**SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549**

**FORM 10-Q**

**(MarkOne)**

**x**** QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934.**

**FOR THE QUARTERLY PERIOD ENDED JUNE30, 2007**

**OR**

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

**FORTHE TRANSITION PERIOD FROM               TO               **

**COMMISSION FILE NUMBER 000-30469**

**deCODEgenetics, Inc.**

(Exact Name of Registrant as Specified in Its Charter)

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

 

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

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

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

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act. (CheckOne):

Large accelerated filer o      Acceleratedfiler x      Non-acceleratedfiler o

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).  o Yes  x No

The aggregate number ofshares of the registrant’s common stock outstanding on July 31, 2007 was61,725,417 shares of common stock $.001 par value.

 

 

----

**deCODEgenetics, Inc.**

**INDEX**

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

 

 

1

----

**PART I.FINANCIAL INFORMATION**

**ITEM 1. FINANCIALSTATEMENTS**

**deCODEgenetics, Inc.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

(Unaudited)

 
| ** **                                                                                                                                                                                                                                                                                                        | ** ** | **June 30,**                                        | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                        | ** ** | **2007**                                                 | ** ** | **2006**              | ** ** |
| ** **                                                                                                                                                                                                                                                                                                        | ** ** | **(In thousands, except  share amounts)** | ** ** |
| ASSETS                                                                                                                                                                                                                                                                                                            |       |                                                     |       |                  |       |
| Current assets:                                                                                                                                                                                                                                                                                                   |       |                                                     |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                                                                                                                                                        |       | $                                                        | 43,758     |                  | $          | 21,882 |   |
| Investments                                                                                                                                                                                                                                                                                                       |       | 88,226                                                   |       | 130,134               |       |
| Receivables                                                                                                                                                                                                                                                                                                       |       | 8,064                                                    |       | 8,464                 |       |
| Other current  assets                                                                                                                                                                                                                                                                                             |       | 13,277                                                   |       | 9,231                 |       |
| Total current  assets                                                                                                                                                                                                                                                                                             |       | 153,325                                                  |       | 169,711               |       |
| Restricted cash  equivalents and investments                                                                                                                                                                                                                                                                      |       | 5,275                                                    |       | —                |       |
| Property and equipment,  net                                                                                                                                                                                                                                                                                      |       | 22,862                                                   |       | 24,382                |       |
| Goodwill                                                                                                                                                                                                                                                                                                          |       | 10,055                                                   |       | 10,055                |       |
| Intangible assets, net                                                                                                                                                                                                                                                                                            |       | 4,191                                                    |       | 4,576                 |       |
| Other long-term  assets                                                                                                                                                                                                                                                                                           |       | 7,272                                                    |       | 6,885                 |       |
| Total assets                                                                                                                                                                                                                                                                                                      |       | $                                                        | 202,980    |                  | $          | 215,609 |   |
| LIABILITIES AND  STOCKHOLDERS’ DEFICIT                                                                                                                                                                                                                                                                       |       |                                                     |       |                  |       |
| Current liabilities:                                                                                                                                                                                                                                                                                              |       |                                                     |       |                  |       |
| Accounts payable                                                                                                                                                                                                                                                                                                  |       | $                                                        | 4,118      |                  | $          | 2,877 |   |
| Accrued expenses  and other current liabilities                                                                                                                                                                                                                                                                   |       | 11,461                                                   |       | 14,360                |       |
| Deferred revenue                                                                                                                                                                                                                                                                                                  |       | 8,877                                                    |       | 3,557                 |       |
| Current portion  of capital lease obligations                                                                                                                                                                                                                                                                     |       | 2,110                                                    |       | 2,100                 |       |
| Current portion  of finance obligation on sale-leaseback                                                                                                                                                                                                                                                          |       | 530                                                      |       | —                |       |
| Current portion  of long-term debt                                                                                                                                                                                                                                                                                |       | 226                                                      |       | 604                   |       |
| Total current  liabilities                                                                                                                                                                                                                                                                                        |       | 27,322                                                   |       | 23,498                |       |
| Deferred revenue                                                                                                                                                                                                                                                                                                  |       | 6,219                                                    |       | 6,219                 |       |
| Deferred gain on  sale-leaseback                                                                                                                                                                                                                                                                                  |       | 24,747                                                   |       | 25,716                |       |
| Capital lease  obligations, net of current portion                                                                                                                                                                                                                                                                |       | 2,452                                                    |       | 3,493                 |       |
| Finance obligation on  sale-leaseback, net of current portion                                                                                                                                                                                                                                                     |       | 24,442                                                   |       | —                |       |
| Long-term debt,  net of current portion                                                                                                                                                                                                                                                                           |       | 209,060                                                  |       | 212,062               |       |
| Commitments and  contingencies                                                                                                                                                                                                                                                                                    |       |                                                     |       |                  |       |
| Stockholders’ deficit:                                                                                                                                                                                                                                                                                       |       |                                                     |       |                  |       |
| Preferred stock,  $0.001 par value; Authorized: 6,716,666 shares; Issued and outstanding: none                                                                                                                                                                                                                    |       | —                                                   |       | —                |       |
| Common stock,  $0.001 par value; Authorized: 150,000,000 and 100,000,000 shares at  June 30, 2007 and December 31, 2006, respectively; Issued and  outstanding: 61,731,417 and 61,720,417 shares, respectively, at June 30,  2007; and 61,556,985 and 61,555,985 shares, respectively, at December 31,  2006 |       | 62                                                       |       | 62                    |       |
| Additional paid-in  capital                                                                                                                                                                                                                                                                                       |       | 486,000                                                  |       | 483,052               |       |
| Notes receivable                                                                                                                                                                                                                                                                                                  |       | (2,698                                                   | )          | (2,778                | )          |
| Accumulated  deficit                                                                                                                                                                                                                                                                                              |       | (574,541                                                 | )          | (535,688              | )          |
| Accumulated  other comprehensive income                                                                                                                                                                                                                                                                           |       | (19                                                      | )          | (22                   | )          |
| Treasury stock,  11,000 and 1,000 shares stated at cost at June 30, 2007 and December 31,  2006, respectively                                                                                                                                                                                                     |       | (66                                                      | )          | (5                    | )          |
| Total  stockholders’ deficit                                                                                                                                                                                                                                                                                 |       | (91,262                                                  | )          | (55,379               | )          |
| Total liabilities and  stockholders’ deficit                                                                                                                                                                                                                                                                 |       | $                                                        | 202,980    |                  | $          | 215,609 |   |

 

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

2

----

**deCODEgenetics, Inc.**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

(Unaudited)

 
| ** **                                                     | ** ** | **For the Three Months  Ended June 30,**     | ** ** | **For the Six Months  Ended June 30,** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                     | ** ** | **2007**                                                              | ** ** | **2006**                                                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                     | ** ** | **(In thousands, except per share amounts)** | ** ** |
|                                                           |       |                                                                  |       |                                                            |       |   |   |   |   |
| Revenue                                                        |       | $                                                                     | 7,614      |                                                            | $          | 10,360 |   | $ | 16,168 |   | $ | 20,493 |   |
| Operating  expenses:                                           |       |                                                                  |       |                                                            |       |   |   |   |   |
| Cost of revenue                                                |       | 9,156                                                                 |       | 10,459                                                          |       | 20,074 |   | 20,309 |   |
| Research and development                                       |       | 14,528                                                                |       | 13,207                                                          |       | 27,204 |   | 28,724 |   |
| Selling, general and administrative                            |       | 6,795                                                                 |       | 4,392                                                           |       | 12,325 |   | 9,659 |   |
| Total operating expenses                                       |       | 30,479                                                                |       | 28,058                                                          |       | 59,603 |   | 58,692 |   |
| Operating loss                                                 |       | (22,865                                                               | )          | (17,698                                                         | )          | (43,435 | ) | (38,199 | ) |
| Interest income                                                |       | 1,518                                                                 |       | 1,336                                                           |       | 3,509 |   | 3,048 |   |
| Interest expense                                               |       | (3,803                                                                | )          | (1,691                                                          | )          | (7,469 | ) | (3,407 | ) |
| Other non-operating  income and (expense), net                 |       | 8,922                                                                 |       | (290                                                            | )          | 8,542 |   | (58 | ) |
| Net loss                                                       |       | $                                                                     | (16,228    | )                                                               | $          | (18,343 | ) | $ | (38,853 | ) | $ | (38,616 | ) |
| Basic and  diluted net loss per share                          |       | $                                                                     | (0.27      | )                                                               | $          | (0.34 | ) | $ | (0.64 | ) | $ | (0.71 | ) |
| Shares used in  computing basic and diluted net loss per share |       | 61,005                                                                |       | 54,746                                                          |       | 60,977 |   | 54,664 |   |

 

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

3

----

**deCODEgenetics, Inc.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

(Unaudited)

 
| ** **                                                                   | ** ** | **For the Six-Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2007**                                                   | ** ** | **2006** | ** ** |
| ** **                                                                   | ** ** | **(In thousands)**                                    | ** ** |
|                                                                         |       |                                                       |       |   |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                       |       |                                                       |       |   |   |
| Net loss                                                                     |       | $                                                          | (38,853    | ) | $ | (38,616 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                                                       |       |   |   |
| Depreciation and amortization                                                |       | 3,061                                                      |       | 3,785 |   |
| Amortization of deferred gain on sale-leaseback of  real estate              |       | (969                                                       | )          | (969 | ) |
| Stock-based compensation                                                     |       | 2,895                                                      |       | 2,050 |   |
| Loss on disposal of equipment, net                                           |       | —                                                     |       | (734 | ) |
| Foreign currency translation                                                 |       | 3                                                          |       | (4 | ) |
| Amortization of debt discount                                                |       | 2,354                                                      |       | — |   |
| Amortization of deferred financing costs                                     |       | 798                                                        |       | 433 |   |
| Other                                                                        |       | —                                                     |       | 53 |   |
| Changes in  operating assets and liabilities:                                |       |                                                       |       |   |   |
| Receivables and other assets                                                 |       | (3,899                                                     | )          | 322 |   |
| Accounts payable, accrued expenses and other current  liabilities            |       | (1,658                                                     | )          | (3,589 | ) |
| Deferred revenue                                                             |       | 5,320                                                      |       | (2,792 | ) |
| Net cash used in operating activities                                        |       | (30,948                                                    | )          | (40,061 | ) |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                       |       |                                                       |       |   |   |
| Purchase of investments                                                      |       | (101,280                                                   | )          | (159,770 | ) |
| Sale of investments                                                          |       | 138,188                                                    |       | 161,530 |   |
| Purchase of property and equipment                                           |       | (1,156                                                     | )          | (1,590 | ) |
| Change in restricted cash                                                    |       | (275                                                       | )          | — |   |
| Proceeds from sale of property and equipment                                 |       | 238                                                        |       | 206 |   |
| Acquisition of UVS, net of cash acquired                                     |       | —                                                     |       | 1,270 |   |
| Net cash provided by investing activities                                    |       | 35,715                                                     |       | 1,646 |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                       |       |                                                       |       |   |   |
| Proceeds from issuance of common stock                                       |       | 52                                                         |       | 778 |   |
| Repayment of notes receivable for common stock                               |       | 20                                                         |       | 89 |   |
| Proceeds from property and equipment financing, net  of transaction costs    |       | 23,830                                                     |       | 798 |   |
| Repayments of short term borrowings                                          |       | —                                                     |       | (376 | ) |
| Repayments of debt, capital lease and finance  obligations                   |       | (6,793                                                     | )          | (1,140 | ) |
| Net cash provided by financing activities                                    |       | 17,109                                                     |       | 149 |   |
| Net increase  (decrease) in cash and cash equivalents                        |       | 21,876                                                     |       | (38,266 | ) |
| Cash and cash  equivalents at beginning of period                            |       | 21,882                                                     |       | 65,943 |   |
| Cash and cash  equivalents at end of period                                  |       | $                                                          | 43,758     |   | $ | 27,677 |   |
| Supplemental  cash flow information:                                         |       |                                                       |       |   |   |
| Cash paid for interest                                                       |       | $                                                          | 4,342      |   | $ | 2,922 |   |
| Supplemental  schedule of non-cash transactions:                             |       |                                                       |       |   |   |
| Common stock  issued for acquisition                                         |       | $                                                          | —     |   | $ | 6,082 |   |
| Cancellation of  notes receivable and forfeiture of common stock             |       | 61                                                         |       | — |   |

 

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

 

4

----

**deCODEgenetics, Inc.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL 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 deCODEgenetics, Inc.’s wholly-owned subsidiary, Islensk erfdagreining ehf., anIcelandic company registered in Reykjavik, and its subsidiaries, as well asdeCODE genetics, Inc.’s wholly-owned subsidiary, MediChem Life Sciences, Inc.,a Delaware corporation, and its subsidiaries.

**2.      Basis of Presentation**

** **

In the opinion ofdeCODE’s management, the accompanying unaudited condensed consolidatedfinancial statements contain all adjustments (consisting of items of a normaland recurring nature) necessary to present fairly the financial position as ofJune 30, 2007, the results of operations for the three and six-month periodsended June 30, 2007 and 2006 and cash flows for the six-month periods endedJune 30, 2007 and 2006. The results of operations for the three andsix-month periods ended June 30, 2007 are not necessarily indicative of theresults to be expected for the full year. These financial statementsshould be read in conjunction with deCODE’s Annual Report on Form 10-K forthe year ended December 31, 2006, which includes consolidated financialstatements and notes thereto for the years ended December 31, 2006, 2005and 2004.

**3.      Revenue**

** **

Significantelements of deCODE’s revenue are summarized as follows:

|                                                                            | ** ** | **For the Three Months  Ended June 30,** | ** ** | **For the Six Months  Ended June 30,** | ** ** |
|----------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                                 | ** ** | **2007**                                                          | ** ** | **2006**                                                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                 | ** ** | **(In thousands)**                                           | ** ** |
| Research funding and  other service fees                                   |       | $                                                                 | 4,798      |                                                            | $          | 5,445 |   | $ | 9,412 |   | $ | 10,913 |   |
| Milestone payments                                                         |       | 249                                                               |       | 101                                                             |       | 591 |   | 299 |   |
| Up-front, exclusivity,  technology access, and technology development fees |       | —                                                            |       | 500                                                             |       | — |   | 1,000 |   |
| Government research  contracts and grant funding                           |       | 2,324                                                             |       | 3,939                                                           |       | 5,684 |   | 6,926 |   |
| Other                                                                      |       | 243                                                               |       | 375                                                             |       | 481 |   | 1,355 |   |
| Total                                                                      |       | $                                                                 | 7,614      |                                                            | $          | 10,360 |   | $ | 16,168 |   | $ | 20,493 |   |

 

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

|                                      | ** ** | **For the Three Months  Ended June 30,** | ** ** | **For the Six Months  Ended June 30,** | ** ** |
|--------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                           | ** ** | **2007**                                                          | ** ** | **2006**                                                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| F. Hoffmann-La Roche  (Roche)        |       | 7                                                                 | %          | 27                                                              | %          | 6 | % | 26 | % |
| National Institutes of  Health (NIH) |       | 18                                                                | %          | 32                                                              | %          | 22 | % | 28 | % |
| European Community (EC)              |       | 12                                                                | %          | 4                                                               | %          | 13 | % | 4 | % |

 

During the three and six-month periods ended June 30,2007, deCODE performed services totaling $3,000 and $124,000 for an employer ofa member of deCODE’s Board of Directors. 

**4.      Research and Development**

** **

deCODE’s researchand development expense consists of the costs of its own proprietary programs,comprised of the following during the three and six-months ended June 30, 2007and 2006: 

|                                                  | ** ** | **For the Three Months  Ended June 30,** | ** ** | **For the Six Months  Ended June 30,** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                       | ** ** | **2007**                                                          | ** ** | **2006**                                                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                       | ** ** | **(In thousands)**                                           | ** ** |
| Salaries and other  personnel costs              |       | $                                                                 | 5,179      |                                                            | $          | 4,360 |   | $ | 9,871 |   | $ | 9,696 |   |
| Materials and supplies                           |       | 3,558                                                             |       | 1,170                                                           |       | 6,230 |   | 2,759 |   |
| Contractor services and  other third party costs |       | 3,350                                                             |       | 5,140                                                           |       | 6,049 |   | 10,966 |   |
| Overhead expenses                                |       | 1,381                                                             |       | 1,251                                                           |       | 2,829 |   | 2,823 |   |
| Depreciation  and amortization                   |       | 626                                                               |       | 891                                                             |       | 1,348 |   | 1,763 |   |
| Stock-based  compensation                        |       | 434                                                               |       | 395                                                             |       | 877 |   | 717 |   |
| Total                                            |       | $                                                                 | 14,528     |                                                            | $          | 13,207 |   | $ | 27,204 |   | $ | 28,724 |   |

 

5

----

**5.      Stock-Based Compensation**

** **

Stock-basedcompensation for the three and six-month periods ended June 30, 2007 and 2006is included in deCODE’s results of operations as follows: 

|                                                       | ** ** | **For the Three Months  Ended June 30,** | ** ** | **For the Six Months  Ended June 30,** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                            | ** ** | **2007**                                                          | ** ** | **2006**                                                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                            | ** ** | **(In thousands)**                                           | ** ** |
| Operating Expenses:                                   |       |                                                              |       |                                                            |       |   |   |   |   |
| Cost of revenue                                       |       | $                                                                 | 131        |                                                            | $          | 143 |   | $ | 252 |   | $ | 259 |   |
| Research and  development — proprietary programs |       | 436                                                               |       | 395                                                             |       | 879 |   | 717 |   |
| Selling, general  and administrative                  |       | 814                                                               |       | 483                                                             |       | 1,659 |   | 968 |   |
| Total                                                 |       | $                                                                 | 1,381      |                                                            | $          | 1,021 |   | $ | 2,790 |   | $ | 1,944 |   |

 

As of June 30,2007 there was approximately $9,356,000 of total unrecognized compensationexpense related to nonvested stock options. This expense is expected to berecognized over a weighted-average period of approximately 2.5 years.

deCODE calculatedthe fair value of each option award on the date of grant using theBlack-Scholes option pricing model. The following weighted average assumptionswere used for the six-months ended June 30, 2007 and 2006:

|                           | ** ** | **Six-Months  Ended June 30,** | ** ** |
|---------------------------|------------|------------------------------------------|------------|
| ** **                | ** ** | **2007**                                 | ** ** | **2006** | ** ** |
|                      |       |                                     |       |   |   |
| Dividend yield            |       | 0                                        | %          | 0 | % |
| Expected volatility       |       | 64.9                                     | %          | 67.7 | % |
| Expected term (in  years) |       | 5.5                                      |       | 5.1 |   |
| Risk-free interest rate   |       | 4.5                                      | %          | 4.7 | % |

 

deCODE estimatesthe expected 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 currently available on the U.S. Treasury zero-coupon issues with acomparable term. As deCODE does not pay dividends, the dividend variable rateis zero.

The followingtable summarizes stock option activity for the six-months ended June 30, 2007:

|                                 | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|---------------------------------|------------|----------------------------|------------|----------------------------------------|------------|
| Outstanding at January  1, 2007 |       | 4,975,074                  |       | $                                      | 8.14       |   |
| Granted                         |       | 2,799,500                  |       | 3.48                                   |       |
| Exercised                       |       | (25,248                    | )          | 2.08                                   |       |
| Forfeited/cancelled             |       | (256,830                   | )          | 8.27                                   |       |
| Outstanding at June 30,  2007   |       | 7,492,496                  |       | 6.41                                   |       |
| Exercisable at June 30, 2007    |       | 3,769,298                  |       | $                                      | 8.14       |   |

 

The weighted average grant date fair value of optionsgranted during the three and six-month periods ended June 30, 2007 was$2.29 and $2.10, per share, respectively, and $4.23 and $5.22, per share duringthe three and six-month periods ended June 30, 2006, respectively.

6

----

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 andthen amortized over the vesting period. During the three and six-months endedJune 30, 2007, deCODE recognized expense related to restricted stock grants of$53,000 and $105,000, respectively, and $53,000 and $106,000 during the threeand six-month periods ended June 30, 2006, respectively. At June 30, 2007,deCODE had 62,138 unvested restricted shares with a weighted average grant datefair value of $8.23.

**6.      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: 

|                                                                                                      | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                                                           | ** ** | **2007**          | ** ** | **2006**          | ** ** |
| ** **                                                                                           | ** ** | **(Shares)**      | ** ** | **(Shares)**      | ** ** |
| Warrants to purchase  shares of common stock                                                         |       | 856,371           |       | 2,385,022         |       |
| Options to purchase  shares of common stock                                                          |       | 7,492,496         |       | 4,766,201         |       |
| Restricted shares subject  to vesting or with an associated outstanding non-recourse promissory note |       | 699,738           |       | 746,291           |       |
| Convertible shares  issuable upon conversion of 3.5% senior convertible notes                        |       | 16,428,572        |       | 10,714,286        |       |
|                                                                                                 |       | 25,477,177        |       | 18,611,800        |       |

 

**7.      Authorized Shares**

** **

In May 2007, deCODE increased its number of authorized shares to156,716,666, of which 150,000,000 is $0.001 par value Common Stock and6,716,666 is $0.001 par value Preferred Stock.

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

** **

In June 2007,deCODE entered into a legal settlement to end ongoing litigation regardingcertain proprietary and confidential information. Financial terms of the legalsettlement stipulated that deCODE would be paid $9,000,000, in twoinstallments. The first installment of $4,000,000 was received prior to June30, 2007 and the second payment of $5,000,000 is due to be paid prior toDecember 31, 2007 and is included in Other current assets on the CondensedConsolidated Balance Sheet at June 30, 2007. deCODE recognized the $9,000,000 duringthe three and six-months ended June 30, 2007, net of related expenses of$41,000 and $646,000, respectively.  

**9.      Comprehensive Income**

** **

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

|                                                     | ** ** | **For the Three Months  Ended June 30,** | ** ** | **For the Six Months  Ended June 30,** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                          | ** ** | **2007**                                                          | ** ** | **2006**                                                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                          | ** ** | **(In thousands)**                                           | ** ** |
| Net loss                                            |       | $                                                                 | (16,228    | )                                                               | $          | (18,343 | ) | $ | (38,853 | ) | $ | (38,616 | ) |
| Other comprehensive  income (loss):                 |       |                                                              |       |                                                            |       |   |   |   |   |
| Foreign currency  translation                       |       | (8                                                                | )          | 13                                                              |       | (22 | ) | 21 |   |
| Unrealized gain  (loss) associated with investments |       | 4                                                                 |       | 6                                                               |       | 25 |   | (15 | ) |
| Total comprehensive loss                            |       | $                                                                 | (16,232    | )                                                               | $          | (18,324 | ) | $ | (38,850 | ) | $ | (38,610 | ) |

 

 

7

----

**10.    Investments**

** **

deCODE invests its excess cash with large U.S. basedfinancial institutions and considers its investment portfolio asavailable-for-sale. Investments are available for current operations and areclassified as current assets. Investments are carried at fair value with theunrealized holding gain or loss included in accumulated other comprehensiveincome. Fair value is generally determined with reference to quotations inactive markets. Premium and discounts associated with investments in bonds areamortized using the effective interest rate method.

Investments as of June 30, 2007 are summarized asfollows:

|                             | ** ** | **Amortized  Cost**     | ** ** | **Estimated  Fair Value** | ** ** |
|-----------------------------|------------|-------------------------|------------|--------------------------------|------------|
| ** **                  | ** ** | **(In thousands)** | ** ** |
| Auction rate securities     |       | $                       | 68,250     |                           | $          | 68,250 |   |
| Municipal bonds             |       | 9,992                   |       | 9,989                          |       |
| Government debt  securities |       | 5,000                   |       | 4,987                          |       |
| Corporate bond              |       | 5,000                   |       | 5,000                          |       |
|                        |       | $                       | 88,242     |                           | $          | 88,226 |   |

 

Gross unrealizedholding gains and gross unrealized holding losses at June 30, 2007 were $0 and$16,000, respectively, and at December 31, 2006 were $0 and $41,000,respectively, and are included in accumulated other comprehensive income. Inaddition to the amounts in investments, deCODE has $5,000,000 of auction ratesecurities at June 30, 2007, which is restricted and is collateral for deCODE’sletter of credit for the Woodridge lease. This amount is included in RestrictedCash Equivalents and Investments on the Balance Sheet.

**11.    Sale-Leaseback Financing**

** **

In June 2007,deCODE completed a sale and leaseback of its property (land and building)in Woodridge, Illinois. Pursuant to the agreement, deCODE sold theWoodridge property for $25,000,000 in cash and leased the property back under a17 year lease at an initial rent of $163,000 per month, subject to annual rentincreases of 2.5%. Under the lease, deCODE has two 5-year renewal options withrent at the then prevailing market rate. The lease is an absolute net lease anddeCODE will continue to pay all expenses relating to the property, includingtaxes, utilities, insurance and maintenance. deCODE’s obligations under thelease are collateralized by a letter of credit in an initial amount of$5,000,000, that may be reduced upon certain conditions. The letter of creditis collateralized by cash equivalents and investments held in a restrictedinvestment account ($5,275,000 at June 30, 2007).

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

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

**12.    Litigation**

** **

Other than claimsand legal proceedings that arise from time to time in the ordinary course ofbusiness which are not material, and matters described below, there has been nochange in the matters reported in our Annual Report on Form 10-K for the yearended December 31, 2006.

In June 2007,deCODE and the other parties in the lawsuit titled deCODE genetics, Inc. v.Hákonarson et al., which is described in deCODE’s Annual Report on Form 10-Kfor the year ended December 31, 2006, entered into a settlement agreementresolving all of 

8

----

the claims in thismatter. Pursuant to the settlement agreement, the individual defendants and theChildren’s Hospital of Philadelphia agreed not to use or disclose any of deCODE’sconfidential information that was the main subject matter of the litigation.The settlement agreement provides for deCODE to receive $9,000,000, of which$4,000,000 was paid in June 2007 and the remainder is payable before December31, 2007. The parties exchanged mutual releases and the litigation wasdismissed with prejudice.

In the matter ofIn re deCODE genetics, Inc. Initial Public Offering, which is described indeCODE’s Annual Report on Form 10-K for the year ended December 31, 2006 anddeCODE’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007, onJune 25, 2007, the United States District Court for the Southern District ofNew York entered an order formally denying the motion for final approval of thesettlement agreement because the settlement class could not be certified.deCODE cannot predict whether deCODE will be able to renegotiate a settlementthat complies with the mandate of the United States Court of Appeals for theSecond Circuit, regarding class certification. The plaintiffs now plan toreplead their complaints and move for class certification again. Due to theinherent uncertainties of litigation, deCODE cannot accurately predict theultimate outcome of the matter.

 

9

----

**ITEM2.****    MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

This Management’s Discussion and Analysis of FinancialCondition and Results of Operations as of June 30, 2007 and for the three andsix-month periods ended June 30, 2007 and 2006 should be read in conjunctionwith the unaudited condensed consolidated financial statements and notesthereto 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 develop drugs and diagnostics for commondiseases. Our population approach and resources enable us to isolate genes anddrug targets directly involved in the development of many of the diseases whichpose the biggest challenges to public health. We are turning these discoveriesinto a growing pipeline of therapeutics and diagnostic tests taking aim at thecauses of disease, not just the signs and symptoms. As these diseases arecommon and current therapies are of limited effectiveness, we believe that ourstrategy represents a significant opportunity to create better medicine withmajor potential in the global marketplace.

We believe thatdeCODE’s advantage derives from our population approach to human genetics andthe ability to apply this approach directly to drug and diagnostic development.In Iceland, 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 inquestion may therefore have broad potential utility, not only to those athighest risk but perhaps also to those at average risk, which in the commondiseases may be unacceptably high. Moreover, these pathways often providebiomarkers that can be used to assess the efficacy of a compound frompreclinical to mid-stage clinical testing.

We are alsoapplying our findings to create DNA-based diagnostic tests to detect many ofthe same genetic variations that we have used to identify drug targets. Suchtests can be employed as an aid in developing more effective disease preventionstrategies by helping individuals to better understand their inherited risk ofa given condition, as well as to identify patients likely to respond well to agiven drug. In April 2007 we began offering deCODE T2TM, our first referencelaboratory DNA-based test, which detects a gene variant we discovered to beassociated with increased risk of type 2 diabetes. In July 2007, we beganoffering deCODE AF TM, our second reference laboratory DNA-based test, for agene variant we discovered to be associated with increased risk of atrialfibrillation and stroke. We offer these tests through our diagnostics website,www.decodediagnostics.com, and deCODE T2TM is also being offered through amarketing arrangement with DNA Direct, Inc.

Through ourchemistry and structural biology units, based in the United States, we are ableto discover novel small-molecule therapeutic compounds, take candidatecompounds through pre-clinical testing, and manufacture sufficient quantitiesfor early-stage clinical trials. Our product development group, which hasexpertise in drug and disease modeling, designs and implements our clinicaltrials. We also actively explore in-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.

In June 2007, weannounced the top line results of a Phase IIa clinical trial andplacebo-controlled clinical pharmacology study for DG041, our developmentalanti-platelet compound for arterial thrombosis. Phase I studies showed DG041 tobe well-tolerated and to effectively reduce platelet aggregation withoutincreasing bleeding time. The Phase IIa and pharmacology studies examinedsafety, tolerability, dosing, and the effect of various dose levels onbiomarkers of platelet activation in patients with peripheral artery disease.In these studies, DG041demonstrated a dose-related impact on inflammatorybiomarkers and, importantly, showed a clear concentration-dependent effect onboth platelet aggregation response and p-selection expression. We also saw astatistically significant improvement in ankle/brachial index (ABI). There wereno serious drug-related effects in these studies and no discernible differencein other adverse events between the DG041 and matched placebo groups. We arenow conducting further clinical pharmacology and Drug-Drug Interaction (DDI)studies to prepare for a larger second Phase II study. We expect to initiate a secondPhase II study in patients with other vascular disease by year end.

deCODE has twocompounds in clinical development targeting the leukotriene pathway for theprevention of heart attack. The results of the recently completed Phase Imultiple dose ranging study of our compound, DG051, showed it to be safe andwell-tolerated in the doses tested; to have a pharmacokinetic profile thatsupports its suitability for once-a-day dosing; and to lower, in adose-dependent manner, levels of leukotriene B4, the pro-inflammatory biomarkerthat deCODE believes confers the increased risk of 

10

----

heart attack through thispathway. deCODE expects to begin Phase II testing later this year. We arecurrently reformulating the tablets for DG031, our Phase III compound for the preventionof heart attack.  We recently completedan accelerated 3 month stability study with our lead candidate and expect to bein a position to restart our Phase III testing near the end of the year. deCODEis conducting drug discovery work in vascular disease and stroke, the mostadvanced of its preclinical programs.

deCODE has apartnership with Roche focused on the discovery and development of PDE4inhibitors for vascular disease. deCODE and Illumina, Inc. are working togetherto develop DNA-based diagnostic kits utilizing deCODE’s gene discoveries inheart attack, type 2 diabetes and breast cancer and Illumina’s platform for SNPgenotyping. deCODE is also actively exploring drug development partnerships inits most advanced therapeutic programs, in order to spread risk and cost, andto focus resources on the advancement of its drug discovery work andpreclinical candidates.

 The goal of ourbusiness strategy is to maximize the creation of value from our human genetics,drug discovery and diagnostics work and to capture that value for the companyand its stockholders. Our product development pipeline now includes drugdevelopment programs in heart attack and arterial thrombosis, and following onthe launch of our deCODE T2TM test in type 2 diabetes and deCODE AFTM in atrialfibrillation, we are advancing the development of DNA-based risk predispositiontests in heart attack and prostate and breast cancer. Executing on our strategy— advancing these programs swiftly while continuing our discovery work in a broadrange of common diseases — requires us to spread risk and manage cost. We areconstantly evaluating the optimal balance between proprietary and partneredproduct development, the level of our investment in research and development,the deployment of cash resources for product development, and the financingenvironment.

As we invest in proprietary programs, we leverage ourcapabilities to form corporate alliances and to provide services to fee-payingcustomers. We also receive contract and grant funding from various governmentalagencies. We have formed drug and other product development alliances withRoche and Illumina, among others. Our chemistry subsidiary provides drugdiscovery and contract manufacturing services to fee-for-service customers, andour other service offerings include protein crystallography products andinstruments through our biosystems subsidiary, as well as protein structureanalysis contract services through our structural biology subsidiary; clinicaltrials services through our Encode CRO; and DNA analysis services through ourgenotyping laboratory in Reykjavik.

We derive revenuesprimarily from research funding and other fees from our service customers andcollaborative partners, as well as from research grants. Milestone payments andupfront, exclusivity, technology-access and technology-development fees underour collaboration agreements constitute another source of our revenues. Ourexpenses consist primarily of research and development expenses such assalaries and related employee costs, materials and supplies, and contractorservices.

We believe thatour ongoing work in genetics, the advancement of our drug and diagnosticprograms, and the conduct of clinical trials will require significant ongoingexpenditure. In 2006, we completed Phase I clinical testing for DG041 andconcluded a Phase IIa trial; filed an IND and conducted a single-dose rangingPhase I study for DG051; and designed and initiated a Phase III trial for DG031for the prevention of heart attack, a trial that we voluntarily suspended inOctober in order to address a formulation problem with the tablets. In thefirst half of 2007 we continued to advance our drug development programs,completing a successful Phase I multiple dose ranging study of DG051, and are workingto advance this compound to the next phases of clinical testing. We completed asuccessful Phase IIa trial of DG041and are working to move this compound into asecond, larger Phase II trial. We have established a Clinical LaboratoryImprovement Amendments (CLIA) certified reference laboratory for offeringDNA-based tests, and expect to follow the launch of our deCODE T2TM test in type2 diabetes and our recent launch of deCODE AF test in atrial fibrillation withseveral other tests we now have in development. We anticipate incurringadditional net losses at least through the next several years, due to, inaddition to the above-mentioned factors, depreciation and amortization, as wellas stock-based compensation and other non-cash charges. We expect that ourrevenues and losses will fluctuate from quarter to quarter and that suchfluctuations may be substantial, especially because progress in our scientificwork and milestone payments that are related to progress can fluctuate betweenquarters. We do not believe that comparisons of our quarter-to-quarterperformance are a good indication of future performance.

At June 30, 2007,we had $137.3 million in cash, cash equivalents and investments, includingrestricted cash equivalents and investments and as we advance discovery workand broaden our drug development pipeline we will require significantadditional capital for product development and so we will continue toinvestigate additional avenues of financing. Our ability to obtain capital inthe future will be affected by conditions in the global financial markets andin the pharmaceutical industry. We expect that more favorable conditions inthose markets will present opportunities for us, while downturns in the marketvaluations of biotechnology companies and of the equity markets more generallywill restrict our ability to raise additional capital on attractive terms.

One of the mainissues confronting big pharmaceutical companies is their lack of promising newdrugs to treat major indications. As many leading brand-name drugs come offpatent and face generic competition, developing successful new medicines willbecome critical for filling the gap. We believe that companies such as ours maybe well positioned to play an important role in filling the gap in the pipelineof new drugs, either alone or as partners of pharmaceutical companies. Recentannouncements demonstrate that the industry is already investing in thedevelopment of new therapeutics based on our approach.

11

----

**DrugDevelopment Programs**

The following is asummary of the development of our drug candidates in late pre-clinical orclinical development. Because of uncertainties involved in the drug developmentprocess, the actual timing for the events described below may differ materiallyfrom that provided in this summary.

·       We have two compounds indevelopment for the prevention of heart attack. These programs come out of ourdiscovery of major risk variants in two genes encoding proteins in theleukotriene pathway. These variants — in the genes that code for 5-lipoxygenaseactivating protein (FLAP) and leukotriene A4 Hydrolase (LTA4H) — appear toconfer risk in the same way: by causing an upregulation in the production ofleukotriene B4, a potent pro-inflammatory molecule that is the end product ofone branch of the pathway.  Thetherapeutic goal of both compounds is to inhibit the activity of the pathway,lowering the production of LTB4 and thereby decreasing the inflammatoryactivity in atherosclerotic plaques and reducing the risk of heart attack. DG051,discovered by deCODE’s chemistry unit, is a small-molecule inhibitor of LTA4H,which is directly involved in the synthesis of LTB4. The results of ourdevelopment work to date on DG051 indicates that it is well tolerated, providespotent inhibition of LTB4 production, is orally bioavailable, has potential foronce-daily dosing, and appears to have minimal potential for drug-interaction.We completed a single-dose ranging Phase I study for DG051 in December 2006,and a multiple dose ranging Phase I trial of DG051 in the first quarter of2007. The results from these studies demonstrated well-characterizedpharmacokinetic parameters and a reduction of LTB4 in a dose-dependentmanner.  We are currently running athirty day trial in DG051 to help determine dosing for our Phase II trial. Wecontinue to expect our Phase II trial to begin in the fourth quarter of thisyear.

In May 2006 we began a Phase III clinical trial for DG031, an inhibitorof FLAP which we licensed from Bayer AG, but voluntarily suspended this trialin October 2006 due to an unexpected formulation problem with the tablets. Inroutine testing of clinical supplies we discovered that, over time, the drugtablets appeared to dissolve more slowly, potentially providing lesseningamounts of active drug the longer they were stored. This raised the possibilitythat as the trial progressed patients would be receiving too little drug,undermining the trial’s chances of success. We are currently reformulating thecompound to resolve this issue and recently completed a three month acceleratedstability study on our lead candidate. We expect to have clinical supplies ready to resume Phase III aroundyear-end.

·       DG041 is being developed asan anti-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) encoded by a gene we have shown to beassociated with increased risk of arterial disease. We believe that PGE2 mayhave additive stimulatory effects on platelet aggregation beyond those of otherpotent agonists such as ADP or thromboxane A2, targeted by clopidogrel andaspirin, respectively. In early 2006, we concluded the Phase I clinical program for DG041 and the results of the Phase Iprogram showed DG041 to be well-tolerated across the entire dose range studied,and that the compound can effectively inhibit platelet aggregation in adose-dependent manner without increasing bleeding time. We presented data fromour Phase IIa clinical trial and a placebo-controlled pharmacology study inJune of this year. Based on the results of our clinical studies thus far, DG041appears to be well-tolerated, showing little difference in bleeding eventsbetween dosing arms and placebo, and to potentially offer focused means ofpreventing the formation of thrombi by specifically inhibiting plateletaggregation mediated by EP3. We are conducting DDI and further clinicalpharmacology studies ahead of our larger Phase II study in patients with vasculardisease.

·       Among our most advancedpreclinical programs, we are pursuing a PDE4 inhibitor program for vasculardisease/stroke pursuant to our 2004 agreement with Roche and are working onidentifying and advancing a lead pre-clinical compound.

We use many of ouremployee and infrastructure resources across several programs, and many of ourresearch and development costs are indirectly attributable to an individuallynamed program or are directed broadly to applicable research programs. However,taking into account costs that are specifically attributable to individualprograms and allocations of our research and development program costs basedupon those direct costs, we have cumulatively invested $40.2 million, $19.0million, $11.8 million and $10.4 million in our heart attack (myocardialinfarction, or MI), arterial thrombosis, stroke and asthma programs,respectively, from the beginning of 2003 to date (June 30, 2007). Inceptionto-date costs are not available as these costs were not historically tracked byprogram.

We have notapplied for or received marketing approval from the applicable regulatoryauthorities in any country for any of our drug candidates. In order for us toachieve marketing 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, ourstrategy includes the option of entering into collaborative arrangements withthird parties to participate in the development and commercialization of ourproducts. Entering into a 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, the 

12

----

complexity of theindication, the size, complexity and expense of necessary development and/orcommercialization efforts, competition in the market and size of the applicablemarket, an assessment of our own resources—financial and operational, and anassessment of the resources of a potential partner. In the event that we docollaborate on any of the above programs in the future, a partner will have alevel of control, which may be significant, over the pre-clinical developmentor clinical trial process for a product. As a result the completion date ofsuch a partnered program could largely be under control of that third partyrather than under our control. We cannot forecast with any degree of certaintywhich proprietary drug candidate will be subject to future collaborativearrangements or how such arrangements would affect our development plan orcapital 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 Development Programs and In-licensing**

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

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

In certainprograms we have taken advantage of the fact that drug targets we haveidentified through our genetics research have already been employed by othercompanies to make developmental compounds for other indications. By licensingthese compounds or entering into co-development arrangements we have been ableto leapfrog over several steps of drug discovery, entering directly into PhaseII clinical trials. DG031, our most advanced compound for the prevention ofheart attack, was licensed from Bayer HealthCare AG, which was initiallydeveloping it for asthma. In 2006, we concluded a Phase II trial in asthma,working with Cephalon on their compound CEP-1347, originally developed forParkinson’s disease. We continue to investigate additional such possibilitiesfor co-development of promising existing compounds that may effectively actagainst targets we have identified through our gene discovery work.

**Results of Operations for the Three and Six-MonthPeriods Ended June 30, 2007 and 2006**

Our results ofoperations have fluctuated from period to period and may continue to fluctuatein the future based upon, among other things, the pace and progress of ourproprietary research and clinical development efforts, the timing andcomposition of funding under our various collaborative agreements, and theprogress of our own research and development efforts. Results of operations forany period may be unrelated to results of operations for any other period. Inaddition, historical results should not be viewed as indicative of futureoperating results. We are subject to risks common to companies in our industryand at our stage of development, including risks inherent in our research anddevelopment efforts, reliance upon collaborative partners, development by us orour competitors of new technological innovations, ability to market products orservices, dependence on key personnel, dependence on key suppliers, protectionof proprietary 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 considerable revenues or royalties based on therapeutic ordiagnostic products for a period of years, if at all.

Financialhighlights as of and for the three and six-month periods ended June 30, 2007include:

·   AtJune 30, 2007, we had $137.3 million in cash, cash equivalents and investments,including restricted cash equivalents and investments, compared to $152.0million at December 31, 2006. The net utilization of our cash in thesefirst six months is principally owing to cash used in product development,research and general operations as reflected in the $30.9 million cash we usedin operations, together with the net proceeds from the sale and leaseback of ourproperty in Woodridge, Illinois ($18.4 million).

·   Ourresearch and development expense was $14.5 million and $27.2 million for thethree and six-month periods ended June 30, 2007, respectively, as compared to$13.2 million and $28.7 million for the three and six month periods ended June30, 2006, respectively. Our research and development expense in 2007 reflectsthe advancement of our drug and diagnostic programs, the launch of our firstDNA-based tests for gauging individual risk of common disease, and theacceleration of our gene and target discovery work.

13

----

·   Ourrevenue for the three and six-month periods ended June 30, 2007 was $7.6million and $16.2 million, respectively, as compared to $10.4 million and $20.5million for the three and six-month periods ended June 30, 2006, respectively,and declined principally due to the conclusion of our diagnostics alliance withRoche. As of June 30, 2007, our deferred revenue had grown to $15.1 millionfrom $11.6 million as of March 31, 2007, largely on account of the growth ofour genotyping service business.

·   InJune 2007, we completed a sale and leaseback of our property in Woodridge,Illinois. Pursuant to the agreement, we sold the Woodridge property for $25.0million in cash and leased the property back under a 17 year lease at aninitial rent of $163,000 per month, subject to annual rent increases of 2.5%.Concurrent with the sale and leaseback we paid the existing mortgage loan($5.4 million) which had been collateralized by the Woodridge property.

*** Revenue***

     Revenue for the three and six-monthperiods ended June 30, 2007 and 2006 is as follows:
| ** ** | ** ** | **For the Three Months**     | ** ** | **For the Six Months** | ** ** | **2007 as Compared to 2006** | ** ** |
|------------|------------|------------------------------|------------|------------------------|------------|------------------------------|------------|
| ** ** | ** ** | **Ended June 30,**           | ** ** | **Ended June 30,**     | ** ** | **Three Months**             | ** ** | **Six Months** | ** ** |
| ** ** | ** ** | **2007**                     | ** ** | **2006**               | ** ** | **2007**                     | ** ** | **2006** | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** ** | ** ** | **(In thousands, except %)** | ** ** |
| Revenue    |       | $                            | 7,614      |                   | $          | 10,360                       |       | $ | 16,168 |   | $ | 20,493 |   | $ | (2,746 | ) | (27 | )% | $ | 4,325 |   | (21 | )% |
|            |            |                              |            |                        |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Our businessstrategy is focused on turning our discoveries into new drugs and diagnosticsfor the treatment of common diseases. At the same time, we leverage ourcapabilities to generate revenue through corporate alliances, through servicecontracts and increasingly through research grants. In the majority of ourprograms we are pursuing drug development on our own. We have also sought andreceived research grant funding. We have entered into research, development,commercialization, and fee for service alliances and contracts across ourbusiness. Depending on the nature of each prospective business opportunity, thekey components of the commercial terms of such arrangements typically includeone or more of the following: research funding; up-front, exclusivity,technology access, and technology development fees; fees for particularservices; milestone payments; license or commercialization fees; and royaltiesor profit sharing from the commercialization of products.

Collaborationswith our most significant partners include:

*F.Hoffmann-La Roche (Roche)*

*Therapeutics*.    In November 2004, we signed a three-yearagreement with Roche to co-develop inhibitors of PDE4 for the prevention andtreatment of vascular disease, including stroke. This agreement continues workadvanced under a completed 2002 agreement (completed in 2005), and we willfocus on optimizing lead compounds identified under the previous agreement andbeginning clinical development. Under this agreement, as of June 30, 2007, wehave received $6.0 million of research funding, of which $2.0 million wasreceived in the six-months ended June 30, 2007. We will share drug discoveryand clinical trials costs under this agreement, and we may also receivemilestone payments and royalties based on drug sales.

*Diagnostics*.    InJune 2001, we signed a five-year alliance with Roche’s diagnosticsdivision and through June 2006 we collaborated to develop and market DNA-baseddiagnostics for major diseases. During the term of this alliance, which expiredin 2006, we received $44.3 million in research funding, up-front fees andmilestone payments under the agreement and we may receive additional milestonepayments upon the achievement of research and development milestones by Rocheand royalties on the sales of diagnostic products developed by Roche.

For thethree-months ended June 30, 2007 and 2006, we recognized revenue of $0.5million and $2.8 million, respectively, and incurred costs of $0 and $3.2million, respectively. For the six-months ended June 30, 2007 and 2006, werecognized revenue of $1.0 million and $5.4 million, respectively, and incurredcosts of $0 and $6.1 million, respectively.

*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).*InSeptember 2004, deCODE was awarded a five-year $23.9 million contract by theNIAID, a division of NIH. Under the contract, deCODE will apply its populationapproach and resources to discover genetic factors associated withsusceptibility to certain infectious diseases and with responsiveness tovaccines targeting such

14

----

diseases. deCODE mayreceive $10.6 million in additional research funding over the remaining term ofthe agreement.

For thethree-months ended June 30, 2007 and 2006, we recognized revenue of $2.3million and $3.9 million, respectively, and incurred costs of $3.7 million and$4.4 million, respectively, from government research contracts and grants. Forthe six-months ended June 30, 2007 and 2006, we recognized revenue of $5.7million and $6.9 million, respectively, and incurred costs of $8.7 million and$7.9 million, respectively, from government research contracts and grants.

Significantelements of our revenue are summarized as follows:

|                                                                            | ** ** | **For the Three Months  Ended June 30,** | ** ** | **For the Six Months  Ended June 30,** | ** ** |
|----------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                                 | ** ** | **2007**                                                          | ** ** | **2006**                                                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                 | ** ** | **(In thousands)**                                           | ** ** |
| Research funding  and other service fees                                   |       | $                                                                 | 4,798      |                                                            | $          | 5,445 |   | $ | 9,412 |   | $ | 10,913 |   |
| Milestone  payments                                                        |       | 249                                                               |       | 101                                                             |       | 591 |   | 299 |   |
| Up-front,  exclusivity, technology access, and technology development fees |       | —                                                            |       | 500                                                             |       | — |   | 1,000 |   |
| Government  research contracts and grant funding                           |       | 2,324                                                             |       | 3,939                                                           |       | 5,684 |   | 6,926 |   |
| Other                                                                      |       | 243                                                               |       | 375                                                             |       | 481 |   | 1,355 |   |
| Total                                                                      |       | $                                                                 | 7,614      |                                                            | $          | 10,360 |   | $ | 16,168 |   | $ | 20,493 |   |

 

Our revenue for the periods presented generallyreflects our strategic focus on proprietary drug discovery and development. Thedecline in revenue in the three and six-months ended June 30, 2007 compared tothe same periods in 2006 is due principally to the conclusion of ourdiagnostics alliance with Roche in mid-2006 but then also is attributed to alower amount of government research contract and grant funding recognized inthe 2007 periods. Revenue deferred on our balance sheet (i.e., received but notrecognized) grew to $15.1 million as of June 30, 2007 as compared to $9.8million as of December 31, 2006 largely on account of the development of ourgenotyping services and an increase in backlog thereof. Of the amount ofrevenue deferred as of June 30, 2007, we believe approximately $8.9 millionwill be recognized within the following twelve months. 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. 

***Cost of Revenue***

     Cost of revenue, including costs incurredin connection with collaborative programs for the three and six-month periodsended June 30, 2007 and 2006 is as follows:
| ** **      | ** ** | **For the Three Months**     | ** ** | **For the Six Months** | ** ** | **2007 as Compared to 2006** | ** ** |
|-----------------|------------|---------------------------------------------|------------|---------------------------------------|------------|--------------------------------------------------|------------|
| ** **      | ** ** | **Ended June 30,**                | ** ** | **Ended June 30,**          | ** ** | **Three Months**                            | ** ** | **Six Months** | ** ** |
| ** **      | ** ** | **2007**                                    | ** ** | **2006**                              | ** ** | **2007**                                         | ** ** | **2006** | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** **      | ** ** | **(In thousands, except %)** | ** ** |
| Cost of revenue |       | $                                           | 9,156      |                                  | $          | 10,459                                           |       | $ | 20,074 |   | $ | 20,309 |   | $ | (1,303 | ) | (12 | )% | $ | (235 | ) | (1 | )% |
|                 |            |                                             |            |                                       |            |                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Our cost ofrevenue consists of the costs of services provided to customers andcollaborators and the costs of programs under research contracts and grants,including: (i) the entirety of the costs incurred in connection with programsthat have been partnered and on which we receive research funding; (ii) costsassociated with other service fee revenues; and (iii) the total amount of thosecosts incurred in connection with discovery and development work performedunder research contracts and grants. At times, we invest in addition to costscovered by research funding received in such collaborative programs and inaddition to monies received under research contracts and grants.

Decreases in ourcost of revenue for the three and six-months ended June 30, 2007 as compared tothe same periods in 2006 are largely on account of (i) the shift away fromcorporate funded research broadly, but specifically the completion of researchfunding under the 2002 agreement with Roche, and also (ii) a relative declinein the amount of discovery and development work performed under ongoingcontracts and grants with the NIH and EC during the reporting periods due totiming of when the work is performed.

Our cost ofrevenue, including costs incurred in connection with collaborative programs inthe three-month period ended June 30, 

15

----

2007 as compared to thethree-month period ended June 30, 2006 decreased chiefly with regard tosalaries ($0.7 million), and usage of chemicals and consumables ($0.5 million).The overall decrease in the cost of revenue for the six-month period ended June30, 2007 as compared to the six-month period ended June 30, 2006 is wasprimarily due to lower expense for salaries ($0.5 million) but then we usedrelatively more in chemicals and consumables ($0.4 million).

***Research and Development***

     Research and development expense for thethree-month periods ended March 31, 2007 and 2006 is as follows:
| ** **                | ** ** | **For the Three Months**     | ** ** | **For the Six Months** | ** ** | **2007 as Compared to 2006** | ** ** |
|---------------------------|------------|---------------------------------------------|------------|---------------------------------------|------------|--------------------------------------------------|------------|
| ** **                | ** ** | **Ended June 30,**                | ** ** | **Ended June 30,**          | ** ** | **Three Months**                            | ** ** | **Six Months** | ** ** |
| ** **                | ** ** | **2007**                                    | ** ** | **2006**                              | ** ** | **2007**                                         | ** ** | **2006** | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** **                | ** ** | **(In thousands, except %)** | ** ** |
| Research and  development |       | $                                           | 14,528     |                                  | $          | 13,207                                           |       | $ | 27,204 |   | $ | 28,724 |   | $ | 1,321 |   | 10 | % | $ | (1,520 | ) | (5 | )% |
|                           |            |                                             |            |                                       |            |                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Our research anddevelopment expense for the three and six-months ended June 30, 2007 reflectsthe advancement of our drug and diagnostic programs, the launch of our firstDNA-based tests for gauging individual risk of common disease, and theacceleration of our gene and target discovery work. As we continue ourhigh-density, whole genome studies utilizing the Illumina SNP genotypingplatform we have seen increases in related materials and supplies as well asthe attendant salary and related costs in both the three and six-month periodsended June 30, 2007 versus the comparable periods in 2006. The decrease incontractor services and other third party costs for the three and six-monthsended June 30, 2007 relative to the comparable periods in 2006 is largely onaccount of the clinical development of DG031, in which we voluntarily suspendedour Phase III trial late last year.  Withour advancements and based upon the range of our current research anddevelopment activities but excluding any significant new collaborations, webelieve that our overall investment in research and development for the fiscalyear 2007 may be in the range of $60 to $65 million.

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

|                                                  | ** ** | **For the Three Months  Ended June 30,** | ** ** | **For the Six Months  Ended June 30,** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                       | ** ** | **2007**                                                          | ** ** | **2006**                                                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                       | ** ** | **(In thousands)**                                           | ** ** |
| Salaries and  other personnel costs              |       | $                                                                 | 5,179      |                                                            | $          | 4,360 |   | $ | 9,871 |   | $ | 9,696 |   |
| Materials and  supplies                          |       | 3,558                                                             |       | 1,170                                                           |       | 6,230 |   | 2,759 |   |
| Contractor  services and other third party costs |       | 3,350                                                             |       | 5,140                                                           |       | 6,049 |   | 10,966 |   |
| Overhead  expenses                               |       | 1,381                                                             |       | 1,251                                                           |       | 2,829 |   | 2,823 |   |
| Depreciation and amortization                    |       | 626                                                               |       | 891                                                             |       | 1,348 |   | 1,763 |   |
| Stock-based compensation                         |       | 434                                                               |       | 395                                                             |       | 877 |   | 717 |   |
| Total                                            |       | $                                                                 | 14,528     |                                                            | $          | 13,207 |   | $ | 27,204 |   | $ | 28,724 |   |

 

During the year ended December 31, 2006 and now into2007, we have experienced increasing research and development costs and weexpect that further increases may continue, particularly as we continuewide-ranging work in genetics and advance our clinical development andproprietary drug development programs. Particularly, in the second half of 2006we began our high-density, whole-genome studies utilizing the Illumina SNPgenotyping platform and that initiative continues in 2007.

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

Selling, generaland administrative expense for the three and six-month periods ended June 30,2007 and 2006 is as follows:
| ** **                           | ** ** | **For the Three Months**     | ** ** | **For the Six Months** | ** ** | **2007 as Compared to 2006** | ** ** |
|--------------------------------------|------------|---------------------------------------------|------------|---------------------------------------|------------|--------------------------------------------------|------------|
| ** **                           | ** ** | **Ended June 30,**                | ** ** | **Ended June 30,**          | ** ** | **Three Months**                            | ** ** | **Six Months** | ** ** |
| ** **                           | ** ** | **2007**                                    | ** ** | **2006**                              | ** ** | **2007**                                         | ** ** | **2006** | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** **                           | ** ** | **(In thousands, except %)** | ** ** |
| Selling, general  and administrative |       | $                                           | 6,795      |                                  | $          | 4,392                                            |       | $ | 12,325 |   | $ | 9,659 |   | $ | 2,403 |   | 55 | % | $ | 2,666 |   | 28 | % |
|                                      |            |                                             |            |                                       |            |                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The increase inour selling, general and administrative expenses for the three and six-monthperiods ended June 30, 2007 compared to the same periods ended June 30, 2006 isprimarily attributable to increased salary expense ($0.4 million and $0.6million, respectively) and increased stock-based compensation ($0.3 million and$0.7 million, respectively) and then increased contractor services ($0.5million and $0.5 million, respectively) related to our diagnostics offerings.Further, our selling, general and administrative expense in the three andsix-month periods ended June 30, 2006 include a $0.8 million gain on the saleof property. 

16

----

***Interest Income***

Interest incomefor the three and six-month periods ended June 30, 2007 and 2006 is as follows:
| ** **      | ** ** | **For the Three Months**     | ** ** | **For the Six Months** | ** ** | **2007 as Compared to 2006** | ** ** |
|-----------------|------------|---------------------------------------------|------------|---------------------------------------|------------|--------------------------------------------------|------------|
| ** **      | ** ** | **Ended June 30,**                | ** ** | **Ended June 30,**          | ** ** | **Three Months**                            | ** ** | **Six Months** | ** ** |
| ** **      | ** ** | **2007**                                    | ** ** | **2006**                              | ** ** | **2007**                                         | ** ** | **2006** | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** **      | ** ** | **(In thousands, except %)** | ** ** |
| Interest income |       | $                                           | 1,518      |                                  | $          | 1,336                                            |       | $ | 3,509 |   | $ | 3,048 |   | $ | 182 |   | 14 | % | $ | 461 |   | 15 | % |
|                 |            |                                             |            |                                       |            |                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Our interestincome has increased in 2007 as compared to 2006. 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, in general, been increasing). We expect to use our cash and investmentsprincipally for advancing our discovery and development programs. In themeantime, we will invest the monies received in accordance with our policy,having the objective of preserving principal and maintaining a high degree ofliquidity to meet operating needs and obtaining competitive returns subject toprevailing market conditions. We expect to maintain our portfolio of cashequivalents and investments in a variety of securities, including auction ratesecurities, commercial paper, money market funds, mutual fund investments andgovernment and non-government debt securities.

***Interest Expense***

Interest expensefor the three and six-month periods ended June 30, 2007 and 2006 is as follows:
| ** **       | ** ** | **For the Three Months**     | ** ** | **For the Six Months** | ** ** | **2007 as Compared to 2006** | ** ** |
|------------------|------------|---------------------------------------------|------------|---------------------------------------|------------|--------------------------------------------------|------------|
| ** **       | ** ** | **Ended June 30,**                | ** ** | **Ended June 30,**          | ** ** | **Three Months**                            | ** ** | **Six Months** | ** ** |
| ** **       | ** ** | **2007**                                    | ** ** | **2006**                              | ** ** | **2007**                                         | ** ** | **2006** | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** **       | ** ** | **(In thousands, except %)** | ** ** |
| Interest expense |       | $                                           | 3,803      |                                  | $          | 1,691                                            |       | $ | 7,469 |   | $ | 3,407 |   | $ | 2,112 |   | 125 | % | $ | 4,062 |   | 119 | % |
|                  |            |                                             |            |                                       |            |                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

**Other non-operatingincome and (expense), net**

Othernon-operating income and (expense), net the three and six-month periods endedJune 30, 2007 and 2006 is as follows:
| ** **                                     | ** ** | **For the Three Months**     | ** ** | **For the Six Months** | ** ** | **2007 as Compared to 2006** | ** ** |
|------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                     | ** ** | **Ended June 30,**                | ** ** | **Ended June 30,**          | ** ** | **Three Months**                            | ** ** | **Six Months** | ** ** |
| ** **                                     | ** ** | **2007**                                    | ** ** | **2006**                              | ** ** | **2007**                                         | ** ** | **2006** | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** **                                     | ** ** | **(In thousands, except %)** | ** ** |
| Other non-operating  income and (expense), net |       | $                                           | 8,922      |                                  | $          | (290                                             | )          | $ | 8,542 |   | $ | (58 | ) | $ | 9,212 |   | 3,177 | % | $ | 8,600 |   | 14,828 | % |
|                                                |            |                                             |            |                                       |            |                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The increaseduring the three and six-months ended June 30, 2007 is due to a legalsettlement we entered into in June 2007 to end ongoing litigation regardingcertain proprietary and confidential information. Financial terms of the legalsettlement stipulated that we would be paid $9.0 million, in two installments.The first installment of $4.0 million was received prior to June 30, 2007 andthe second payment of $5.0 million is due to be paid prior to December 31,2007. We recognized the $9.0 million during the three and six-months ended June30, 2007, net of litigation expenses incurred of $0.04 million and $0.7million, respectively.

**Liquidityand Capital Resources**

We have financedour operations primarily through funding from research and developmentcollaborative agreements, and the issuance of equity securities and long-termfinancing instruments ($996.1 million from the beginning of 1999 to-date).At June 30, 2007, future funding under terms of our existing agreements isapproximately $38.9 million excluding milestone payments, royalties and otherpayments that we may earn under such collaborations. Of the $38.9 million,approximately $19.6 million is expected to be received during the year endedDecember 31, 2007, with the remaining amount due through 2010.

 

17

----

We makesignificant investments in proprietary research and development and we incurthe costs of such activities. In the near term, this requires us to devoteresources to our in-house drug and clinical development which we believe willbetter position us to capture the most value to us in our discoveries. As weidentify promising discoveries for further development, we may choose tocontinue the development ourselves into and through clinical trials, regulatoryapprovals, manufacturing, distribution and marketing. In other cases we are orwill be working to varying degrees with partners. The decisions we make as tothese matters will affect our cash requirements.

Our cashrequirements depend on numerous factors, including the level and timing of ourresearch and development expenditures; our ability: to access the capitalmarkets; to obtain new research and development collaboration agreements; toobtain and maintain contract service agreements in our pharmaceuticals,biostructures, clinical research trials and genotyping service groups;expenditures in connection with alliances, license agreements and acquisitionsof and investments in complementary technologies and businesses; competingtechnological and market developments; the cost of filing, prosecuting,defending and enforcing patent claims and other intellectual property rights;the purchase of additional capital equipment; and capital expenditures at ourfacilities. Changes in our research and development plans, notably the entryinto clinical trials of drugs based on our discoveries, or other changesaffecting our operating expenses may result in changes in the timing and amountof expenditures of our capital resources.

At June 30, 2007,we had $137.3 million in cash, cash equivalents and investments, includingrestricted cash equivalents and investments of $5.3 million. In light of oursteady progress as well as proceeds from both the sale and leaseback of ourWoodridge property and the recent settlement of litigation, we believe that ouroverall use of cash resources in 2007 may be in the range of $60 to $65million. As we advance and broaden our drug development pipeline we willrequire significant additional capital for product development and so we willcontinue to investigate additional avenues of financing, such as further publicor private equity offerings, additional debt financing, other forms offinancing or added collaborations and licensing arrangements. However, noassurance can be given that additional financing or collaborations and licensingarrangements will be available when needed, or that if available, will beobtained on favorable terms. If adequate funds are not available when needed,we may have to curtail operations or attempt to raise funds on unattractiveterms.

|                                             | ** ** | **For the Six-Month Periods  Ended June 30,** | ** ** |
|---------------------------------------------|------------|------------------------------------------------------------------------|------------|
|                                             | ** ** | **2007**                                                               | ** ** | **2006** | ** ** |
| ** **                                  | ** ** | **(In thousands)**                                                | ** ** |
| **Cash provided by (used in):**             |       |                                                                   |       |   |   |
| Operating activities                        |       | $                                                                      | (30,948    | ) | $ | (40,061 | ) |
| Investing activities                        |       | 35,715                                                                 |       | 1,646 |   |
| Financing activities                        |       | 17,109                                                                 |       | 149 |   |
| Cash and cash equivalents, at end of period |       | 43,758                                                                 |       | 27,677 |   |
|                                             |            |                                                                        |            |  |  |  |  |

 

*Cashand Cash Equivalents.*  AtJune 30, 2007, we had $43.8 million in cash and cash equivalents. Togetherwith our investments ($88.2 million) and restricted cash equivalents andinvestments ($5.3 million), this balance ($137.3 million) is $14.7 millionless than at December 31, 2006. The net utilization of our cash in thesefirst six months is principally owing to cash used in product development,research and general operations as reflected in the $30.9 million cash we usedin operations, together with the net proceeds from the sale and leaseback ofour property in Woodridge, Illinois ($18.4 million).

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

At June 30, 2007,our cash is largely invested in U.S. dollar denominated money market andchecking accounts and also in Icelandic krona denominated accounts. At June 30,2007, our investments are in auction rate securities, a municipal bond, USgovernment securities and a corporate bond.

*Operating Activities.*Net cash used in operating activities was $30.9 million for the six-monthperiod ended June 30, 2007 as compared to $40.1 million having been used in thesame period in 2006. Cash used in our operations is principally owing to cashused in product development, research and general operations as reflected inthe $30.9 million cash we used in operations, as more fully described above.

*Investing Activities.*Ourinvesting activities have consisted of short-term investments in marketablesecurities (mainly investments in auction rate securities, US governmentsecurities and a corporate bond) and capital expenditures. In the six-monthsended June 30, 2006, we acquired $1.3 million of cash in our purchase of UVS,money used to fund the acquired liabilities of UVS. We principally madereplacement capital expenditures during the six-month periods ended June 30,2007 and 2006. We have experienced the pace of necessary capital expendituresincrease somewhat of late and this trend may continue.

18

----

*Financing Activities.*Net cash of $17.1 million was provided by financing activities in the six-monthperiod ended June 30, 2007, as compared to $0.1 million that was providedin the six-month period ended June 30, 2006. Our most significant financingactivity for the six-month period ended June 30, 2007 was the sale andleaseback of our property in Woodridge, Illinois (netting us $18.4 millionafter the payment of transaction costs and the repayment of our existingproperty mortgage). Further, we had ongoing repayment of and installmentpayments on debt, capital lease and finance obligations amounting to $1.4million in the six-month period ended June 30, 2007. Financing activities forthe six-month period ended June 30, 2006 largely consisted of equity proceedson the exercise of common stock options ($0.8 million), financing of certainequipment ($0.8 million) and installment payments on debt and capital leaseobligations ($1.5 million).

In June 2007, wecompleted the sale and leaseback of our property (land and building)in Woodridge, Illinois. Pursuant to the agreement, we sold the Woodridgeproperty for $25.0 million in cash and leased the property back under a 17 yearlease at an initial rent of $163,000 per month, subject to annual rentincreases of 2.5%. Our obligations under the lease are collateralized by aletter of credit in an initial amount of $5.0 million that may be reduced uponcertain conditions. The letter of credit is collateralized by restricted cashequivalents and investment ($5.3 million at June 30, 2007).

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

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

*Contractual Commitments andOff-Balance Sheet Arrangements.  * The followingsummarizes our contractual obligations at June 30, 2007, and the effects suchobligations are expected to have on our liquidity and cash flows in futureperiods:
| ** **                                         | ** ** | ** **              | ** ** | **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 |       | $                       | 262,200    |                                      | $          | 8,050 |   | $ | 8,050 |   | $ | 8,050 |   | $ | 238,050 |   | $ | — |   | $ | — |   |
| Long-term debt,  including interest                |       | 772                     |       | 287                                       |       | 272 |   | 213 |   | — |   | — |   | — |   |
| Capital lease  obligations, including interest     |       | 4,894                   |       | 2,352                                     |       | 2,076 |   | 466 |   | — |   | — |   | — |   |
| Finance obligation  (sale-leaseback)               |       | 40,707                  |       | 1,966                                     |       | 2,009 |   | 2,059 |   | 2,111 |   | 2,164 |   | 30,398 |   |
| Operating leases(1)                                |       | 72,675                  |       | 6,026                                     |       | 5,998 |   | 5,835 |   | 5,753 |   | 5,747 |   | 43,316 |   |
| Total                                              |       | $                       | 381,248    |                                      | $          | 18,681 |   | $ | 18,405 |   | $ | 16,623 |   | $ | 245,914 |   | $ | 7,911 |   | $ | 73,714 |   |

----

(1)  Balance includes $71.0 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 $0.06 million.

Under the terms ofcertain technology licensing agreements, deCODE is obligated to make paymentsupon the achievement of established milestones leading to the discovery of definedproducts. These payments could total $5.0 million, with the timing of paymentsnot determinable at the current time. These potential payments are not includedin the above table.

All materialintercompany balances and transactions have been eliminated. We do not have anyother significant 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**

 Thepreparation of financial statements in conformity with generally acceptedaccounting principles requires us to make certain estimates and assumptionsthat affect the reported amounts of assets and liabilities, the disclosure ofcontingent assets and liabilities at the date of the financial statements, andthe reported 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 

19

----

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 risksrelated to these and our other accounting policies on our business oroperations is discussed throughout Management’s Discussion and Analysis ofFinancial Condition and Results of Operations where such policies affect ourreported and expected financial results. For a detailed discussion on theapplication of these and other accounting policies, please refer to our notesto the Condensed Consolidated Financial Statements in this quarterly report onForm 10-Q and the Consolidated Financial Statements in the Annual Reporton Form 10-K. There can be no assurance that actual results may not differfrom the estimates referred to above.

**FORWARD-LOOKINGSTATEMENTS AND CAUTIONARY FACTORSTHAT MAY AFFECT FUTURE RESULTS**

This Quarterly Report onForm 10-Q contains forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933, as amended, and Section 21E ofthe Securities Exchange Act of 1934. These statements relate to future eventsor our future financial performance. In some cases, forward-looking statementscan be identified by terminology such as “may,” “should,” “could,” “expect,” “plan,”“anticipate,” “believe,” “estimate,” “predict,” “intend,” “potential” or “continue”or the negative of such terms or other comparable terminology. These statementsare only expectations. We cannot assure you that our expectations andassumptions will 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, 2006 as updated byItem A of this Quarterly Report on Form 10-Q and elsewhere in this QuarterlyReport on Form 10-Q and in the reports we file under 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. Investments are made primarily in high-gradecorporate bonds, asset-backed debt securities and U.S. government agency debtsecurities. These investments are subject to risk of default, changes in creditrating and changes in market value. These investments are also subject tointerest rate risk and will decrease in value if market interest ratesincrease. A hypothetical 100 basis point increase in interest rates wouldresult in an approximate $0.2 million decrease in the fair value of ourinvestments as of June 30, 2007. Due to the conservative nature of ourinvestments and relatively short effective maturities of debt instruments,interest rate risk is mitigated. Changes in interest rates do not affectinterest expense incurred on the Company’s Convertible Notes, because they bearinterest at a fixed rate. Using the prices of the latest trades inJune 2007, the market value of the Convertible Notes was approximately$167.1 million on June 30, 2007.

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 $0.02 million on our Icelandic krona denominatednon U.S. dollar assets and liabilities. We have historically purchasedinstruments to hedge these general risks through the use of derivativefinancial instruments.

** ITEM 4. CONTROLS AND PROCEDURES**

a)*Evaluation ofdisclosure controls and procedures.* Our Chief Executive Officer andour Chief Financial Officer evaluated the effectiveness of our disclosurecontrols and procedures (as defined in Rule 13a-15(e) under the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”)) as of the end of thefiscal quarter covered by this Quarterly Report on Form 10-Q.  Based upon that evaluation, theChief Executive Officer and the Chief Financial Officer have concluded that asof the end of such fiscal quarter deCODE’s disclosure controls and proceduresare adequate and effective to ensure that information required to be disclosedin the 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.

20

----

In designing and evaluating our disclosure controls andprocedures, our management recognizes that any controls and procedures, nomatter how well designed and operated, can provide only reasonable assurancethat the desired objectives of the control system will be met. In addition, thedesign of any control system is based in part upon certain assumptions aboutthe likelihood of future events and the application of judgment in evaluatingthe cost-benefit relationship of possible controls and procedures. Because ofthese and other inherent limitations of control systems, there is onlyreasonable assurance that our controls will succeed in achieving their goalsunder all potential future conditions.

b) *Changes in InternalControls.* We are continuously seeking to improve the efficiency andeffectiveness of our internal controls. This results in periodic refinements tointernal control processes throughout the company. However, there was no changein our internal control over financial reporting (as defined in Rule 13a-15(f)under the Exchange Act) during the fiscal quarter covered by this QuarterlyReport on Form 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 claimsand legal proceedings that arise from time to time in the ordinary course ofbusiness which are not material, and matters described below, there has been nochange in the matters reported in our Annual Report on Form 10-K for the yearended December 31, 2006.

On June 14, 2007,we and the other parties in the lawsuit titled deCODE genetics, Inc. v.Hákonarson et al., which is described in our Annual Report on Form 10-K for theyear ended December 31, 2006, which description is incorporated by referenceherein, entered into a settlement agreement resolving all of the claims in thismatter. Pursuant to the settlement agreement, the individual defendants and theChildren’s Hospital of Philadelphia agreed not to use or disclose any of ourconfidential information that was the main subject matter of the litigation.The settlement agreement provides for us to receive $9.0 million, of which $4.0million was paid in June 2007 and the remainder is payable before December 31,2007. The parties exchanged mutual releases and the litigation was dismissedwith prejudice.

In the matter ofIn re deCODE genetics, Inc. Initial Public Offering, which is described in ourAnnual Report on Form 10-K for the year ended December 31, 2006 and ourQuarterly Report on Form 10-Q for the quarter ended March 31, 2007, whichdescription is incorporated herein by reference, 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. We cannot predict whetherwe will be able to renegotiate a settlement that complies with the mandate ofthe United States Court of Appeals for the Second Circuit, regarding classcertification. The plaintiffs now plan to replead their complaints and move forclass certification again. Due to the inherent uncertainties of litigation, wecannot accurately predict the ultimate outcome of the matter.

**ITEM1A. RISK FACTORS**

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

***If we continue to incur operating losseslonger than anticipated, or in amounts greater than anticipated, we may beunable to continue our operations.***

     We incurred a net loss of $38.9 millionand $38.6 million for the six-months ended June 30, 2007 and 2006,respectively, and $85.5 million for the year ended December 31, 2006,and had an accumulated deficit of $574.5 million at June 30, 2007. We havenever generated a profit and we have not generated revenues except for paymentsreceived in connection with our research and development collaborations withRoche, Merck and others, from contract services, Emerald BioSystems productsand instruments, and under grants. Our research and development expendituresand general and administrative costs have exceeded our revenue to date, and weexpect to spend significant additional amounts to fund research and developmentin order to enhance our core technologies and undertake product development(including drug development and related clinical trials). We do not expect toreceive considerable royalties or other revenues from commercial sales ofproducts developed using our technology in the near term. It may be severalyears before product revenues materialize, if they do at all. As a result, weexpect to incur net losses for several years. If the time required to generateproduct revenues and achieve profitability is longer than we currentlyanticipate or the level of losses is greater than we currently anticipate, wemay not be able to continue our operations.

***If we are not able to obtain sufficientadditional funding to meet our capital requirements, we may be forced toreduce or terminate our research and product development programs.***

     We have spent substantial amounts of cashto fund our research and development activities and expect to continue to spendsubstantial amounts for these activities over the next several years. We expectto use cash to collect, generate and analyze genotypic and disease data fromvolunteers in our disease-gene research programs; to conduct drug discovery anddevelopment activities (including clinical trials); and to continue otherresearch and development activities. Many factors will influence our futurecapital needs, including:

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

·                                       our ability to attract customers;

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

21

----

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

·                                       the costs and timing of regulatoryapprovals.

     We have relied on, and may continueto rely on, revenues generated by our corporate alliances and fee-payingcustomers for significant funding of our research efforts. Historically, asubstantial portion of our revenue has been derived from contracts with alimited number of significant customers. Roche, accounted for approximately 6%and 26% of our consolidated revenue in the six-months ended June 30, 2007 and2006, respectively. For the six-months ended June 30, 2007 and 2006, governmentresearch contract and grant revenues from divisions of the NIH constituted 22%and 28%, respectively, and from the EC constituted, 13% and 4%, respectively,of consolidated revenue.

     In addition, we may seek additionalfunding through public or private equity offerings and debt financings. Wemay not be able to obtain additional financing when we need it or thefinancing may not be on terms favorable to us or our stockholders.Stockholders’ ownership will be diluted if we raise additional capital byissuing equity securities.

     If we raise additional funds throughcollaborations and licensing arrangements, we may have to relinquishrights to some of our technologies or product candidates, or grant licenses onunfavorable terms. If adequate funds are not available, we would have to scaleback or terminate our discovery and research programs and product development.

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

     On May 11, 2007, we held our annualmeeting of stockholders. The results of the voting on the proposals submittedto the stockholders at this meeting were as follows:

1.  Election of three Class III Directors

| NAME                | ** ** | **FOR**    | ** ** | **WITHHELD** |
|---------------------|------------|------------|------------|--------------|
| Kari Stefansson     |       | 52,454,931 |       | 648,903      |
| Terrance G. McGuire |       | 52,464,926 |       | 638,908      |
| Peter Goodfellow    |       | 52,512,787 |       | 591,047      |

 

2. Ratification of theappointment of Deloitte & Touche LLP as our independent registeredpublic accounting firm for the fiscal year ending December 31, 2007

| FOR        | ** ** | **AGAINST** | ** ** | **ABSTAIN** |
|------------|------------|-------------|------------|-------------|
| 52,702,144 |       | 345,122     |       | 51,568      |

 

3.  Approval of the amendment of our Amended andRestated Certificate of Incorporation to increase the number of authorizedshares of our common stock from 100,000,000 to 150,000,000

| FOR        | ** ** | **AGAINST** | ** ** | **ABSTAIN** | ** ** | **BROKER  NON-VOTES** |
|------------|------------|-------------|------------|-------------|------------|-----------------------|
| 51,340,300 |       | 1,683,056   |       | 80,478      |       | 0                     |

 

22

----

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

(a) EXHIBITS

The following is alist of exhibits filed as part of this Quarterly Report on Form 10-Q.
| EXHIBIT    | ** ** | ** **                                                                                                                                                                                                                                                                        |
|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **NUMBER** | ** ** | **DESCRIPTION OF EXHIBIT**                                                                                                                                                                                                                                                        |
|       |       |                                                                                                                                                                                                                                                                              |
|  3.1  |       | Amended and Restated Certificate of Incorporation,  as further amended (Incorporated by reference to Exhibit 3.1 and Exhibit  3.3 to the Company’s Registration Statement on Form S-1 (Registration  No. 333-31984) which became effective on July 17, 2000). |
|       |       |                                                                                                                                                                                                                                                                              |
|  3.2  |       | Certificate of Amendment to Amended and Restated  Certificate of Incorporation dated August 30, 2002 (Incorporated by  reference to Exhibit 3.2 to the Company’s Quarterly Report on  Form 10-Q filed on November 14, 2002).                             |
|       |       |                                                                                                                                                                                                                                                                              |
|  3.3  |       | Certificate of Amendment to Amended and Restated  Certificate of Incorporation dated May 11, 2007.                                                                                                                                                                                |
|       |       |                                                                                                                                                                                                                                                                              |
|  3.4  |       | Bylaws, as amended (Incorporated by reference to  Exhibit 3.2 to the Company’s Registration Statement on Form S-1  (Registration No. 333-31984) which became effective on July 17, 2000).                                                                     |
|       |       |                                                                                                                                                                                                                                                                              |
| 10.1       |       | Form of Incentive Stock Option Agreement under 2006  Equity Incentive Plan.                                                                                                                                                                                                       |
|       |       |                                                                                                                                                                                                                                                                              |
| 10.2       |       | Form of Non-Qualified Stock Option Agreement under  2006 Equity Incentive Plan.                                                                                                                                                                                                   |
|       |       |                                                                                                                                                                                                                                                                              |
| 10.3       |       | Form of Restricted Stock Agreement under 2006 Equity  Incentive Plan.                                                                                                                                                                                                             |
|       |       |                                                                                                                                                                                                                                                                              |
| 10.4       |       | Lease dated June 8, 2007 between deCODE Chemistry,  Inc. and Woodridge Holdings, LLC and Big T Investments, LLC.                                                                                                                                                                  |
|       |       |                                                                                                                                                                                                                                                                              |
| 10.5       |       | Guaranty of deCODE genetics, Inc. and MediChem Life  Sciences, Inc. dated June 8, 2007.                                                                                                                                                                                           |
|       |       |                                                                                                                                                                                                                                                                              |
| 10.6       |       | Letter Of Credit Reimbursement, Guarantee, Security  and Pledge Agreement dated June 8, 2007 among Custodial Trust Company, deCODE  Chemistry, Inc. and deCODE genetics, Inc.                                                                                                     |
|       |       |                                                                                                                                                                                                                                                                              |
| 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: Unlessotherwise noted, the SEC File number of each of the above referenced documentsis 000-30469.

 

23

----

**SIGNATURES**

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

Dated: August 9, 2007
|        | deCODE genetics, Inc. |
|--------|----------------------------|
|   |                       |   |
|   |                       |   |
|   |                       | /s/ Kari Stefansson |
|   |                       | Kari Stefansson |
|   |                       | Chairman, President, |
|   |                       | and Chief Executive  Officer |
|   |                       |   |
|   |                       | /s/ Lance Thibault |
|   |                       | Lance Thibault |
|   |                       | Chief Financial Officer  and |
|   |                       | Treasurer (principal  financial |
|   |                       | officer and principal  accounting officer) |

 

24

----

 
| 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.                                                                                                                                                                                |
|       |       |                                                                                                                                                                                                                                                                              |
|  3.4  |       | Bylaws, as amended (Incorporated by reference to  Exhibit 3.2 to the Company’s Registration Statement on Form S-1  (Registration No. 333-31984) which became effective on July 17, 2000).                                                                     |
|       |       |                                                                                                                                                                                                                                                                              |
| 10.1       |       | Form of Incentive Stock Option Agreement under 2006  Equity Incentive Plan.                                                                                                                                                                                                       |
|       |       |                                                                                                                                                                                                                                                                              |
| 10.2       |       | Form of Non-Qualified Stock Option Agreement under  2006 Equity Incentive Plan.                                                                                                                                                                                                   |
|       |       |                                                                                                                                                                                                                                                                              |
| 10.3       |       | Form of Restricted Stock Agreement under 2006 Equity  Incentive Plan.                                                                                                                                                                                                             |
|       |       |                                                                                                                                                                                                                                                                              |
| 10.4       |       | Lease dated June 8, 2007 between deCODE Chemistry,  Inc. and Woodridge Holdings, LLC and Big T Investments, LLC.                                                                                                                                                                  |
|       |       |                                                                                                                                                                                                                                                                              |
| 10.5       |       | Guaranty of deCODE genetics, Inc. and MediChem Life  Sciences, Inc. dated June 8, 2007.                                                                                                                                                                                           |
|       |       |                                                                                                                                                                                                                                                                              |
| 10.6       |       | Letter Of Credit Reimbursement, Guarantee, Security  and Pledge Agreement dated June 8, 2007 among Custodial Trust Company, deCODE  Chemistry, Inc. and deCODE genetics, Inc.                                                                                                     |
|       |       |                                                                                                                                                                                                                                                                              |
| 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: Unlessotherwise noted, the SEC File number of each of the above referenced documentsis 000-30469.

 

25

----