This Management's Discussion and Analysis of Financial Condition and Results of Operations as of March 31, 2009 and for the three-month periods ended March 31, 2009 and 2008 should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto set forth in Item 1 of this report.

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

Overview

Headquartered in Reykjavik, Iceland, deCODE is a bio-pharmaceutical company developing and marketing products to improve the treatment, diagnosis and prevention of common diseases. deCODE applies its discoveries in human genetics to bring to market DA-based reference laboratory tests and consumer genome analysis services to assess individual risk of common diseases and applies its capabilities in chemistry and structural biology to the development of drugs in major therapeutic areas.

In the context of limited financial resources the Company's principal focus continues to be to maximize near-term value creation, utilizing our success in gene discovery to advance the commercial opportunities in our diagnostics and deCODEme™ businesses. We are also pursuing partnerships that provide a parallel means of capturing the commercial potential of the intellectual property coming out of our gene discovery work. In April 2009 we entered into non-exclusive, worldwide licensing agreements with Celera, Inc., under which Celera can incorporate our genetic markers for risk of certain cardiovascular and metabolic diseases into Celera's risk assessment tests and services, and for which we have received an upfront payment and will receive royalties on sales of Celera products utilizing our markers. We have been seeking to continue the development of our therapeutics programs through partnerships and have advanced select preclinical programs while employing our drug discovery capabilities to generate contract service revenue.

At March 31, 2009, we had liquid funds available for operating activities (cash and cash equivalents) of $6.1 million as compared to $3.7 million at December 31, 2008. The net utilization of cash in operating activities for the quarter ended March 31, 2009 was $8.2 million as compared to $20.0 million during the quarter ended March 31, 2008 and $54.5 million during the year ended December 31, 2008. In January 2009, we transferred our Auction Rate Securities (ARS) to an Icelandic financial institution for an aggregate price of approximately $11.3 million. This transaction has been accounted for as a secured borrowing. In April 2009 we entered into a licensing deal with Celera Corporation ("Celera") which provided us with a $10.0 million upfront payment. With the collateralized borrowing and the licensing deal with Celera we believe we have sufficient funds to sustain our operations only through the second quarter of 2009. deCODE's management and the Board of Directors are exploring a variety of possibilities for obtaining additional funds, including partnerships similar to that recently announced with Celera . However, if deCODE is unable to raise additional capital through one or more of these options, it will be able to continue operations through the second quarter of 2009 and thereafter may be forced to discontinue its operations and liquidate its remaining assets.

Diagnostics. We are applying our discoveries and unique expertise in human genetics and genotyping to the development of reference laboratory DNA-based tests for assessing individual risk of a growing range of common diseases. Since April 2007 we have launched six reference laboratory DNA-based diagnostic tests to detect single-letter variations in the human genome (called SNPs) that we have linked to increased risk of several common diseases:

† deCODE T2™ - which detects SNPs we discovered to be associated with increased risk of type 2 diabetes.

† deCODE AF™- which detects SNPSs we discovered to be associated with increased risk of atrial fibrillation and stroke

† deCODE MI™- which detects SNPs we discovered to be associated with early-onset heart attack, (myocardial infarction, or MI)

† deCODE ProstateCancer™ - which detects SNPs we have linked to increased risk of prostate cancer

† deCODE Glaucoma™ - which detects SNPs we have linked to increased risk of exfoliation glaucoma

† deCODE BreastCancer™ - which detects SNPs we and others have linked to risk of the most common forms of breast cancer

Beginning in 2008, deCODE initiated billing to commercial insurance companies on behalf of physicians ordering these tests and has received reimbursement from several health insurance companies. All of our diagnostic tests are offered by deCODE via direct sales efforts to physicians in the United States; through marketing collaborations with other organizations in the U.S. and other countries; as well as through our dedicated diagnostics website, www.decodediagnostics.com. deCODE also has an alliance with Illumina, Inc. to develop DNA-based diagnostic kits utilizing deCODE's gene discoveries in certain diseases and Illumina's platform for SNP genotyping.

In April 2009, we entered into non-exclusive, worldwide licensing agreements with Celera, mentioned above, and we are exploring similar opportunities as a pathway to complement our own diagnostics business, deriving additional commercial value from our intellectual property by leveraging third-party marketing and outreach.

deCODEme™. In November 2007, we launched the first consumer genetic analysis service: deCODEme™. This service takes advantage of deCODE's leadership in human genetics and the capabilities of its high-throughput genotyping laboratory, which is CLIA registered for analytical and clinical validation. Through deCODEme™, subscribers can put themselves in the context of the latest discoveries in genetics, learning what their own DNA says about their ancestry and certain physical traits, as well as whether they have genetic variants that have been associated with higher or lower than average risk of a range of common diseases. This information is continually updated as new discoveries are made, and is presented in subscribers' secure individual web pages. Recently, we launched two focused disease scans, deCODEme Cardio™ for cardiovascular-related diseases and deCODEme Cancer™ for several common types of cancer. These scans offer subscribers an opportunity to understand their risk of groups of diseases that may be of particular interest without ordering the full genome scan. deCODEme™ products are offered through a dedicated website, www.decodeme.com.

Drug Discovery and Development. The expertise of our chemistry and structural biology units enables us to discover novel small-molecule therapeutic compounds targeting pathways identified by us or against novel targets identified by us in known pathways, take candidate compounds through pre-clinical testing, and manufacture sufficient quantities for early-stage clinical trials. Our integrated approach to medicinal chemistry and protein crystallography have helped us to discover compounds that bind selectively to our targets and at sites that may offer better safety and tolerability profiles than existing compounds for certain indications. deCODE is actively exploring drug development partnerships and out-licensing opportunities in order to advance the development of its therapeutics programs.

Our lead drug development programs include:

† DG041 for the prevention of arterial thrombosis. DG041 is our novel, first-in-class antagonist of the EP3 receptor for prostaglandins E2, which we are developing as a next-generation oral anti-platelet therapy aimed at preventing arterial thrombosis without increasing bleeding risk.

† DG051 and DG031 for the prevention of heart attack. We have completed Phase I and Phase IIa clinical studies for DG051, our leukotriene A4 hydrolase (LTA4H) inhibitor being developed for the prevention of heart attack. We successfully completed our reformulation of DG031, our Phase III 5-lipoxygenase activating protein (FLAP) inhibitor, in-licensed from a third party and which is also being developed for the prevention of heart attack.

† DG071 for Alzheimer's and other cognitive disorders. In October 2008 we filed an investigational new drug (IND) application for DG071, a novel small-molecule modulator of phosphodiesterase 4 (PDE4), being developed for Alzheimer's and other cognitive disorders.

For our most significant research and development programs we have cumulatively invested $47.5 million, $24.5 million and $16.0 million in our heart attack (myocardial infarction, or MI), arterial thrombosis and stroke programs, respectively, from the beginning of 2003 to date (March 31, 2009). Inception to-date costs are not available as these costs were not historically tracked by program.

Contract genotyping services

At our research facility in Reykjavik, we have one of the largest and most advanced genotyping laboratory in the world. We have extensive expertise in microsatellite genotyping and also conduct genome-wide single nucleotide polymorphisms (SNP) association analyses. We utilize these capabilities both for in-house gene discovery work and contract genotyping services to fee paying customers. We have in place efficient, automated systems for all stages of the genotyping process, from DNA isolation and amplification to plate preparation and the generation, storage and analysis of volumes of genotypic data. Our customers for genotyping services include pharmaceutical companies, research consortia and academic institutions. Our reference laboratory is Clinical Laboratory Improvement Act of 1998 as amended (CLIA) registered.

Drug discovery and development services

In order to offset the cost of maintaining its proprietary drug development infrastructure, deCODE utilizes its capabilities in chemistry, structural biology and clinical trials to offer contract services to fee-paying customers, principally pharmaceutical and biotechnology companies.

† Our chemistry subsidiary, deCODE chemistry, Inc., based in Woodridge, Illinois, provides a full range of drug discovery technology and services using multiple integrated high-throughput technologies to streamline the drug discovery process.

† Our structural biology subsidiary, deCODE biostructures, Inc., based in Bainbridge Island, near Seattle, determines three-dimensional X-ray crystal structures of target proteins for structure-based drug design and development.

† Our proteomics tools subsidiary, Emerald BioSystems, Inc., based in Bainbridge Island, commercializes a series of instruments, consumables and software products for structural proteomics research.

Results of Operations for the Three-Month Periods Ended March 31, 2009 and 2008

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

Financial highlights as of and for the three-months ended March 31, 2009 include:

† Our planned operations require immediate additional liquidity which may not be available, raising substantial doubt about our ability to continue as a going concern. We incurred a loss of $12.6 million and used cash of $8.2 million in operating activities during the three months ended March 31, 2009. We incurred a loss of $80.9 million and used cash of $54.8 million in operating activities in the year ended December 31, 2008. At March 31, 2009 we had liquid funds available for operating activities (cash and cash equivalents) of $6.1 million as compared to $3.7 million at December 31, 2008. In April, 2009 we entered into a license agreement with Celera which provided us with an upfront payment of $10.0 million and we will also receive royalties on sales of Celera testing products and services incorporating deCODE genetic risk markers. The Company believes it has sufficient resources to sustain our operations through the second quarter of 2009 and is engaged in negotiations on sequencing collaborations, the sale of business units and therapeutic programs, debt restructurings and equity financing.

† Our revenue was $8.9 million for the three-months ended March 31, 2009 as compared to $15.0 million during the three-month period ended March 31, 2008. As of March 31, 2009, we had $12.7 million in deferred revenue that will be recognized over future reporting periods. The period-on-period decrease is largely on account of our contract genotyping, part of our genomics services, but then also in our chemistry and structural biology units and work performed under government research contracts and grants.

† Our research and development expense was $4.2 million for the three-month period ended March 31, 2009 as compared to $12.7 million for the three-month period ended March 31, 2008. Our research and development expense for the quarter reflects deCODE's current focus of applying its established capabilities in human genetics to drive its diagnostic and deCODEme businesses, and the curtailment of investment in clinical trials for its therapeutics programs reflected in the 2008 period.

† Our selling, general and administrative expense was $4.9 million during the three-month period ended March 31, 2009 as compared to $7.2 million during the three-month period ended March 31, 2008. The changes in selling, general and administrative expense period-on-period are primarily due to lower overall headcount in 2009 versus 2008 as well as decreased contractor and legal expenses.

† In January 2009 we entered into an agreement with an Icelandic financial institution (NBI hf) pursuant to which NBI has purchased all auction rate securities ("ARS") owned by deCODE for an aggregate price of $11.3 million at exchange rates at the date of the transaction. The agreement includes both call and put rights under certain instances and which expire at the end of 2009. The transaction was accounted for as a secured borrowing with the ARS remaining on our balance sheet and as a result we recognized a liability for the borrowing ($11.6 million at March 31, 2009) which represents the amount we would be required to pay should we exercise our call right to repurchase the ARS or should we be required to repurchase the ARS in the event of a sale of Icelandic assets or if exercised by NBI hf on December 16, 2009.

Revenue

In 2008 and into 2009 our business strategy has focused on emphasizing our core capabilities in human genetics and leveraging those strengths to build on opportunities to generate near-term revenue from products that we already have available; namely our genomic services comprising diagnostics, our consumer genetics service deCODEme and genotyping and other scientific services. At the same time, we seek to advance our early and late stage drug programs through corporate partnerships, and will generate revenue from contract and other service fees. Further, we will continue to leverage our capabilities to continue with and pursue funding in the form of research grants. In the majority of our programs we are pursuing diagnostic and early-stage drug development on our own. Depending on the nature of each prospective business opportunity, the key components of the commercial terms of the types of collaborations we seek typically include one or more of the following: research funding; up-front, exclusivity, technology access, and technology development fees; fees for particular services; milestone payments; license or commercialization fees; and royalties or profit sharing from the commercialization of products.

Significant elements of our revenue are summarized as follows:

                                                    Three Months Ended
                                                        March 31,
                                                     2009         2008
                                                      (In thousands)
Genomic services                                  $    1,902    $  4,876
Research funding and other service fees                3,108       4,552
Government research contracts and grant funding        3,397       4,875
Milestone payments and other                             510         675
                                                  $    8,917    $ 14,978

Decreases in our revenue for the three-months ended March 31, 2009 as compared to the same period in 2008 are largely on account of (i) the decrease of our genomics business, principally our contract genotyping services, (ii) decreased services provided by our chemistry and structural biology units, and also
(iii) a decreased amount of discovery and development work performed under ongoing contracts and grants with the NIH and EC including new grants. Driving the decrease of our contract genotyping services and our chemistry and structural biology units is our current financial condition and available operating resources.

At March 31, 2009 we had $12.7 million in deferred revenue, compared to $12.0 million at December 31, 2008. Of this deferred revenue, $6.2 million relates to our agreement with Merck to conduct information-rich clinical trials in Iceland and, to date, Merck has not selected any compounds for development under the agreement. We expect that our revenues will fluctuate from period to period and that such fluctuations may be substantial especially because progress in our scientific work, including milestone payments that are related to progress, can fluctuate between periods.

Government Research Contracts and Grant Funding. We have received various research grants from divisions of the United States National Institutes of Health (NIH), the Commission of the European Communities (EC) and other government agencies and private foundations. Research grants for multiple years are based on approved budgets with budgeted amounts subject to approval on an annual basis. NIH grants generally provide for 100% reimbursement of allowable expenditures while grants under the EC generally provides for fifty percent reimbursement of allowable research and development related expenditures. Our most significant research contract is with the National Institutes of Allergy and Infectious Diseases (NIAID) dating to September 2004, where we were awarded a five-year $23.9 million contract by the NIAID. Under the contract, we are applying our population approach and resources to discover genetic factors associated with susceptibility to certain infectious diseases and with responsiveness to vaccines targeting such diseases. We may receive $3.9 million in additional research funding over the remaining term of the agreement.

Cost of Revenue

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

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

                                                             Three Months Ended
                                                               March 31, 2009
                                                                   Cost of
                                                        Revenue    Revenue      Net
                                                               (In thousands)
Genomic services, research funding and other services   $  5,520   $  4,368   $ 1,152
Government research contracts and grant funding            3,397      3,816      (419 )
Total cost of revenue                                   $  8,917   $  8,184   $   733




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

Decreases in our cost of revenue for the three-months ended March 31, 2009 as compared to the same period in 2008 are largely on account of overall decreased revenue, specifically (i) the decrease of our genomics business, principally the decrease of contract genotyping services, (ii) services provided by our chemistry and structural biology units, and also (iii) a decreased amount of discovery and development work performed under ongoing contracts and grants with the NIH and EC. Our cost of revenue in the three-month period ended March 31, 2009 as compared to the same period in 2008 increased chiefly with regard to our usage of chemicals and consumables ($3.3million) and also decreased salaries ($1.9 million) due to lower headcount and decreased contractor services ($0.6 million).

Research and Development

Our research and development expense consist of the following:

                                                          Three Months Ended
                                                              March 31,
                                                           2009         2008
                                                            (In thousands)
      Salaries and other personnel costs                $    1,935    $  4,813
      Materials and supplies                                   651       2,882
      Contractor services and other third party costs          444       2,324
      Overhead expenses                                        495       1,390
      Depreciation and amortization                            496         914
      Stock-based compensation                                 212         330
                                                        $    4,233    $ 12,653

Our research and development expense for 2009 and 2008 reflects the advancement of our drug and diagnostic programs, including costs related to the development and launch of our latest DNA-based diagnostic tests for gauging individual risk of a growing number of common disease and ongoing gene discovery work that is feeding our diagnostic pipeline and our deCODEme service offerings. We also continued to pursue our PDE4 modulator program across several indications and filed an IND for DG071 in October 2008. With near-term value creation in mind, our core focus in 2008 and into 2009 has been towards building our diagnostics and deCODEme businesses and our genomic services broadly. With that focus in mind and continued decreased clinical trial work in 2009, we experienced decreased overall expense in 2009.

Selling, General and Administrative Expense



                                       Three Months Ended
                                           March 31,              2009 as Compared to 2008
                                       2009          2008         $ Change        % Change
                                                    (In thousands, except %)
Selling, general, and
administrative expense              $    4,903    $    7,211    $     (2,308 )           (32 )%

The decrease in our selling, general and administrative expense for the three-month period ended March 31, 2009 compared to the three-month period ended March 31, 2008 is principally attributable to decreased salary and stock-based compensation ($0.5 million) due to lower head-count, decreased legal fees ($0.6 million) and lower overhead and travel costs ($0.9 million) .

Interest Expense

Our interest expense is primarily attributable to interest on our 3.5% Senior Convertible Notes due in 2011 for which our cash interest payments are approximately $8.1 million on an annual basis. In order to provide more time for . . .