31,2008). At March 31, 2008, future funding under terms of our existingagreements is approximately $35.6 million excluding milestone payments,royalties and other payments that we may earn under such collaborations. Of the$35.6 million, approximately $27.7 million is expected to be received duringthe year ending December 31, 2008, with the remaining amount due through2010.

 

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 in complementarytechnologies and businesses; competing technological and market developments;the cost of filing, prosecuting, defending and enforcing patent claims andother intellectual property rights; the purchase of additional capitalequipment; and capital expenditures at our facilities. Changes in our researchand development plans, notably the entry into clinical trials of drugs based onour discoveries, development of our genetic services and marketing thereof orother changes affecting our operating expenses may result in changes in thetiming and amount of expenditures of our capital resources.

 

At March 31, 2008,we had $69.5 million in cash, cash equivalents and investments, including noncurrent investments of $21.7 million and restricted cash equivalents of $5.1million. At March 31, 2008, we held investments in Auction Rate Securities(“ARS”) with original purchase principal values totaling $33.5 million, whichare classified as non-current investments on our balance sheet. We have reducedour holdings of ARS by $5.0 million during the three-months ended March 31,2008 through the auction process by selling, at par value, the $5.0 million ARSsecurity classified in current investments at December 31, 2007.

 

The non-currentinvestments in ARS held by us are private placement securities with long-termnominal maturities for which the interest rates are reset through a Dutchauction process at pre-determined calendar intervals, generally each month.This mechanism generally allows existing investors to rollover their holdingsand continue to own their respective securities or liquidate their holdings byselling their securities at par value. We generally invest in these securitiesfor short periods of time as part of our cash management program. However, therecent uncertainties in the credit markets have prevented us and otherinvestors from liquidating holdings of our remaining ARS in recent auctions forthese securities because the amount of securities submitted for sale hasexceeded the amount of purchase orders and this has resulted in multiple failedauctions.

 

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 March 31,2008 was $21.7 million. Although the ARS continue to pay interest according totheir stated terms, based on the valuation models and an analysis of 

 

19

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other-than-temporaryimpairment factors, we have recorded a further impairment charge of $4.0million during the three-months ended March 31, 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 $4.0 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. Thevaluation models used to value the securities include those that are based onexpected cash flow streams and collateral values, including assessments ofcounterparty credit quality, default risk underlying the security, discountrates and overall capital market liquidity. The valuation of our investments inARS is subject to uncertainties that are difficult to predict. Factors that mayimpact the valuation include changes in credit ratings of the securities ortheir guarantors, underlying collateral value, discounts rates, counterpartyrisk and ongoing 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.

 

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 and 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 are taking steps to ensurethat we have a sustainable operation and have slimmed down elements of ourbroad operation to focus our resources in line with our goal of having twoyears of cash on hand. We will continue to analyze other non-core elements ofour operations as well as continue to seek efficiencies throughout theorganization. With this focus, we believe that our overall net use of cash forthe fiscal year 2008 may be in the range of $45 million to $55 million;excluding any major new alliances or treasury activities.

 

As we advance our geneticservices and our drug development pipeline we will require significantfinancial resources. Given our current financial resources, we areinvestigating 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.

 
| ** **                                          | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                          | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| ** **                                          | ** ** | **(In thousands)**                          | ** ** |
| **Cash provided by (used in):** |       |                                             |       |   |   |   |   |
| Operating  activities                               |       | $                                                | (20,031    | ) | $ | (16,305 | ) |
| Investing  activities                               |       | 9,291                                            |       | 12,254 |   |
| Financing  activities                               |       | (704                                             | )          | (625 | ) |
| Cash and cash  equivalents, at end of period        |       | 42,728                                           |       | 17,206 |   |

 

*Cashand Cash Equivalents.*  AtMarch 31, 2008, we had $42.7 million in cash and cash equivalents.Together with our investments ($21.7 million) and restricted cashequivalents ($5.1 million), this balance ($69.5 million) is $24.6 millionless than at December 31, 2007. The net utilization of our cash in2008 is principally owing to cash used in product development, research andgeneral operations as reflected in the $20.0 million cash we used inoperations.

 

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 Iceland, the United Kingdom and the United Stateshaving a high credit standing (A-/A3 or better). We expect to maintain ourportfolio of cash equivalents and investments in accordance with our policy,having the objective of preserving principal and maintaining a high degree ofliquidity to meet operating needs and obtaining returns subject to prevailingmarket conditions. At March 31,2008, our cash equivalents and investmentsare in U.S. Treasury money market funds and auction rate securities. Atpresent, we expect to maintain our portfolio of cash equivalents andinvestments in government debt securities and money market funds, and toliquidate our remaining holdings of auction rate securities if and whenauctions on them begin to clear. At March 31, 2008, our cash and cashequivalents are largely invested in U.S. dollar denominated money market andchecking accounts and also in Icelandic krona denominated accounts.

 

*OperatingActivities.* Net cash used in operating activities increasedto $20.0 million for the three-months ended March 31, 2008 as compared to$16.3 million for the three-months ended March 31, 2007, the difference isprincipally due to an increase in our 

 

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receivables as of March 31,2008. Cash used in our operations is principally owing to cash used intherapeutic and diagnostic product development, research and general operationsas more fully described above.

 

*InvestingActivities.*Our investing activities have consisted ofcapital expenditures and the sale of investments in marketable securities, suchcapital expenditures being principally replacement capital expenditures duringthe three-months ended March 31, 2008 and 2007. We aim to make onlynecessary replacement capital expenditures in the near term. Net cash usedin investing activities may in the future fluctuate significantly from periodto period due to timing of our capital expenditures and other investments aswell as changing business needs.

 

*FinancingActivities.* Net cash of $0.7million was used in financingactivities during the three-months ended March 31, 2008, as compared to$0.6 million that was used during the three-months ended March 31, 2007.Financing activities for the three-month periods ended March 31, 2008 and2007 consisted primarily of ongoing repayment of and installment payments ondebt, capital lease and finance obligations amounting to $1.0 million and $0.7million, respectively.

 

*Contractual Commitments and Off-Balance Sheet Arrangements.*  Thefollowing summarizes our contractual obligations at March 31, 2008 and theeffects such obligations are expected to have on our liquidity and cash flowsin 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 |       | $                                         | 258,175    |   | $ | 8,050 |   | $ | 8,050 |   | $ | 8,050 |   | $ | 234,025 |   | $ | — |   | $ | — |   |
| Long-term debt,  including interest                |       | 553                                       |       | 272 |   | 250 |   | 31 |   | — |   | — |   | — |   |
| Capital lease  obligations, including interest     |       | 5,217                                     |       | 3,254 |   | 1,963 |   | — |   | — |   | — |   | — |   |
| Finance obligation,  including interests           |       | 39,239                                    |       | 2,002 |   | 2,047 |   | 2,098 |   | 2,151 |   | 2,204 |   | 28,737 |   |
| Operating leases  (1)                              |       | 69,943                                    |       | 6,165 |   | 5,990 |   | 5,911 |   | 5,911 |   | 5,852 |   | 40,114 |   |
| Total                                              |       | $                                         | 373,127    |   | $ | 19,743 |   | $ | 18,300 |   | $ | 16,090 |   | $ | 242,087 |   | $ | 8,056 |   | $ | 68,851 |   |

 

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(1) Balance includes $68.7 million of Icelandic krona (ISK)denominated lease obligations which are variable based on the exchange rate ofthe ISK versus the U.S. dollar and also this amount is subject to periodicadjustments based on the Icelandic Consumer Price Index (ICPI). A hypothetical10% increase or decrease in the ISK and U.S. dollar exchange rate would resultin an increase or decrease of our annual lease payments of $0.6 million. Ahypothetical 100 basis point increase of the ICPI would result in an increaseor decrease of our annual lease payments of $0.1 million.

 

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 March 31, 2008, the potential minimumlump sum payment (salary and bonus amounts only) under these change in controlprovisions would have totaled approximately $6.5 million (calculated as of March 31,2008).

 

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

 

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that we believe to bereasonable under the circumstances, the results of which form our basis formaking judgments about carrying values of assets and liabilities that are notreadily apparent from other sources. The impact and any associated risks relatedto these and our other accounting policies on our business or operations isdiscussed throughout Management’s Discussion and Analysis of FinancialCondition and Results of Operations where such policies affect our reported andexpected financial results. For a detailed discussion on the application ofthese and other 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 ANDCAUTIONARY FACTORS**

**THAT MAY AFFECT FUTURERESULTS**

 

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. Historically, investments have been madeprimarily in high-grade corporate bonds, asset-backed debt securities and U.S.government agency debt securities. At March 31, 2008, our investments arein auction rate securities. These investments are subject to risk of default,changes in credit rating and changes in market value. These investments arealso subject to interest rate risk and will decrease in value if marketinterest rates increase. A hypothetical 100 basis point increase in interestrates would result in an approximate $0.1 million decrease in the fairvalue of our investments as of March 31, 2008. Changes in interest ratesdo not affect interest expense incurred on deCODE’s Convertible Notes, becausethey bear interest at a fixed rate. Using the price in the latest trade in March 2008,the market value of the Convertible Notes was approximately $102.1 million on March 31,2008.

 

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 $0.1 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.

 

** 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 ChiefExecutive Officer and the Chief Financial Officer have concluded that as of theend of such fiscal quarter deCODE’s disclosure controls and procedures areadequate and effective to ensure that information required to be disclosed inthe reports deCODE files under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the Securities andExchange Commission’s rules and forms. Disclosure controls and proceduresinclude without limitation, controls and procedures designed to ensure thatinformation required to be disclosed by an issuer in the reports that it filesor submits under the Act is accumulated and communicated to the issuer’smanagement including its principal executive and principal financial officersor persons performing similar functions as appropriate to allow timelydecisions regarding required disclosures.

 

Indesigning and evaluating our disclosure controls and procedures, our managementrecognizes that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance that the desired objectives ofthe control system will be met. In addition, the design of any control systemis based in part upon certain assumptions about the likelihood of future eventsand the application of judgment in evaluating the cost-benefit relationship ofpossible controls and procedures. Because of these and other inherentlimitations of control systems, there is only reasonable assurance that ourcontrols will succeed in achieving their goals under all potential futureconditions.

 

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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 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. The focus cases are a small group of cases that were selected astest cases due to the large number of nearly identical actions which wereconsolidated in the Initial Public Offering litigation. The court has indicatedthat the focus cases are intended to provide strong guidance for the othercases. The case involving deCODE is not a focus case. On November 12,2007, certain of the defendants in the focus cases moved to dismiss the secondconsolidated amended class action complaints. On March 26, 2008, thedistrict court denied the motions to dismiss except as to Section 11claims raised by those plaintiffs who sold their securities for a price inexcess of the initial public offering price and those who purchased outside thepreviously certified class period. Briefing on the class certification motion wascompleted in April 2008. Due to the inherent uncertainties of litigation,deCODE cannot accurately predict the ultimate outcome 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 March 31,2008.

 

***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$26.7 million and $22.6 million for the three months ended March 31, 2008and 2007, respectively, and $95.5 million for the year ended December 31,2007, and had an accumulated deficit of $657.9 million at March 31,2008. We have never generated a profit and we have not generated significantrevenues except for payments received in connection with our research anddevelopment collaborations with Roche, Merck and others, from contractservices, Emerald BioSystems products and instruments, and under grants. Ourresearch and development expenditures and general and administrative costs haveexceeded our revenue to date, and we expect to spend significant additionalamounts to develop our diagnostics and deCODEmeTM products andservices, fund research and development in order to enhance our coretechnologies and undertake product development (including drug development andrelated clinical trials). We do not expect to receive royalties or otherrevenues from commercial sales of products developed using our technology inthe near term. It may be several years before product revenuesmaterialize, if they do at all. As a result, we expect to incur net losses forseveral years. If the time required to generate product revenues and achieveprofitability is longer than we currently anticipate or the level of losses isgreater than we currently anticipate, we may not be able to continue ouroperations.

 

***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 (including clinical trials); andto continue other research and development activities. Many factors willinfluence our future capital 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;

 

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·                                       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. For the three-monthsended March 31, 2008 and 2007, government research contract and grantrevenues from divisions of the NIH constituted 24% and 26%, respectively, andfrom the EC constituted, 8% and 13%, respectively, of consolidated revenue.

 

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 March 31, 2008, we had $33.5 million of principal investedin auction 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 and mortgage-backedsecurities, government and money-market issues and other ARS. Consistent withour investment 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 ournon-current ARS holdings at March 31, 2008 was $21.7 million, whichreflects an $11.8 million adjustment to the principal value of $33.5 million.Although the ARS continue to pay interest according to their stated terms,based on valuation models and an analysis of other-than-temporary impairmentfactors, we have recorded a further impairment charge of $4.0 million in thefirst quarter of 2008, which includes $0.9 million related to ARS impairmentspreviously recorded as a temporary or unrealized loss 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.

 

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**ITEM6. EXHIBITS AND REPORTS ON FORM 8-K**

 

(a) 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).                                                                          |
|               |       |                                                                                                                                                                                                                                                                                         |
| 31.1               |       | Certification pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                               |
|               |       |                                                                                                                                                                                                                                                                                         |
| 31.2               |       | Certification pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                               |
|               |       |                                                                                                                                                                                                                                                                                         |
| 32.1               |       | Certification pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                               |

 

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

 

** 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:  May 9,2008

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

 

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

 

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

 

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