This Management's Discussion and Analysis of Financial Condition and Results of Operations as of June 30, 2009 and for the three and six-month periods ended June 30, 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 list and description of some of the risks and uncertainties is contained below and in the summary of risk factors that follow in Part II, Item 1A.

Overview

Headquartered in Reykjavik, Iceland, deCODE is a biotechnology company developing and marketing products to improve the treatment, diagnosis and prevention of common diseases. deCODE employs its discoveries in human genetics to bring to market DNA-based reference laboratory tests and consumer genome analysis services to assess individual risk of common diseases, and applies its capabilities to the development of drugs in major therapeutic areas. As these diseases are common and there is significant unmet need for both for tools to empower better prevention as well as for more effective therapies, we believe that our strategy represents a significant opportunity to create better models for diagnosis and prevention, leading to improved outcomes with major potential
- both near- and longer-term - in the global marketplace.

We believe that our advantage in DNA-based disease risk assessment tests and personal genomics derives from our population approach to human genetics and the ability to apply our discoveries directly to product development. We have comprehensive population resources in Iceland and one of the largest genotyping facilities in the world, enabling our scientists to effectively identify key variations in the sequence of the human genome associated with a major impact on individual risk of common diseases. Well-validated genetic variations conferring risk of disease are the requisite basis for DNA-based reference laboratory tests and personal genome scans that can aid in assessing individual risk of disease, and deCODE is a global leader in the discovery of these genetic risk factors. As virtually all common diseases have both genetic and environmental risk factors, measuring genetic risk is in our view a critical component for the realization of personalized medicine. By providing a more complete understanding of individual risk, such tests can empower better prevention in those conditions in which known lifestyle and environmental risk can be modified, as well as targeted screening and early intervention in major fields such as cardiovascular disease and cancer. Because we have discovered many major genetic risk factors before others, and file for intellectual property on our discoveries, we believe that we are well positioned not only to launch pioneering products but also to create additional value from our discoveries through partnerships and licensing agreements.

In the context of limited financial resources the company's principal focus continues to be on maximizing near-term value creation. We are pursuing the commercial opportunities coming out of our gene discovery work, applying these discoveries in our diagnostics and deCODEme™ businesses, and for out-licensing agreements such as that we signed in April 2009 with Celera, Inc., under which we granted non-exclusive licenses for our genetic markers for increased risk of several major cardiovascular and metabolic diseases for use in Celera's risk assessment products and services. At the same time we are seeking to realize revenues from our existing therapeutics programs through partnerships, out-licensing or sales, and are employing our drug discovery capabilities to generate contract service revenue.

At June 30, 2009, we had cash and cash equivalents of $3.8 million, compared to $3.7 million at December 31, 2008. In early 2009 deCODE sold its ARS for approximately $11.3 million in cash, and in April we signed licensing agreements with Celera Corporation ("Celera") under which we received an upfront payment and will receive royalties on sales of Celera testing products and services incorporating deCODE genetic risk markers. deCODE believes it has sufficient resources to fund operations only into the latter half of the third quarter. We are simultaneously pursuing several options to ensure sufficient funding to take it to the execution of strategic options that can support the near- and longer-term viability of our core business. Regardless, deCODE's planned operations require immediate additional liquidity substantially in excess of the amounts noted above, raising substantial doubt about deCODE's ability to continue as a going concern.

In deCODE's ongoing strategic review, deCODE has been evaluating and pursuing various alternatives aimed at focusing its business and underpinning ongoing product development and commercialization in its core business. One likely component of this effort is the sale of some or all of deCODE's US medicinal chemistry and structural biology units. Although these units continue to operate and contribute to deCODE, in view of their prospective sale the company has accounted for these businesses as "discontinued operations". With the exception of combined net loss figures, the operating results are thus all for deCODE's continuing operations in its core business of employing the Company's capabilities in gene discovery to advance DNA-based diagnostics, personal genome analysis, intellectual property licensing opportunities, and contract genotyping.

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 many 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. under which the company's can 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 a non-exclusive outlicensing agreement with Celera. This agreement gives Celera the right , on a non-exclusive worldwide basis, to use markers deCODE has associated with risk of heart attack, atrial fibrillation/stroke, and type 2 diabetes in Celera's risk assessment products and services. deCODE is exploring similar opportunities as a pathway to monetizing the value of its gene discoveries as it continues to extend the marketing of its own diagnostic products.

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 at a more modest price than the full genome scan. deCODEme™ products are offered through a dedicated website, www.decodeme.com.

Drug Discovery and Development. Given our focus on furthering our diagnostic business, we are actively exploring drug development partnerships and out-licensing and sale opportunities in order to realize revenues from our 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. DG041 was developed as a next-generation oral anti-platelet therapy aimed at preventing arterial thrombosis without increasing bleeding risk, and have taken it through successful Phase II clinical studies.

†

† 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.

†

† 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.

Our product portfolio and development pipeline

Over the course of more than a decade we have also actively studied the genetics and pathology of over 50 different common diseases using our population genetics approach. We have led the world in the discovery of variations in the sequence of the human genome conferring risk of common diseases, and our pioneering DNA-based reference laboratory diagnostic tests and personal genome scans are based upon these discoveries. Over the past several years we have discovered and brought into clinical testing several novel small molecule compounds in major disease areas, compounds we believe have major therapeutic and commercial potential and which we are now seeking to bring forward in clinical development through corporate partnerships or to out-license or sell.

DNA-based risk-predictive diagnostic tests and consumer genome analysis

Diagnostics represent an important avenue for rapidly pursuing the medical and commercial value of our genetic discoveries, and since the beginning of 2007 we have brought to market six DNA-based reference laboratory tests for measuring individual inherited risk of several common diseases. We also offer a personal genome analysis service, deCODEme™. Because genetic variants linked to disease are by definition markers of disease susceptibility, we can apply the same findings we employ in our drug discovery efforts to the development of DNA-based diagnostic tests. We believe that such tests may be useful as a means for identifying patients who are at a particularly high risk of a given disease, and those who are likely to respond well to drugs that target the same disease pathway.

The key to developing such tests and scans is the ability to identify common SNPs that confer significant risk of common diseases. deCODE is a world leader in gene discovery, based upon a unique set of capabilities and resources the company has assembled in Iceland. These include a genealogy database linking together the entire current-day population of Iceland; detailed genetic and medical information from most of the adult population of Iceland, who are taking part in one or more of our research programs; genetic and medical data from hundreds of thousands of participants from the U.S., Europe and around the world; one of the world's largest high-throughput genotyping facilities, enabling us to conduct genome-wide association studies utilizing hundreds of thousands of markers across the genomes of many thousands of patients and control subjects in each study; and proprietary bioinformatics and statistical tools to correlate information on disease with specific genetic variations.

By mining these datasets our scientists can effectively trace the genetic components of virtually any common disease, pinpointing key SNPs and genes that confer increased risk. The company's discoveries are also validated in multiple populations before they are integrated into our tests and scans. Once we have replicated our discoveries in several populations we publish them, a process which enables independent groups to analyze the role of our disease markers in yet more populations around the world and provides additional information we can then use to fold back into and expand the utility of our products.

Key new genetic risk factors for bladder cancer, skin cancer and thyroid cancer, and for lung cancer and nicotine dependence, are elements in the deCODEme Cancer™ scan. New genetic markers for risk of abdominal aortic and intracranial aneurysm and heart attack have been added to the company's well-established heart attack and atrial fibrillation/stroke markers in the deCODE MI™ test and the deCODEme Cardio™ scan. All of these discoveries, along with others in bone mineral density and osteoporosis, obesity, schizophrenia, essential tremor, and asthma, have provided an unrivalled series of replicated and validated updates for subscribers of deCODEme™.

We believe that DNA-based diagnostic tests are an important new means for improving disease prevention, and that they will be used in tandem with existing approaches to increase the success of prevention efforts. Common diseases occur at the interface of genetics and the environment, as both inherited as well as lifestyle and environmental risk factors play important roles in the disease process. Carrying a genetic risk variant for a common disease does not mean that one will necessarily develop the disease; and not having a certain risk variant does not eliminate all risk of developing the disease. Rather, in the common diseases, genetic risk variants impact the likelihood that one may develop a given condition. Understanding this inherited risk is empowering information with potentially important clinical utility, as it is possible to take preventive action - through lifestyle modification or by taking certain medications - to minimize the likelihood of an inherited predisposition ever developing into a disease. This is similar to the approach that is taken to address other risk factors for common diseases, such as high cholesterol, which is commonly treated using statin drugs to lower the risk of heart disease if dietary change is not enough.

We are actively marketing and working to secure reimbursement for these tests, even as we continue to bring new diagnostic products to market. These products are listed in the table below.

Indication                  Product        Launch date          Utility / Highlights
Type 2 diabetes           deCODE T2™       April 2007     †††† High-risk pre-diabetics can
                                                          receive earlier lifestyle and
                                                          pharmacologic intervention
                                                          †††† Validated in more than 60
                                                        † populations
Atrial                    deCODE AF™        July 2007     †††† Post-stroke/TIA patients at
fibrillation/stroke                                       risk of AF to obtain additional
                                                          cardiac monitoring
                                                          †††† Patients with intermittent
                                                          AF, family history and CHF to
                                                          obtain additional cardiac
                                                          monitoring
                                                          †††† Validated in more than 10
                                                        † populations
Early-onset heart         deCODE MI™      October 2007    †††† Risk of early-onset MI to
attack/abdominal                                          seek CVD assessment or
aortic                                                    prevention management
aneurysm/intracranial                                     †††† Validated in more than 25
aneurysm                                                † populations
Personal genome scan       deCODEme™      November 2007   †††† Launched with variants in
                                                          18 conditions; currently 42
                                                        † conditions
Prostate cancer             deCODE        February 2008   †††† Validated common risk
                        ProstateCancer™                   variants that are linked to more
                                                          than 50% of all prostrate cancer
                                                        † cases

                                                        †††† Some variants included
                                                        identify risk of aggressive
                                                        forms of prostrate cancer
                                                        †††† Validated in more than 15
                                                      † populations
Exfoliation glaucoma       deCODE       February 2008   †††† Risk of exfoliation
                          Glaucoma™                     glaucoma
                                                        †††† Validated in more than 10
                                                      † populations
Breast cancer              deCODE       October 2008    †††† Tests 7 genetic risk
                        BreastCancer™                   variants
                                                        †††† Assesses risk of the most
                                                        common forms of breast cancer,
                                                        which represents 95% of all
                                                        breast cancers.
                                                        †††† Validated in more than 10
                                                      † populations

Other DNA-based risk diagnostic tests currently in development include:
melanoma, basal cell cancer, bladder cancer and lung cancer.

Drug Development Programs

deCODE has discovered and brought into clinical development several novel compounds in major disease areas and we are working to realize revenues from these compounds through corporate partnerships and out-licensing sales. Our most advanced programs are listed in the following table. Squares indicate the phases in which at least one clinical trial has been completed.

Therapeutic area               Compound   IND    Phase I     Phase II       Phase III
Cardiovascular
Heart attack                    DG051      †        †       Completed
                                        †      †            Phase Iia
Arterial thrombosis (heart      DG041      †        †           †
attack, vascular disease)                                   Additional
                                                             clinical
                                                           pharmacology
                                                             studies
                                                           completed in
                                        †      †         †     2008
Heart attack                    DG031      †        †           †         Reformulation
                                        †      †         †                  completed
Cognitive Disorders
Alzheimer's and other           DG071      †
cognitive disorders                     †

DG041. DG041 is being developed as an anti-platelet compound for the prevention of arterial thrombosis. DG041 is a first-in-class small molecule inhibitor of the EP3 receptor for prostaglandin E2, a G-protein coupled receptor (GPCR). It has been demonstrated by in vitro studies that PGE2 may have additive stimulatory effects on platelet aggregation beyond those of other potent agonists such as ADP or thromboxane A2, targeted by clopidogrel and aspirin, respectively.

Structure-based drug design has also been crucial in our DG041 program. The current mainstays of anti-thrombotic therapy are compounds that broadly inhibit platelet activation, with the result that they also cause increased bleeding risk and are therefore problematic for chronic use. In the discovery of DG041, deCODE began with a target - the EP3 receptor for prostaglandins E2 - that the company's genetics and biology work had identified as a key modulator of arterial thrombosis. And the use of ligand-based drug design and crystallographic modeling of the PGE2 bound to EP3 enabled the discovery of DG041 as a very highly selective inhibitor of EP3.

Based on the results of our clinical studies thus far, DG041 appears to be well-tolerated, showing little difference in bleeding events between dosing arms and placebo, and to potentially offer focused means of preventing the formation of thrombi by specifically inhibiting platelet aggregation mediated by EP3. In the first half of 2008, we completed a second clinical pharmacology study examining the impact of DG041 on top of aspirin and PlavixTM, the results of which show that DG041 blocks platelet aggregation and does not increase bleeding time when given alone, with PlavixTM, or with Plavix™ and aspirin.

DG051 and DG031. We have two compounds in development for the prevention of heart attack, DG051 and DG031. These programs come out of our discovery of major risk variants in two genes encoding proteins in the leukotriene pathway. These variants - in the genes that code for leukotriene A4 Hydrolase (LTA4H) and 5-lipoxygenase activating protein (FLAP) - appear to confer risk in the same way: by causing an up regulation in the production of leukotriene B4, a potent pro-inflammatory molecule that is the end product of one branch of the pathway. The therapeutic goal of both compounds is to inhibit the activity of the pathway, lowering the production of LTB4 and thereby decreasing the inflammatory activity in atherosclerotic plaques and reducing the risk of heart attack. In addition to reducing the risk of heart attack, these drugs may provide benefit in other inflammatory diseases.

DG051, discovered internally by deCODE's chemistry unit, is a small-molecule inhibitor of LTA4H, which is directly involved in the synthesis of LTB4. In 2007, we completed our Phase I program, the results of which demonstrated that DG051 was safe and well

tolerated at all doses tested, has a pharmacokinetic profile suited for potential once-a-day dosing, and significantly reduces LTB4 levels in a concentration-dependent manner. We also concluded a Phase IIa study in late 2007, which demonstrated safety and tolerability and a significant reduction in LTB4, even at lower doses than were originally considered. deCODE also in-licensed a FLAP inhibitor from Bayer AG, now known as DG031. Our Phase II clinical studies demonstrated that DG031 was well-tolerated and reduced production of LTB4 in a dose-dependent manner. This effect was seen on top of the effects of the current standard of care, which included statin therapy for a majority of patients in our trials.

DG071. DG071 is a novel, potent and selective PDE4D modulator discovered by deCODE's chemistry group. First and second generation PDE4 inhibitors such as rolipram, cilomilast, and roflumilast caused significant side effects, including nausea and vomiting, at therapeutic doses in human clinical trials. Such side effects severely limit the utility of these earlier compounds. Data generated at deCODE suggest that the observed side effects were closely correlated with the binding of these molecules in the PDE4 enzymatic active site competitively with cAMP. As cAMP is of critical importance to neuronal signaling, the goal of deCODE's program has been to discover compounds that would modulate PDE4 activity via an allosteric mechanism to improve safety and tolerability. Towards this goal, the deCODE biostructures team solved multiple novel co-crystal structures of PDE4D and PDE4B containing regulatory domains with bound ligands. Those structures allowed the deCODE chemistry team to identify a novel binding site for allosteric modulators in the PDE4 regulatory domain. Binding of an allosteric modulator at that site is non-competitive with cAMP. DG071 has been shown in animal models to improve cognitive function with benefit similar to that of cholinesterase inhibitors such as donepezil that currently are a mainstay of therapy for memory loss in early Alzheimer's disease, yet also benefiting long term memory function in animal tests where the cholinesterase inhibitors are ineffective.

The DG071compound is being developed as a new and potentially safer means of targeting PDE4 to combat memory loss and cognitive deficits associated with Alzheimer's disease and other disorders in which neural signaling is reduced or impaired. In animal models, DG071 has been shown to significantly improve learning and long- and short-term memory at doses that offer a wide margin for safety and tolerability. The compound has the potential to eliminate the nausea that limits the utility of previous PDE4 inhibitors. In October 2008 we filed an IND application for DG071.

For our most significant research and development programs we have cumulatively invested $47.7 million, $24.7 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 (June 30, 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.

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