**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**Form
      10-KSB**




x ANNUAL
        REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
        1934




For
      the
      fiscal year ended December 31, 2007




o TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For
      the
      transition period from _____ to ______




**Commission
      file number 0001124608**




**RESPONSE
      GENETICS, INC.**


(Name
      of
      Small Business Issuer in Its Charter)




**Delaware**
            
            **2835**
            
            **11-3525548**(State
                or Other Jurisdiction of
              Incorporation
                or Organization)
            
            (Primary
                Standard Industrial
              Classification
                Code Number)
            
            (I.R.S.
                Employer
              Identification
                No.)




**1640
      Marengo St., 6th Floor**


**Los
      Angeles, California 90033**


**(323)
      224-3900**


(Address
      and Telephone Number of Principal Executive Offices)





Securities
      registered under Section 12(b) of the Exchange Act:




Title
                of each class
            Name
                of each exchange on which registeredCommon
                Stock, par value 0.01 per share
            Nasdaq
                Capital Market




Securities
      registered under Section 12(g) of the Exchange Act:





None.




Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      Section 15(d) of the Exchange Act.  ̈









Check
        whether the issuer (1) filed all reports required to be filed by Section
        13 or
        15(d) of the Exchange Act during the past 12 months (or for such shorter
        period
        that the registrant was required to file such reports), and (2) has been
        subject
        to such filing requirements for the past 90 days.
 Yes
          þ  No o
  Check
        if there is no disclosure of delinquent filers in response to Item 405 of
        Regulation S-B contained in this form, and no disclosure will be contained,
        to
        the best of registrant’s knowledge, in definitive proxy or information
        statements incorporated by reference in Part III of this Form 10-KSB or any
        amendment to this Form 10-KSB. o
  Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).
 Yes 
          o  No þ
 State
          issuer’s revenues for its most recent fiscal year.
$7,789,789
 
 State
        the aggregate market value of the voting and non-voting common equity held
        by
        non-affiliates computed by reference to the price at which the common equity
        was
        sold, or the average bid and asked price of such common equity, as of a
        specified date within the past 60 days. (See definition of affiliate in Rule
        12b-2 of the Exchange Act.)
 
 Note:
        If determining whether a person is an affiliate will involve an unreasonable
        effort and expense, the issuer may calculate the aggregate market value of
        the
        common equity held by non-affiliates on the basis of reasonable assumptions,
        if
        the assumptions are stated.
 
 **(ISSUERS
        INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE
        YEARS)**
 
 Check
        whether the issuer has filed all documents and reports required to be filed
        by
        Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities
        under a plan confirmed by a court.  Yes o  No o
  
 **(APPLICABLE
        ONLY TO CORPORATE REGISTRANTS)**
  As
          of March 28, 2008, there were 10,239,276 shares of the issuer's common
          stock
          outstanding.
  
  **DOCUMENTS
        INCORPORATED BY REFERENCE**
  None.
  Transitional
          Small Business Disclosure Format (Check one): Yes o  No þ


2


**TABLE
      OF CONTENTS**




****
            **Page**Part
                IItem
                1. Description of Business.
            
            4Item
                2. Selected Consolidated Financial Data.
            
            22Item
                3. Legal Proceedings.
            
            23Item
                4. Submission of Matters to a Vote of Security Holders.
            
            23Part
                IIItem
                5. Market for Common Equity and Related Stockholder Matters and Small
                Business Issuer Purchases of Equity Securities.
            
            23Item
                6. Management’s Discussion and Analysis or Plan of Operation.
            
            23Item
                7. Financial Statements.
            
            28Item
                8. Changes In and Disagreements With Accountants on Accounting and
                Financial Disclosure
            
            28Item
                8A(T). Controls and Procedures.
            
            29Item
                8B. Other Information
            
            29Part
                IIIItem
                9. Directors, Executive Officers, Promoters, Control Persons and
                Corporate
                Governance; Compliance with Section 16(a)of
                the Exchange Act.
            
            29Item
                10. Executive Compensation
            
            31Item
                11. Security Ownership of Certain Beneficial Owners and Management
                and
                Related Stockholder Matters.
            
            37Item
                12. Certain Relationships and Related Transactions, and Director
                Independence.
            
            38Item
                13. Exhibits.
            
            40Item
                14. Principal Accountant Fees and Services.
            
            41




3




**Item
      1. Description of Business**




**Overview**




Response
        Genetics, Inc. was formed as a Delaware corporation in September 1999. We
        are a
        life sciences company engaged in the research, and development of innovative
        clinical diagnostic tests for cancer based on our proprietary technologies.
        Our
        mission is to provide personalized genetic information that will help guide
        physicians and patients in choosing the treatment from which a given patient
        is
        most likely to benefit. We currently generate revenues primarily from sales
        of
        our proprietary analytical pharmacogenomic testing services of clinical trial
        specimens to the pharmaceutical industry. We launched our first diagnostic
        tests
        under the brand name ResponseDxTM for
        non small
        cell lung cancer and colon cancer.




Our
      patented technologies enable us to reliably and consistently extract the nucleic
      acids RNA and DNA from tumor specimens that are stored as formalin-fixed and
      paraffin-embedded, or FFPE, specimens and thereby to analyze genetic information
      contained in these tissues. This is significant because the majority of patients
      diagnosed with cancer have a tumor biopsy sample stored in paraffin, while
      only
      a small percentage of patients’ tumor specimens are frozen. Our technologies
      also enable us to use the FFPE patient biopsies for the development of
      diagnostic tests. To our knowledge, we are the first company to generate
      clinically relevant information regarding the risks of recurrence of cancer
      or
      chemotherapy response using approximately 30,000 genes available from microarray
      profiling of FFPE specimens.




Clinical
      studies have shown that not all cancer chemotherapy works effectively in every
      patient, and that a number of patients receive therapy that has no benefit
      to
      them and may potentially even be harmful. Our goal is to provide physicians
      and
      cancer patients with a means to make informed, individualized treatment
      decisions based on genetic analysis of tumor tissues.


**Response
        DXTM**
  The
          outcome of cancer chemotherapy is highly variable due to genetic differences
          among patients. Some patients respond well with tumor shrinkage and increase
          in
          life span. Other patients do not obtain benefit from the same therapy but
          may
          still experience toxic side effects as well as delay in effective treatment
          and
          psychological trauma.
  At
            present most chemotherapy regimens are administered without any pre-selection
            of
            patients on the basis of their particular genetics. However recent development
            of very sensitive molecular technologies has enabled researchers to identify
            and
            measure genetic and biochemical factors in patients’ tissues that can predict
            the probability of success or failure of many currently used anti-cancer
            agents.
            In order to increase the chances of a better chemotherapy outcome for
            cancer
            patients, RGI is developing genetic tests that will measure predictive
            factors
            for tumor response in tumor tissue samples. We have begun offering tests
            for
            non-small cell lung cancer (NSCLC) and colorectal cancer (CRC) patients’ tumor
            tissue through our CLIA registered laboratory and we anticipate offering
            additional tests for esophageal and pancreatic cancer in the future.
 **Our
        technology**
  All
          of
          our tests are based on the polymerase chain reaction (PCR), which is a
          sensitive, precise and reliable technology that gives numerical values
          that are
          not dependent on subjective interpretation by pathologists, as are
          antibody-based tests. We developed and extensively validated technology
          to
          perform quantitative PCR analysis of gene expressions in formalin-fixed
          paraffin
          embedded (FFPE) tumor tissues. We have used our technological expertise
          in many
          projects for the pharmaceutical industry and for many collaborative scientific
          studies. The benefit of our capability for patients is that in many cases,
          no
          tissue samples other than the pre-treatment diagnostic biopsy will be required
          for the biomarker analysis.
  We
          developed ResponseDX in part by using our
          technologies to extract genetic information from FFPE tumor specimens.
          Our
          technology provides gene expression information for each patient's tumor
          tissue
          specimen. Our mission is to help doctors and patients choose the most effective
          cancer treatment options - the first time - based on a patient's unique
          genetic
          code. We assess non-small cell lung cancer (NSCLC) and/or colorectal cancer
          (CRC) patients' tumor tissue specimens through our ResponseDX: LungTM and
          ResponseDX:
          ColonTM test suites. The test results may help doctors and patients decide
          the best course of treatment for patients.
  Since February
            2008, ResponseDX: Lung and
            ResponseDX: Colon tests are commercially available through our laboratory
            located in Los Angeles, California, which is registered under the Clinical
            Laboratory Improvement Amendments of 1988 (CLIA).
 ResponseDX:
        LungTM and ResponseDX: ColonTM
  ResponseDX:
            LungTM comprises four tests: ERCCI, RRMI,
            KRAS Mutation and EGFR Amplification and ResponseDX: ColonTM comprises three
            tests: ERCCI, KRAS Mutation and TS. The Response DX test measures the
            RNA
            expression of ERCCI and RRMI by RT-PCR from a patient's tumor tissue.
            PCR
            analysis of DNA from the patient's sample is used to determine EGFR
            amplification and KRAS mutational status. The ERCCI test is a test for
            the
            probability of response to platin-based therapies and the analysis of
            RRMI tests
            for the probability of response to gemcitabine-based therapies. We determine
            the
            ranges of ERCCI expression and RRMI expression that classify a patient's
            tumor
            into categories of the low and high probability of responding to platin-based
            therapy and gemcitabine-based therapies, respectively. The EFGR Amplitication
            test assesses the probability of benefit from EGFR-directed therapy.
            We
            determine if the EGFR gene is amplified, which is associated with better
            response to EGFR-based therapy. The KRAS gene mutation test identifies
            tumors
            that have low probability of response to EGFR-directed therapy. This
            test
            utilizes a 7 mutation panel to identify KRAS gene mutations in a sample
            that are
            associated with low response to EGFR-directed therapy. The
            TS
            gene expression test measures the probability of response to 5-fluorouracil
            (5-FU)-based chemotherapy.


***Diagnostic
        Tests for Other Cancers***




I n
        addition to ResponseDx: Lung and ResponseDx: Colon, we are
        developing and intend to commercialize tests of other types of
        cancer that identify genetic profiles of tumors that are more aggressive
        and recur rapidly after surgery. We also are identifying genetic profiles
        of
        tumors that are more or less responsive to a particular chemotherapy. Following
        the development of tests to predict the risk of recurrence after surgery,
        we
        intend to develop tests to determine the most active chemotherapy regimen
        for
        the individual patient at risk. Once developed and after obtaining any necessary
        regulatory approvals, we intend to leverage our relationships in the healthcare
        industry to market, sell or license these tests as a means for physicians
        to
        determine the courses of cancer treatment.




*Expansion
        of our pharmacogenomic testing services
        business*




We
        have
        started the expansion of our pharmacogenomic testing services business into
        major markets of the healthcare industry outside of the United States. We
        have
        established service laboratories in Europe and Japan, and are working to
        establish a service laboratory in China, through collaboration with some
        of our
        current clients in the pharmaceutical industry. The pharmaceutical industry
        is
        in need of standardized integrated worldwide analysis of clinical trial
        specimens. It is important to the pharmaceutical industry and the regulatory
        agencies that the same analytical methods are used for each clinical trial
        sample around the world so that the data can be easily compared and used
        for
        global drug development. Also, export of clinical trial specimens to the
        United
        States is restricted from some areas of the world, such as China. Our goal
        is to
        offer an analysis of patient specimens and generate consistent data based
        on
        integrated common platforms and technology into the major markets of the
        healthcare industry including outside of the United States. To our knowledge,
        we
        will be the only company offering consistent pharmacogenomic analysis to
        the
        industry across geographical regions.


There
          are
          no assurances that the Company will be able to continue making its current
          ResponseDx tests available, or make additional ResponseDx tests available;
          will
          be able to develop and commercialize tests of other types of cancer; or
          will be
          able to expand our pharmacogenomic testing service business.
  Except
          for the historical information contained herein, this Annual Report on
          Form
          10-KSB contains or may contain, among other things, certain forward-looking
          statements, within the meaning of the Private Securities Litigation Reform
          Act
          of 1995. Such forward-looking statements involve significant risks and
          uncertainties. Such statements may include, without limitation, statements
          with
          respect to the Company's plans, objectives, projections, expectations and
          intentions, such as the ability of the Company to analyze cancer samples,
          the
          potential for using the results of this research to develop diagnostic
          tests for
          cancer, the usefulness of genetic information to tailor treatment to patients,
          the ability of the Company to make its ResponseDX: Lung and ResponseDX:
          Colon
          tests available in a number of institutions, and other statements identified
          by
          words such as "projects," "may," "could," "would," "should," "believes,"
          "expects," "anticipates," "estimates," "intends," "plans" or similar
          expressions.
  These
          statements are based upon the current beliefs and expectations of the Company's
          management and are subject to significant risks and uncertainties, including
          those detailed in this Annual Report on Form 10-KSB filed with the Securities
          and Exchange Commission. Actual results, including, without limitation,
          actual
          sales results, if any, or the application of funds, may differ from those
          set
          forth in the forward-looking statements. These forward-looking statements
          involve certain risks and uncertainties that are subject to change based
          on
          various factors (many of which are beyond the Company's control).




4




**Background**




***The
      nature of cancer***




Cancer
      is
      basically an uncontrolled growth of cells and expansion of tissues that can
      invade and destroy the function of adjoining and even distant organs. In
      contrast to infectious diseases which are entirely caused by outside agents
      such
      as viruses and bacteria, cancer is a disease that arises from genetic breakdown
      within our own cells. To be sure, this internal cellular malfunction can also
      be
      triggered or promoted by external causes such as chemicals in tobacco smoke
      or
      asbestos exposure or even viruses, but in many cases, cancer also seems to
      occur
      spontaneously because of an inherent instability of the human genome. The
      problem with cancer from a treatment point of view is that it is not one disease
      but one of almost infinite variety. Due to the vast biochemical complexity
      of
      human cells, there are numerous ways by which loss of control of cell growth
      can
      occur, and this diversity of pathways leads to cancers with varying properties:
      growth rate, invasiveness of adjoining tissues, the ability to develop a new
      vascular system, metastatic potential, and responsiveness to various therapies.
      Cancers arising in different organs (e.g., colon, breast or lung) and tissues
      within these organs have distinct biological properties depending on the
      triggering event and pathway of tumor development. For example, lung cancers
      associated with smoking are different from those that develop in non-smokers
      and
      cancers of the esophagus associated with excessive alcohol and smoking
      consumption are different from those associated with chronic gastro-esophageal
      acid reflux.




***The
      worldwide market for pharmacogenomics***




Human
      beings are about 99.9% identical in their genetic makeup, with the remaining
      0.1% responsible for their unique individual characteristics. Analyzing these
      naturally occurring genetic differences may enable scientists to understand
      the
      variability that contributes to physiological traits, including cancer
      susceptibilities and the progression of cancer. The variation in several genes
      affects each individual’s risk of cancer development, the level of tumor
      aggressiveness, the probability of metastasis, and the probability of survival.
      Natural genetic variations also lead to differences in the way that drugs are
      absorbed, metabolized and incorporated by the body, and thus affect the relative
      efficacy of drugs in different individuals.




Understanding
      genetic variations and discovering the correlations of the genes that are
      associated with clinical outcomes constitutes the field of pharmacogenomics
      and
      underlies the concept of personalized medicine. Pharmacogenomics promises to
      help researchers produce better predictive and diagnostic molecular tests and
      drugs which, in turn, will enable physicians to implement personalized medicine
      by selecting treatments and drugs based on individual needs of each patient.
      Personalized medicine may offer a number of key benefits, including earlier
      interventions, more efficient drug development and more effective
      therapies.




According
      to a 2005 report published by BCC Research, the worldwide market for
      pharmacogenomics reached $1.24 billion in 2004 and is projected to rise at
      an
      average annual growth rate of 24.5% to reach $3.7 billion by 2009. Diagnostics
      comprised 39.2% of the total market in 2004 and are projected to grow at 27.7%
      per year to increase its share to 44.6%, or $1.65 billion in 2009.




We
      believe that the application of pharmacogenomics to cancer treatment represents
      a significant opportunity, as new cancer cases are estimated to increase by
      50%
      and approach 15 million worldwide by the year 2020, according to a new World
      Cancer Report by the World Health Organization.  According to this report,
      lung cancer accounts for 1.2 million new cases worldwide annually; colorectal
      cancer for 940,000; esophageal cancer for 410,000; pancreatic cancer for
      216,000. Cancer of unknown primary affects about 5% of all cancer patients.
      We
      focus our research efforts on developing diagnostic tests for each of these
      common cancer types. The National Institutes of Health estimates overall costs
      for cancer in 2005 at $210 billion, including $74.0 billion for direct medical
      costs.




***Benefits
      of personalized medicine***




Treatment
      of the disease presents a major challenge because of the wide biological
      variations among cancers. As such, there is no one standard therapy or approach
      for treating the disease that can be recommended to cancer patients. Cancers
      originating from various tissues or organ sites require specialized therapies;
      but even cancers emanating from the same tissue type may call for different
      treatment modalities because of varying degrees of disease
      progression.




To
      help
      choose among treatment options, physicians try to determine the extent to which
      the cancer has spread to other parts of the body. Patients are assigned to
      different stage categories ranging from I to IV depending on the degree of
      invasion of the tumor into the adjacent tissues, the number of lymph nodes
      with
      detectable cancer cells, and the presence of distant metastasis. For instance,
      Stage I lung cancer is confined to the lung and has no lymph node involvement.
      Stage II lung cancer has regional node involvement that may not be completely
      removed by surgery. Later stage tumors have spread to more distant sites; Stage
      III to the more distant mediastinal lymph nodes and Stage IV to the other
      organs. In addition to staging, tumors are also graded according to cell type.
      Cells that are well differentiated closely resemble mature, specialized cells
      and indicate a good prognosis (predicted survival time), whereas cells that
      are
      undifferentiated represent a malignant population associated with poor
      prognosis.




5




Once
        the
        prognosis for a patient is determined by taking into account the stage of
        the
        tumor and the grade of malignancy of the cells, healthcare providers can
        determine the appropriate treatment options available to a particular patient.
        For example, current “standard of care” clinical guidelines for non-small cell
        lung cancer (NSCLC) recommend resection (surgery) and then observation for
        Stage
        I cancer whereas Stage II patients are candidates for chemotherapy following
        the
        surgery (adjuvant chemotherapy). While the overall survival for Stage I patients
        is quite good, approximately 50% will suffer early relapse within five years.
        The subset of Stage I lung cancer patients destined for early relapse might
        well
        benefit from adjuvant chemotherapy, but first they have to be identified
        as
        being in the high-risk category prior to treatment. It is not feasible to
        treat
        all Stage I NSCLC patients with adjuvant therapy in order to capture the
        high-risk ones because the low risk patients would be subjected to needless,
        expensive and potentially harmful overtreatment with toxic drugs. Similar
        issues
        arise in the other major cancers.




Current
      staging and grading methods, which are based largely on subjective
      histopathologic examination (i.e., visual inspection by a pathologist) of
      tissues or cells, often fall short and fail to adequately predict malignancy
      aggressiveness. This suggests that the key to distinguishing the low-risk from
      the high-risk patients must lie in understanding the genetic variations between
      these groups at the molecular level. The study of how genes specify individual
      characteristics is called “genomics.”




The
      “genome” is the entire set of human genes which comprises the DNA in the nucleus
      of the cell and directs the production of proteins, the molecules that carry
      out
      our life functions. The sequence of bases of a gene in DNA provides the
      instructions or the blueprint for the subsequent sequence of amino acids in
      the
      proteins. However, the information from DNA is transmitted to the protein
      synthesizing machinery through the intermediary molecule messenger RNA (mRNA),
      which is complementary to the gene sequences in the DNA. The mRNA can be
      transcribed any number of times from the DNA and thus can be “expressed” in
      various quantities. The base sequence information in the mRNA is subsequently
      “translated” into the amino acid sequence of the protein, but the number of mRNA
      molecules that have been transcribed (the “gene expression”) also specifies the
      number of protein molecules that are made.




Analyzing
      naturally-occurring inherited differences in DNA base sequence (polymorphism)
      enables scientists to catalogue and understand the variability in the genome
      and
      how that variability contributes to physiological traits, including disease
      susceptibilities. Mutations (changes in sequence that develop in otherwise
      normal cells) in DNA can contribute to tumor formation. Analyzing levels of
      mRNA, or gene expression, provides a way to understand the function or
      expression of the genome. The gene-expression pattern for a tumor cell might
      show increased mRNA levels for genes responsible for tumor development as well
      as decreased expression of tumor-suppressor genes. Examining the expressions
      of
      many genes (gene expression profiling) is used to identify the group of genes
      that are abnormally expressed in each stage of cancer formation. Patterns of
      gene expression may help to classify the cancer subtype, its prognosis, or
      its
      likely response to a therapeutic regime.




Until
        recently, however, it was very difficult to characterize genetic differences
        at
        the molecular level because the technology did not exist either for rapid
        analysis of the genetic sequence or for precise measurement of various mRNA
        molecules in biopsy tissues. This situation dramatically changed with the
        invention of PCR and gene expression microarrays. Scientists have applied
        gene
        expression profiling to identify markers of high risk of relapse for patients
        with various types of cancer. Studies of breast, lung, lymphoma and other
        cancers suggest that there are different sets of genes expressed in various
        tumor tissues that are associated with specific clinical outcomes. Categorizing
        these expressed sets of genes, as we do with our technologies, can offer a
        powerful complementary approach to clinical or histopathological examination.
        We
        believe that this approach will help researchers produce better predictive
        and
        diagnostic molecular tests and drugs which in turn, will help physicians
        select
        treatments and drugs based on individual needs of each
        patient.




Personalized
      medicine offers a number of key benefits:




· *Better
      diagnoses and earlier interventions* .
      Molecular analysis can help guide treatment choices by determining precisely
      which variant of a disease a person has, or whether he or she is susceptible
      to
      drug toxicities. For preventive medicine, such analysis could improve the
      ability to identify which individuals are predisposed to develop a particular
      condition and guide decisions about interventions that might prevent it, delay
      its onset or reduce its impact.




· *More
      efficient drug development* .
      A
      better understanding of genetic variations in tumor tissue could help scientists
      identify new disease subgroups and their associated molecular pathways, and
      design drugs that target them. Molecular analysis could also assist in the
      identification of patients better suited for inclusion in, or exclusion from,
      late-stage clinical trials — potentially facilitating the identification and
      approval of drugs that might otherwise be abandoned because they appear to
      be
      ineffective in the larger patient population.




· *More
      effective therapies* .
      Currently, physicians often have to use trial and error to find the most
      effective medication for each patient. As we learn more about which molecular
      variations best predict how a patient will react to a treatment, and develop
      accurate and cost-effective tests, doctors will have more information to guide
      their decisions about which medications are likely to work best. In addition,
      testing could help predict the best dosing schedule or combination of drugs
      for
      a particular patient.




6




***Current
      technologies to measure gene expression***




*Polymerase
      Chain Reaction (PCR)* .
      The PCR
      is a technique that makes it possible to amplify a specific DNA segment
      thousands or even millions of times, thereby making it possible to achieve
      a
      quantitative measure of the amount of a particular mRNA species in a tissue
      specimen. The PCR method is sensitive, accurate and precise and is best suited
      for analysis of a limited number of genes in a large set of
      specimens.




*Gene
      expression microarrays* .
      Gene
      expression microarray technology is based on the principle of “capturing”
specific RNA sequences extracted from a patient sample by binding to
      complementary sequences placed on a silicon wafer chip. The specific RNA
      sequences are labeled with a dye that emits a stronger or weaker signal when
      “captured” on the chip depending on whether the gene is expressed at a high or
      low level. Since sequences from the majority of the human genome (approximately
      30,000 genes) are placed on the chip, information about gene expression from
      all
      of these genes becomes available to the researcher by this technology.
      Microarrays are commonly used to simultaneously study large numbers of genes
      and
      their regulation. The power of the microarray lies in its ability to measure
      the
      expression of many thousands of genes simultaneously. The use of gene expression
      microarrays from mRNAs has grown rapidly in academia, medicine and the
      healthcare industry.




The
      recent microarray- and RT-PCR-based studies showing that gene expression
      profiles can predict eventual clinical outcomes (such as long or short survival)
      for patients have generated great interest because they demonstrated the
      potential of gene expression profiling in cancer prognosis. However, before
      predictive gene profiles are adopted for individualized therapy, the findings
      of
      these initial studies will require independent validation using larger sets
      of
      clinical specimens and prospective trials of the markers in a large patient
      population will be essential. These large number of specimens are readily
      available from patient biopsies embedded in paraffin. Until recently, microarray
      analysis of formalin fixed paraffin embedded, or FFPE tumor specimens was not
      possible.




***Our
      Technologies***




The
        value
        of the information gained through genetic analysis of tumor specimens suggests
        that there will be a growing need for this kind of analysis of ever larger
        numbers of tumor specimens. Prior to the means offered by our technologies,
        this
        presented a major obstacle. RT-PCR technology and especially gene expression
        microarrays are best done using a large quantity of nearly full-length RNA
        recovered from fresh-frozen clinical specimens; yet fresh-frozen specimens
        are
        not generally available except in a very limited number of cases in which
        collection of fresh tissues is a specific part of a clinical trial. The majority
        of hospitals and clinics lack the infrastructure to store and archive frozen
        tissues. Rather, clinical specimens are usually available as formalin fixed
        paraffin embedded specimens, or FFPE specimens. Fixation and paraffin embedding
        allow staining and visualization of tumor cells by pathologists, making FFPE
        specimens more useful to pathologists than fresh frozen tissue. Also, once
        embedded in paraffin, the tissue remains stable indefinitely, thus allowing
        for
        easy storage. The end result is that, unlike fresh-frozen tissues, large
        tissue
        banks of archival FFPE with long-term follow-up are extensively available
        and
        easily accessible.





Although
        most clinical tissue specimens are paraffin-embedded, until recently RNA
        in FFPE
        tissue specimens has not been considered useable for genetic profiling studies
        because the isolation of RNA from FFPE with methods that have been published
        in
        the past is unreliable and inconsistent in terms of RNA fragment size. Whereas
        RNA isolated from fresh tissues is generally close to full-length, the fixation
        process degrades the RNA in the tissue and the more extreme extraction
        conditions degrade the RNA further into even shorter fragments. Short fragment
        RNA from FFPE has not given consistently good results with currently available
        gene expression microarray chips and is also more difficult to use in RT-PCR.
        For these reasons, all important diagnostic biomarker studies to date involving
        gene expression microarrays and most studies involving RT-PCR have used
        fresh-frozen tissue specimens and thus many have been constrained to analyzing
        a
        small number of specimens because of the limited availability of fresh-frozen
        biopsy tissue. In contrast, almost all patients diagnosed with cancer have
        a
        paraffin block stored at the hospital from which they were diagnosed.




We
        have
        developed technologies for the extraction of RNA from FFPE tissues which
        enable
        us to reliably recover RNA suitable for a variety of applications, such as
        gene
        expression research, development of diagnostics, and microarray platforms.
        We
        believe our technologies for the first time can provide access to molecular
        information from the entire vast body of archival tissue specimens from past
        clinical trials for which clinical outcomes and results are documented. In
        addition, our technologies permit gene profiling analysis of current clinicals
        trials, most of which are still using the paraffin embedding technique for
        tissue specimen storage. For example, our analysis of a clinical trial involving
        breast cancer in elderly patients illustrates the reliability of our results.
        We
        received paraffin blocks from various clinical sites, and we were able to
        obtain
        valid data on 401 out of 441 FFPE specimens (91%). Our overall success rates
        with other sets of specimens typically mirror these results. The factors
        that
        cause an unsuccessful analysis are generally related to the prior tumor specimen
        collection and fixation (e.g. specimen size (i.e. too few cells), the lack
        of
        actual tumor tissue present in the specimen, or improper fixation of the
        tissue
        specimen), not to any unreliability of the assay itself.




There
      are approximately 1.4 million patients
      diagnosed with cancer per year in the United States. We can access molecular
      information from paraffin blocks that have been stored up to 10 years.
      Therefore, there are about 14 million specimens in existence in the United
      States that we potentially could analyze.




***RGI-1***




Kathleen
      Danenberg, our President, Chief Executive Officer and director, co-developed
      and
      patented (U.S. Patent No. 6,248,535; *Danenberg* ,
      et al.,
      Method For Isolation of RNA From Formalin-Fixed Paraffin-Embedded Tissue
      Specimens), an extraction method (RGI-1) that allows reliable and consistent
      isolation of RNA and DNA from FFPE suitable for use in RT-PCR analysis, while
      she was employed at USC. Using RGI-1, successful RT-PCR quantitation of gene
      expressions is possible from as little as a single 10-micron section of a
      paraffin block with over 90% reliability and excellent reproducibility. We
      validated our methodology, which particularly addressed issues of recovery
      of
      RNA, accuracy, and precision. RGI-1 allows for rapid extraction of RNA with
      little or no DNA contamination, which makes it suitable for large-scale
      analysis. We have used RGI-1 successfully to quantify gene expressions in over
      45,000 FFPE specimens received by us from various pharmaceutical companies
      since
      2001 as well as in our own research projects. We and others have published
      over
      fifty papers and articles based on data generated using RGI-1.


7




We isolated
        RNA from FFPE tissues by RGI-1 and from matched sets of fresh-frozen tissues
        of
        the same tumor specimens. We quantitated the expression of several genes by
        RT-PCR. This experiment shows that if RT-PCR analysis is done within the
        guidelines and parameters established by RGI, very similar results are obtained
        from FFPE specimens when compared to frozen specimens data.




***RGI-2***




RNA
      isolated by RGI-1 is fragmented by the heating process, but may be analyzed
      by
      the PCR process. The PCR assay works by binding DNA primers, which are specific
      sequences of DNA, at various sites on the gene and copying these sequences
      through PCR. These sequences can be designed to bind closely together to
      accommodate short fragments of RNA. However, the microarray technology works
      best through binding of longer RNA sequences. We have developed
      a second technology, RGI-2, designed to maximize the isolation of longer
      fragments of RNA. This technology does not replace RGI-1, since it is less
      rapid
      and may contain a small amount of genomic DNA. Using this technology, the
      average length of RNA fragments recovered from FFPE is substantially increased.
      The RNA preparations obtained with RGI-2 produced similar results on gene
      expression microarrays as RNA isolated from fresh-frozen tissues. Therefore,
      we
      believe that this new technology, which we are in the process of patenting,
      enables profiling of gene expression by microarray of archival FFPE specimens
      from clinical studies.




An
        essential part of our analytical procedure is the microdissection of tumor
        specimens to separate tumor from non-tumor tissue. Most
        tumor biopsy specimens are mixtures of normal and tumor tissue. A specimen
        may
        include only a small percentage of tumor cells. The molecular biology of
        tumor
        and normal tissues may be considerably different and mixing the two may yield
        false results for gene expression profiling. To accurately measure gene
        expression and establish expression profiles of various pathologic lesions,
        it
        is important to analyze RNA from tumor cells. With the assistance of a
        pathologist, we can identify the tumor cells and isolate them, either manually
        or with laser-capture micro-dissection. Since we are able to work with FFPE
        we
        can more accurately dissect out the tumor cells from the normal cells than
        would
        be possible with frozen tissue because the resolution in FFPE is better than
        in
        frozen tissue.




We
        also
        can use our technologies to isolate DNA from the same specimen used to obtain
        RNA*.* Alterations
        in DNA sequence that are inherited (polymorphisms) as well as acquired
        (mutations) are often associated with disease susceptibilities, treatment
        response, and survival. DNA polymorphisms and mutations may change the gene
        expression pattern of a cell in specific ways. Characterization of gene
        expression profiles associated with various DNA sequence alterations may
        lead to
        a better understanding of disease mechanisms and may suggest new and better
        treatments. Our technique for isolating DNA and RNA from the same specimen
        facilitates such studies because in many cases the amount of available tissue
        may not be sufficient for separate isolation of DNA and RNA. In addition,
        measuring gene expressions and DNA sequence alteration in the same cells
        rather
        than in different areas of the tissue specimen is likely to give more valid
        data.




We
      believe these technologies may be used as a powerful tool to establish
      diagnostic gene sets for predicting a patient’s likelihood of survival under a
      particular treatment regimen. Such diagnostic tests will provide the opportunity
      for choosing the best treatment prior to therapy and thus enable application
      of
      personalized medicine based on each person’s unique genetics.




8




**Our
      Strategy**




Our
        goal
        is to provide cancer patients and their physicians with the means to make
        informed, individualized treatment decisions based on genetic analysis of
        tumor
        tissues. Using our two technologies for extraction of RNA from FFPE tissue,
        we
        can provide personal genetic information that will help guide physicians
        and
        cancer patients in choosing the treatment from which the patient is most
        likely to benefit. We can also analyze specific RNAs rapidly by PCR or the
        entire genome by using microarray methods. Elements our business strategy
        include:


**Response
          DXTM**
  The
          outcome of cancer chemotherapy is highly variable due to genetic differences
          among patients. Some patients respond well with tumor shrinkage and increase
          in
          life span. Other patients do not obtain benefit from the same therapy but
          may
          still experience toxic side effects as well as delay in effective treatment
          and
          psychological trauma.
  At
          present most chemotherapy regimens are administered without any pre-selection
          of
          patients on the basis of their particular genetics. However recent development
          of very sensitive molecular technologies has enabled researchers to identify
          and
          measure genetic and biochemical factors in patients’ tissues that can predict
          the probability of success or failure of many currently used anti-cancer
          agents.
          In order to increase the chances of a better chemotherapy outcome for cancer
          patients, we are developing genetic tests that will measure predictive
          factors
          for tumor response in tumor tissue samples. We have begun offering tests
          for
          non-small cell lung cancer (NSCLC) and colorectal cancer (CRC) patients’ tumor
          tissue through our CLIA registered laboratory and we anticipate offering
          additional tests for esophageal and pancreatic cancer in the future.
  **Our
          technology**
  All
          of
          our tests are based on the polymerase chain reaction (PCR), which is a
          sensitive, precise and reliable technology that gives numerical values
          that are
          not dependent on subjective interpretation by pathologists, as are
          antibody-based tests. We developed and extensively validated technology
          to
          perform quantitative PCR analysis of gene expressions in formalin-fixed
          paraffin
          embedded (FFPE) tumor tissues. We have used our technological expertise
          in many
          projects for the pharmaceutical industry and for many collaborative scientific
          studies. The benefit of our capability for patients is that in many cases,
          no
          tissue samples other than the pre-treatment diagnostic biopsy will be required
          for the biomarker analysis.
  **ResponseDX:
          LungTM and ResponseDX: ColonTM**
  We
          offer
          ResponseDX test suites as clinical laboratory tests, where we analyze tumor
          tissue samples in our laboratory and provide physicians with genomic information
          specific to the patient’s tumor. Currently, we assess non-small cell lung cancer
          (NSCLC) and/or colorectal cancer (CRC) patients’ tumor tissue specimens through
          its ResponseDX: LungTM and ResponseDX: ColonTM test suites. The test
          results may help doctors and patients decide the best course of treatment
          for patients.
  ResponseDX:LungTM
          comprises four tests - ERCC1, RRM1, KRAS Mutation and EGFR
          Amplification.
  **ERCC1
          gene expression:** Cisplatin
          and carboplatin are widely used in combination with other drugs to treat
          non-small cell lung cancer (NSCLC). DNA crosslinks formed by the platin
          drugs
          are repaired by the nucleotide excision repair pathway. A critical gene
          in this
          pathway is excision repair complementing factor 1 (ERCC1). Low expression
          of
          ERCC1 is a favorable indicator for tumor response to platinum therapy whereas
          a
          high level means that the tumor is likely to be resistant due to its increased
          DNA repair capacity. ERCC1 is one of the most validated predictive markers
          for
          tumor response to chemotherapy based on both retrospective and prospective
          studies. We have determined ranges of ERCC1 expression values that will
          optimally classify tumors into categories of low and high probability of
          response to platinum-based therapy. The ERCC1 test can help doctors to
          make
          informed decisions about whether to recommend platinum versus non-platinum
          therapies for NSCLC. Non-platinum therapies have shown results comparable
          to
          platinum-based therapies but generally have lower toxicities.
  **RRM1
          gene expression:** Gemcitabine
          is one of the drugs currently used to treat NSCLC, often in combination
          with
          cisplatin. The target of this drug is the enzyme ribonucleotide reductase
          subunit 1 (RRM1). Published studies have shown that patients treated with
          gemcitabine-based therapy with low RRM1 expression in their tumors have
          significantly longer median survival than those with high levels. Measuring
          RRM1
          and ERCC1 together may be an especially effective predictor of the combined
          gemcitabine/cisplatin therapy in NSCLC.
  **EGFR
          copy number:** The
          epidermal growth factor receptor (EGFR) is involved in cell growth as well
          as
          cancer development. EGFR is the target molecule for many recently-developed
          anti-cancer drugs, including gefitinib and erlotinib, which are used in
          the
          treatment of NSCLC. When cancer develops, the number of copies of the EGFR
          gene
          in the genome of cancer cells often increases. Recent studies have shown
          that a
          high copy number of the EGFR gene lung cancer patients means increased
          likelihood of response to gefitinib and erlotinib.
  ***KRAS*** **mutations:** Part
          of
          the EGFR signaling pathway includes downstream GTPases encoded by the *RAS* genes.  The *RAS* gene
          family has an important role in cancer development. Studies have shown
          that
          K-ras gene ( *KRAS* )
          mutations occur in about 30% of human lung adenocarcinomas and are often
          closely
          associated with heavy smoking. A mutated *KRAS* is a
          very strong predictor of non-response and no survival benefit from the
          EGFR
          inhibitors gefitinib and erlotinib. Thus, a test for *KRAS* mutation
          status may be a helpful guide to doctors in making recommendations regarding
          treatment with EGFR inhibitors, especially to patients with a history of
          smoking.
  ResponseDX:
          ColonTM comprises three tests - ERCC1, KRAS Mutation and TS:
  **ERCC1
          gene expression:** In
          the
          case of colorectal cancer (CRC), a widely used combination chemotherapy
          is
          oxaliplatin together with 5-fluorouracil (5-FU)(the FOLFOX regimen). For
          platinum therapies, one of the critical determinants is the excision repair
          complementing factor 1 (ERCC1). In 2001, RGI participated in a study which
          showed that ERCC1  mRNA
          expression levels predicted the clinical outcome of  patients
          with advanced CRC treated with FOLFOX. Since high expression of ERCC1 may
          actually increase the response rate to irinotecan therapy, the FOLFIRI
          regimen
          (5-FU plus irinotecan), which has almost identical overall efficacy to
          FOLFOX,
          provides an alternative option for patients with high tumor levels of ERCC1.
          The
          ERCC1 test can help doctors to make informed decisions about whether to
          recommend FOLFOX or FOLFIRI for treatment of CRC.
  ***KRAS*** **mutations:** The
          EGFR
          signaling pathway is overexpressed in more than 85% of tumors from patients
          with
          metastatic CRC. Cetuximab and panitumumab are two EGFR inhibitors that
          have
          shown promising activity as second-line therapy for metastatic CRC and
          in
          first-line use in combination with oxaliplatin and irinotecan-based therapies.
          Mutations in the *RAS* genes
          occur in about 35% of CRC patients and recent studies have shown that a
          mutated
          K-ras gene ( *KRAS* ) very
          strongly predicts lack of response as well as shorter survival from both
          cetuximab and panitumumab therapy. These results suggest that a test for *KRAS* mutation
          status would be a helpful guide to doctors in making recommendations regarding
          treatment of CRC patients with these EGFR inhibitors.
  **Thymidylate
          synthase (TS) gene expression** :
          Since
          its introduction 50 years  ago,
          5-fluorouracil (5-FU) has been a mainstay for chemotherapy of colorectal
          cancer
          (CRC). The intracellular target for 5-FU is the enzyme thymidylate synthase
          (TS), which is rate-limiting for  DNA
          synthesis and thus essential for tumor growth. Many retrospective clinical
          studies have shown that low levels of expression of TS correlate with an
          improved  response
          rate and overall survival in CRC patients treated with  5-FU
          or
          its derivatives. The same relationship between low TS expression and better
          clinical outcome is also seen in the 5-FU-based combination chemotherapy
          of  oxaliplatin
          and 5-FU (FOLFOX), which is now widely used in CRC treatment. However,
          when 5-FU
          is used in combination with irinotecan (FOLFIRI), the therapy is still
          efficacious at high TS levels, thus providing an alternative to FOLFOX
          for CRC
          patients with high TS. The TS test can help doctors to make informed decisions
          about whether to recommend FOLFOX or FOLFIRI for treatment of CRC.
  **Developing
          diagnostic tests for assessing the risk of cancer recurrence, prediction
          of
          chemotherapy response and tumor classification in cancer patients based
          on our
          technologies.**


To
      date,
      all studies involving microarray analysis could only be done using frozen
      tissues. Since frozen tissues from clinical trials are available on a very
      limited basis or often not available at all, this has severely limited the
      development of diagnostic tests. In contrast, for the reasons discussed above,
      nearly all patients diagnosed with cancer have a diagnostic tissue specimen
      stored in a paraffinized state. Therefore, there is a vast number of patient
      specimens available for the development of a diagnostic test using our
      technology.




·*Develop
      a lung cancer recurrence test.*We have developed preliminary gene
      sets for predicting risk of recurrence in early stage non-small cell lung cancer
      after surgery through analysis of 80 patient specimens by microarray. This
      “product candidate” must be validated in a larger set of patient specimens
      (300-500) in the research setting. Since lung cancer is among the highest
      frequency cancers around the world, patient specimens are available from many
      sites. We have chosen to prioritize development of a diagnostic test to predict
      outcome for this cancer. Generally, Stage 1A and 1B lung cancer is not treated
      with chemotherapy even though these patients have a 50% risk of recurrence
      within five years. The patient is considered in remission unless and until
      the
      tumor recurs. At the time of recurrence chemotherapy is administered. However,
      if there were a test for high risk of recurrence, then the physician could
      treat
      the patient right away with chemotherapy rather than waiting for the recurrence.
      These concepts are summarized in the charts below:




Microarray
      gene expression profiling analysis of FFPE tissues using RGI methodology
      accurately separated early stage non-small cell lung cancer (NSCLC) patients
      into a group with high risk (Group 1) and a group with low risk (Group 2) of
      cancer recurrence. This data was presented by RGI at the American Society of
      Clinical Oncology (ASCO) meeting on June 5, 2006.




Our
      plan
      is to use our proprietary technologies to analyze these archived patient
      specimens and to correlate the data with clinical outcomes so that we can
      develop diagnostic tests to predict likelihood of recurrence and responsiveness
      to chemotherapy.




After
      preliminary validation of the predictive gene set, a formal clinical trial
      will
      be designed to prove the ability of the gene set to accurately predict outcome
      in additional patients using reagents available from Affymetrix. Since RGI
      is
      able to analyze archived FFPE tissue, the patients included in this trial will
      have been treated years ago, but the outcome will be blinded to RGI by the
      clinical investigators until the end of the trial. The number of specimens
      required in this clinical trial will be determined by the accuracy in which
      the
      preliminary gene set can predict the first 300-500 specimens in the research
      study. Based on the current predictability of our gene set, over 90% accuracy,
      we estimate that the clinical trial will require 500-1000 early stage lung
      cancer patients. Additional trials may then be launched at various sites to
      continue to refine the accuracy of our assay.




We
      believe that it will take approximately one year to gather and analyze the
      specimens in the research setting and the clinical trial analysis and compliance
      with potential regulatory requirements will require approximately two to three
      additional years.




There
      are
      a number of diagnostic test developers available to partner with RGI during
      the
      clinical trial and test launch process. Roche, with whom we have a strategic
      alliance, is one of these providers.




·  *Develop
      a lung cancer chemotherapy response test.* In
      addition to our ResponseDX: lung test and our tests for recurrence of lung
      cancer, we also intend to continue to develop a test to determine responsiveness
      to chemotherapy treatment for lung cancer. Of the 169,000 newly diagnosed lung
      cancer patients in the United States, a majority will receive chemotherapy
      as an
      initial treatment. Of those who receive chemotherapy, greater than 90% are
      given
      the combination of Paclitaxel/Carboplatin as their first chemotherapy.
      Paclitaxel/Carboplatin is only effective in about 19% of the patients for whom
      it is prescribed. We intend to develop a pharmacogenomic test to determine
      whether an individual patient  would be likely to be included in the
      19% of NSCLC patients responding to Paclitaxel/Carboplatin or whether the
      patient should consider a different chemotherapy. Clinical trial specimens
      are
      available to us for development of this test, including from Duke University,
      however, there can be no assurance that we will be successful in developing
      this
      test, or if developed, that such a test will be commercially
      viable.




In
      June
      2006, we presented at the ASCO meeting the first study demonstrating the
      possibility of a predictive molecular test derived by microarray analysis of
      patients’ FFPE tumor biopsies.




9




Through
      these preliminary studies in lung cancer using our technologies for RNA
      extraction from FFPE, we have produced gene expression profiles which
      describe the probability of recurrence among patients with early stage lung
      cancer. Other expression profiles have been generated predicting the risk of
      metastases. By applying our technologies to early stage non-small cell lung
      cancer, we have:




· demonstrated
      the feasibility of creating a preliminary genomic risk prediction model using
      FFPE tissue, and




· identified
      the differential pathways indicated by the unique gene signatures between early
      stage patients surviving less or greater than two years for both adenocarcinomas
      and squamous cell carcinomas, and demonstrated the feasibility of generating
      differential pathways from FFPE specimens.




We
      believe that this study represents the first “biologically significant” result
      in lung cancer using microarray analysis of FFPE specimens.




The
      diagnostic test, when implemented, will involve extracting RNA from tumor
      biopsies using our technologies and measuring a series of genes (a gene set)
      either by microarray or RT-PCR that have been found to differentiate long and
      short-term survivors. Levels of expression of these genes will provide
      information regarding whether the patient is at a higher than normal risk of
      recurrence. We are currently in the process of refining and validating the
      predictive gene set for early stage lung cancer recurrence.




In
        addition to our studies in lung cancer, we have identified similar preliminary
        predictive gene sets for cancer recurrence after surgery for pancreatic,
        colon
        and esophageal cancers. In each of these studies we analyzed patient specimens
        from early stage cancers and developed predictive gene sets by microarray
        analysis. We have analyzed an average of 40 specimens from each of these
        cancer
        types but will require more research to validate these gene sets.




· *Develop
      a pancreatic cancer recurrence test.* Similarly to the test for recurrence in lung cancer, we are in the research
      phase of developing a test for recurrence after surgery for pancreatic cancer.
      We have analyzed a series of twenty specimens by microarray from patients with
      pancreatic cancer who were at “high risk” and “low risk” of rapid recurrence
      after surgery. The patients at “high risk” had a median cancer-free survival of
      150 days, where the patients at “low risk” had a median cancer-free survival of
      1225 days. Development of a diagnostic tests is planned to determine the
      patients at “high risk” of rapid recurrence after surgery, so that physicians
      may choose to treat these patients with aggressive chemotherapy rather than
      an
      ineffective surgery at the time of diagnosis. We are in the early research
      phase
      of development of this test and will need to analyze more specimens before
      we
      test our initial gene set by validation. After the initial validation, a large
      clinical trial of patients with known outcome to surgery will be analyzed and
      the ability of our predictive gene set will be tested for accuracy. Development
      of the diagnostic test will be similar to that for the lung cancer test. We
      have
      entered into an agreement with University of California San Francisco to obtain
      additional pancreatic cancer specimens and have begun to analyze these
      specimens.




· *Develop
      a*  *colon
      cancer risk of metastasis test.* We have
      analyzed a series of primary tumors in colon cancer and determined a preliminary
      gene set predictive of whether the patient tumor has spread beyond the colon
      into other sites (metastasized). If a colon cancer tumor has spread or invaded
      other organs or lymph nodes, the treatment may include earlier, more aggressive
      chemotherapy and not surgery at the time of diagnosis. It is not always possible
      for the physician to determine whether a cancer has spread before surgery has
      taken place. Therefore, we are developing a diagnostic test using microarray
      technology to predict whether the patient’s tumor is contained in the colon
      before surgery.  We are in the research phase of development of this test.
      We have analyzed sixty patient specimens with metastatic and non-metastatic
      colon cancer and have developed a preliminary gene set predictive of metastatic
      cancer. We will validate this gene set in a larger group of specimens and
      proceed with development of the test in the same manner as the lung
      test.




· *Develop
      an esophageal cancer risk of recurrence test.* We have
      analyzed a series of esophageal tumors from patients with long and short
      survival after esophageal surgery. A preliminary gene set predictive of “high
      risk” patients was determined using the first 46 patients analyzed.  We
      will use an additional set of specimens to validate this predictive gene set
      and
      development of the diagnostic test will be similar to the lung
      test.




· *Develop
      a*  *cancers
      of unknown primary test.* About 5%
      of patients suffer from cancer without knowing where the tumor originated.
      For
      example, the cancer may have invaded both the colon and the lungs. Treatments
      for lung cancer are quite different from treatments for colon cancer, Therefore,
      we are planning to develop a diagnostic test using microarray methods for
      determination of the origin of the cancer. We have collected patient specimens
      from a series of cancers that have been diagnosed as tumors of unknown origin.
      These include, gallbladder, pancreas, gastric, kidney, breast, prostate cancer
      and others. We intend to analyze these specimens using microarray methodology
      and develop a gene set that will identify the origin of the tumor. We are in
      the
      early stages of planning our research analysis of these specimens. Development
      of a diagnostic test will be similar to the lung cancer test.




We
      will
      validate these tests using clinical specimens available from our network of
      over
      a dozen clinical investigators. As we proceed from the research phase to the
      validation phase with respect to these tests, we will need to access additional
      specimens from larger institutions. We have identified these institutions and
      are in the process of negotiating the appropriate agreements with them. However,
      there can be no assurance that we will be able to enter into agreements with
      these institutions on terms favorable to us, or at all.




10




***Expanding
      our pharmacogenomic testing services business and creating a standardized and
      integrated testing platform in the major markets of the healthcare industry
      outside of the United States.***




We
      have
      ongoing relationships with several pharmaceutical companies both in the United
      States and abroad. We currently have contracts with pharmaceutical companies
      using a “fee for service” model for both discovery and validation of biomarkers
      using our validated RT-PCR platforms and microarray technologies and hope to
      continue this line of business in the future. We believe that we are in
      compliance with FDA’s Good Laboratory Practice regulation (GLP), making our data
      appropriate for submission to the FDA by the pharmaceutical industry. Our
      experience and reproducible methods, along with our patented/patent pending
      methods have generated business for us in the “outsourcing” of pharmacogenomic
      testing for the pharmaceutical industry. The demand from the pharmaceutical
      industry for our services has steadily increased over the years. Given the
      industry’s increasing focus on personalized medicine and pharmacogenomics, we
      expect a growth in revenues from these services.




Moreover,
      as pharmaceutical companies begin to place patients on clinical trials of their
      drugs in various parts of the world, they will require that patient specimens
      be
      analyzed regionally. The requirement will be partially due to the need for
      rapid
      turnaround in the testing and partly due to regulatory compliance within the
      region. For instance, the pharmaceutical industry is increasing its clinical
      trial enrollment of patients in China, but the Chinese government severely
      restricts sending biopsy specimens out of China for genetic testing. While
      we
      currently expect to expand globally to meet these needs, there can be no
      assurance that we will achieve such expansion or, if we do expand, that we
      will
      maintain our profitability.




***Additional
      Products for Service Provider Business: FISH, IHC and
      Bioinformatics.***




· *FISH
      analysis.* We have
      added the analysis of patient specimens by fluorescent in situ hybridization
      or
      FISH analysis to detect genes associated with response to drugs associated
      with
      known biomarkers, such as HER2 and EGFR. FISH test kits for HER2 and EGFR are
      commercially available in other labs, but our pharmaceutical clients would
      rather have RGI perform these additional tests and avoid the risks associated
      with sending valuable clinical trial specimens to a second lab. FISH tests
      employ an FDA approved methodology for analysis of DNA levels in a patient
      sample by binding the fluorescent DNA material in the test kit to the patient
      section. The amount of fluorescence captured by the patient specimens determines
      whether the patient’s tumor is positive or negative for the gene. A positive
      test by FISH analysis is required by pharmaceutical companies enrolling patients
      on therapy with various drugs targeting HER2 or EGFR. An FDA approved test
      kit
      is available for analysis of HER2 by FISH. We are using this test. We have
      set
      up equipment and provided the laboratory space for Dr. Michael Press to perform
      these analyses in his CLIA certified laboratory for our clients. We will
      consider revising our CLIA certification application to include this type of
      testing service to allow us to conduct these types of tests in our own
      laboratory.




· *IHC
      analysis.* We have
      added the ability to analyze specimens by immunohistochemistry (IHC) for common
      ancillary tests such as estrogen receptor (ER) and progesterone receptor (PR).
      These tests, which are used to direct hormone therapy to breast cancer patients,
      involve binding of antibodies to patient specimens to detect levels of ER and
      PR
      by intensity of staining. We are beginning to market these ancillary tests
      to
      our pharmaceutical clients as research tests and will consider adding these
      tests to our CLIA certification application. In the interim, we have set up
      equipment and provided the laboratory space for Dr. Michael Press to perform
      these analyses in his CLIA certified laboratory for our clients.




· *Bioinformatics
      Service for Pharmaceutical Clients.* We
      produce gene expression data for our pharmaceutical clients using microarray
      and
      PCR technologies. We are beginning to offer detailed statistical analysis of
      the
      data we produce for our pharmaceutical clients. In the past the pharmaceutical
      clients received raw data from us and analyzed the results using their own
      statisticians. However, we have begun to receive requests for statistical
      analysis of this data using a series of bioinformatics software. We have
      acquired the necessary software and have successfully processed data for a
      pharmaceutical client. We are developing a team of statisticians and will market
      this service.




11




· *DNA
      analysis by microarray.* Affymetrix upgraded our instruments to support analysis of DNA by microarray
      and
      intend to offer this service to our pharmaceutical clients. We have
      technologies in place to isolate DNA from FFPE specimens and will validate
      the
      use of this DNA on the Affymetrix Instrument. We plan to perform this validation
      within the next year, so that we may offer this service.




***Growth
      Through Globalization of Our Service Business.***




We
        estimate based on our internal market research and experience to date that
        the
        addressable market opportunity for our testing services business in the area
        of
        analyzing tumor specimens in the course of clinical trials is between $400
        and
        $500 million per year  worldwide.




Demand
      within the pharmaceutical industry requires us to offer “integrated” service
      throughout the world for analysis of their clinical trial specimens. It is
      important to the pharmaceutical industry and the regulatory agencies that the
      same analytical methods be used for each clinical trial sample around the world
      so that the data can be easily compared and used for global drug development.
      Also, export of clinical trial specimens to the United States is restricted
      from
      some areas of the world such as China. Finally, the enrollment of patients
      in
      clinical trials sometimes depends on analyzing the sample for a specific
      biomarker within five days, which does not provide sufficient time for shipping
      specimens to the United States.




The
      pharmaceutical industry is moving a large percentage of their clinical trials
      to
      Asia to access and treat patients that are chemotherapy-naïve (patients who have
      not had previous chemotherapies), to carry out less expensive clinical trials
      and to generate “on site” chemotherapy response data to be used in conjunction
      with drug approval in these areas. The goal of our globalization plan is to
      offer a worldwide analysis of patient specimens and generate consistent data
      based on integrated common platforms and technology.




· *Europe* .
      We
      offer our pharmacogenomic testing at a site in Edinburgh, Scotland, which is
      associated with the University of Edinburgh and Edinburgh Royal Infirmary.
      We
      established a subsidiary, Response Genetics, Ltd. in November 2006 through
      which
      we manage the work at this site. As of March 2007, we began to lease this
      laboratory space and have equipped the laboratory to process specimens from
      specific clinical trials from a large pharmaceutical company. These trials,
      which involve about 10,000 patients, require us to analyze the patient sample
      within five days of surgery. It is not possible to ship the specimens to Los
      Angeles in this time frame, thus necessitating a laboratory on site in Europe.
      Other pharmaceutical companies have shown interest in processing specimens
      in
      Europe through us. The cost of the European lab will be offset by an advance
      on
      processing fees from a large pharmaceutical company.




· *China* .
        We
        intend to offer our services in China through an arrangement with an established
        biotech company, Shanghai Biochip Company, Ltd. (“SBC”). This collaboration is
        necessary, since the Chinese government does not allow shipment of patient
        specimens outside of China for processing elsewhere. We believe that placement
        of a laboratory in China is important because several of our pharmaceutical
        clients have stated that they have clinical trial specimens stored in China
        that
        they have not been able to analyze. Additionally, prospective clinical trials
        are planned in China as part of an effort to get drugs approved in China.
        We
        finalized the terms of our arrangement with SBC. In the agreement, we provide
        technology, training and the laboratory manager and SBC provides the space,
        equipment and the rest of the staff.




· *Japan
        and Asia (except China and India).* We offer
        our services in Japan through an arrangement with Hitachi
        Chemical Co., Ltd. (“Hitachi”), a leading diagnostics manufacturer in
        Japan Under
        this arrangement, Hitachi processes specimens collected throughout Asia,
        except
        China and India, and Australia using our technology. Pharmaceutical clients
        have
        requested analysis of patient specimens on site in Japan and surrounding
        countries for prospective clinical trials for the same reasons we are opening
        the lab in Europe.




We
      believe that growth in our pharmacogenomic testing services business will be
      enhanced by our ability to process specimens in various locations throughout
      the
      world. To our knowledge, we will be the only company offering this type of
      service with consistent results at various sites around the world to the
      industry.


***Growth
          Through Strategic Relationships***




· *Co-marketing
      of our services by Affymetrix.* We are
      an Affymetrix service provider for analysis of pharmacogenomic information
      by
      microarray using the Affymetrix microarray platform. We expect this alliance
      with Affymetrix to expand our business, since there is an unmet demand from
      the
      pharmaceutical industry for analysis of paraffin tissue using microarray
      technology. Under the contract, Affymetrix will be able to announce us as a
      “solution” to their pharmaceutical clients for analysis of FFPE tissue and
      thereby co-market us as service provider to their clients.




12




Affymetrix
      has also upgraded our microarray system to allow us to analyze DNA as well
      as
      RNA. We are able to generate DNA and RNA from the same microdissected specimens
      and will now be able to add DNA analysis on the microarray platform as a new
      service.




· *Collaboration
      with Roche Molecular Systems, Inc.* Once
      a
      predictive biomarker has been found to be associated with response to a
      particular chemotherapeutic agent, a pharmaceutical company client may wish
      to
      develop a companion in vitro diagnostic (IVD) kit, to be available for testing
      the patient population globally as their drug is approved. Such a test that
      determines patient responsiveness to their drug could enhance the probability
      of
      approval of the new agent with the FDA. In order to provide such a test using
      higher quality reagents and with global distribution potential, we have formed
      a
      collaboration with Roche. Once we have developed effective research-grade
      reagents for a particular biomarker or series of biomarkers, the pharmaceutical
      company may contract directly with Roche to generate reagents compliant with
      FDA
      standards for development of IVD tests to replace our research reagents for
      a
      particular biomarker or series of biomarkers. We will use these high quality
      reagents comprising the pre-IVD test for positivity of a particular biomarker
      or
      series of biomarkers as a requirement to enroll a  patient
      in prospective clinical trials. Data from these trials will be submitted to
      the
      FDA for approval of an IVD kit for response simultaneously with the approval
      of
      the New Drug Application. Since we are involved in the discovery of the genes
      involved for response to a particular chemotherapy with the pharmaceutical
      client, we enjoy royalty free and exclusive rights to analyze the prospective
      trial specimens for these biomarkers. These include specimens generated from
      the
      large phase II and phase III trials to be submitted to the FDA, EMEA and other
      global regulatory agencies for approval of the drug. The value of this
      relationship is that we provide for the pharmaceutical industry testing services
      that produce research-grade assays for development of biomarkers and
      determination of the appropriate target populations for their therapy, and
      potentially enhance their opportunity for clinical trial success in enriched
      patient populations. In this way individualized therapy will be available to
      patients, and the speed to market of chemotherapy agents targeted to a subset
      of
      the population that would not have met the criteria for approval for the entire
      population will be increased.




13




**Strategic
      Collaborations**




***License
        Agreement with the University of Southern California
        ("USC")***




In
      April
      2000, as amended in June 2002 and April 2005, we entered into a license
      agreement with USC, pursuant to which USC granted us a worldwide, exclusive
      license with the right to sublicense, the patents for RGI-1 and related
      technology, for use in human and veterinary diagnostic laboratory services,
      the
      sale of clinical diagnostic products, and the sale of research products to
      the
      research community. We are obligated under the agreement to use best efforts
      to
      work toward the commercialization of the licensed technology. In consideration
      for this license, we are obligated to pay royalties to USC, as a percentage
      of
      net sales of products or services using the technology, and to meet a certain
      minimum in royalty payments. Royalty expense for the years ended December 31,
      2007 and 2006 was $152,502, and $160,674, respectively. USC retains the right
      under the agreement to use the technology for research and educational
      purposes.




Upon
      authorization from us, USC has the obligation to undertake all responsibilities
      for the filing, prosecution and maintenance of all patents covered under the
      license; however, we have agreed to reimburse USC for all associated costs.
      If
      we elect not to pursue a particular patent, the rights to that patent revert
      to
      USC if USC takes the necessary steps to prosecute and maintain the patent;
      if
      USC does not undertake such actions, the exclusive license rights to the patent
      remain with us. We bear full responsibility for enforcement of patent rights
      against all claims of infringement by third parties and the right, but not
      the
      obligation to bring action against any alleged infringement of the licensed
      patents by third parties, bearing all costs. USC has the right to pursue any
      offensive enforcement we chose not to pursue at its own expense and we may
      agree
      with USC to pursue such action jointly, sharing all related costs.




This
      agreement terminates on the first to occur of: (i) the date of the expiration
      of
      the last to expire of the patents issued in any country, or (ii) if no patents
      issue, the date on which any decision or determination to reject or deny
      the last remaining patent application or claim becomes final. Either party
      may
      terminate this agreement for uncured material breach or default upon written
      notice to the other party. We may terminate the agreement for any reason, upon
      written notice to USC. USC may terminate the agreement, upon written notice,
      in
      the event that we transfer or assign our rights and obligations under the
      agreement to a third party, in any manner contrary to the terms of the agreement
      or in derogation of USC’s proprietary rights; and immediately if we fail to
      obtain or maintain insurance coverage and for other specified causes. We are
      obligated to indemnify USC against all liabilities to third parties, from claims
      arising in connection with the agreement and our use, sale or other distribution
      of services and products involving the licensed technology. We also are required
      to maintain comprehensive general liability insurance, appropriately covering
      the full scope and range of activities we pursue with the licensed
      technology.




14




***License
      Agreement with Roche Molecular Systems, Inc.***




In
      November 2004, we entered into a license agreement with Roche, pursuant to
      which
      we are collaborating with Roche to produce commercially viable assays related
      to
      the validation of genetic markers for pharmaceutical companies. Specifically,
      we
      have licensed the rights to Roche to use the pre-diagnostic assays we develop
      in
      the course of using our RNA-extraction technologies to provide testing services
      to pharmaceutical companies, to produce diagnostic kits that then can be sold
      commercially to those pharmaceutical companies. Roche is required to pay us
      royalties of a certain percentage of net sales of the diagnostic kits sold
      to
      pharmaceutical companies.




Roche
      will own the rights to all improvements or modifications solely made by it
      to
      the assays or to the technologies we use to develop those assays. Roche has
      granted us a license to use the optimized assays that form the basis of the
      diagnostic kits for research purposes. Each party has the exclusive right to
      prosecute, maintain and defend against infringement, its own patents and
      applications for patents using counsel of its choice at its
      expense.




The
      agreement will continue until the date on which each and every application
      for
      patent and claim of our patent rights has expired, been disclaimed, been
      cancelled, abandoned or terminated, or has been held invalid by a court of
      law.
      Either party may terminated the agreement for material breach or for cause,
      as
      defined in the agreement, upon prior written notice to the other party.
      Following the two year anniversary of the effective date of the agreement,
      either party may terminate the agreement by meeting certain notice obligations
      and provided that the term will be extended to the point necessary to meet
      the
      requirements of any third party pharmaceutical company collaboration transaction
      then subject to completion.




***Patent
      License Agreement with Roche Molecular Systems, Inc.***




In
      November 2004, we entered into an agreement with Roche pursuant to which we
      obtained a royalty-bearing, non-exclusive, personal, non-transferable license
      to
      use certain licensed technology, including specified nucleic acid amplification
      processes, to perform certain polymerase chain reaction-based human in vitro
      clinical laboratory services.




Roche
      retains all proprietary rights to the licensed technologies and our
      non-exclusive license is limited to the use of the technology as described
      above. Under this agreement, neither party is obligated to defend any
      proprietary rights against third parties for infringement.




In
      consideration for this license, we are obligated to pay royalties to Roche,
      as a
      certain percentage of revenues we receive from performing services using the
      licensed technology. Royalty expense for the years ended December 31, 2007
      and 2006 was $219,721 and $221,861, respectively.




This
      agreement terminates on the date of expiration of the last to expire of the
      patents included in the licensed technology. Roche may immediately terminate
      the
      agreement upon written notice in the event of any material change in our
      ownership or control, or in the event that we breach certain non-assignability
      provisions of the agreement. Roche may also terminate the agreement upon prior
      written notice in the event of any breach or default by us of a material term
      under the agreement. The agreement will automatically terminate upon our entry
      into bankruptcy or similar proceedings.




***Services
      Agreement with Taiho Pharmaceutical Co., Ltd.***




In
      July
      of 2001, we entered into an agreement with Taiho pursuant to which we will
      provide Taiho with molecular-based tumor analyses for use in guiding
      chemotherapy treatment for cancer patients using RGI-1, for use in its business
      developing and marketing pharmaceutical and diagnostic products for use against
      cancer. Pursuant to the agreement, we appointed Taiho as the exclusive purchaser
      in Japan of tests and testing services based upon RGI-1 using gene expression
      for: (i) any one or the combination of specified molecular markers,
      (ii) the therapeutic use of specified compounds, or (iii) the
      diagnosis or therapeutic treatment of specified precancerous and cancerous
      diseases. We also granted Taiho the right to be a non-exclusive purchaser in
      Japan of tests and testing services based upon RGI-1 using gene expression,
      other than those for which Taiho has exclusivity, for: (i) any one or
      combination of molecular markers, (ii) the therapeutic use of any compound
      or biological product against cancer, or (iii) the diagnosis or therapeutic
      treatment of precancerous and cancerous diseases.




We
      are
      obligated to notify Taiho of new molecular markers, therapeutic compounds and
      diseases for which RGI-1 may be useful and to offer Taiho the option of
      including those within its exclusivity. Taiho must perform all testing services
      pursuant to our instructions and we retain the right to process some or all
      of
      the testing services for Taiho internally, or through any other designated
      and
      licensed laboratory; provided that such other laboratory is under an appropriate
      obligation of confidentiality with respect to this agreement.




In
      consideration for the testing services provided, Taiho made a fixed amount
      advanced payment to us and is obligated to pay regular testing fees, covering
      the specific services performed on a monthly basis. Taiho is obligated to
      purchase a minimum amount of testing services from us during each calendar
      quarter. Revenue recognized under this agreement for the years ended December
      31, 2007 and 2006 was $2,864,425, and $2,745,125, respectively. We obtained
      a
      non-exclusive sublicense from the University of Southern California for Taiho
      for distribution of the testing services in Japan. We retain all intellectual
      property rights to our proprietary testing services and materials, other than
      specimens provided by Taiho, and all related patent applications. Provided
      that,
      however, Taiho retains all intellectual property rights to the results of the
      testing services performed under the agreement.




15




Taiho
      has
      agreed to indemnify us against any damages claims brought by third parties
      based
      on the distribution of the testing services; any claims related to false
      advertising or unfair competition; and any regulatory challenges. We have agreed
      to indemnify Taiho against claims of intellectual property infringement related
      to the testing services. Both parties have agreed to indemnify one another
      against any breaches of warranties or failures to perform obligations under
      the
      agreement. We have agreed to maintain comprehensive general liability insurance
      for the term of the agreement and for a specified period thereafter. Either
      party has the right to terminate the agreement in the event of an uncured
      material breach by the other party, upon written notice, or for cause, as
      defined under the agreement. Since we do not hold a patent for RGI-1 in Japan,
      we have agreed to negotiate to adjust Taiho’s fee obligations in the event that
      a third party obtains a patent for similar testing services in Japan and offers
      those services at a competitive rate. In the event that we cannot reach an
      agreement Taiho has the right to terminate the agreement upon fulfilling certain
      notice obligations. In addition, should Taiho terminate the agreement for cause,
      Taiho retains the right to have Dr. Peter Danenberg and/or Kathleen
      Danenberg provide the testing services in the same manner as we provide them
      under the agreement. This agreement with Taiho was renewed for an additional
      two
      years and expires on January 1, 2010.




***Services
      Agreement with SmithKline Beecham Corporation (d.b.a. GlaxoSmithKline)
      (“GSK”)***




In
      January 2006, we entered into an agreement with GSK, pursuant to which we
      provide services in relation to profiling the expression of various genes from
      a
      range of human cancers. Under the agreement, we will provide GSK with testing
      services as described in individual protocols and GSK will pay us for such
      services based on the pricing schedule established for each particular protocol.
      GSK is obligated to make minimum annual payments to us under the agreement
      and
      also was obligated to make a non-refundable upfront payment to us of $2,000,000,
      of which $600,000 was recognized as revenue during the year ended
      December 31, 2006, to be credited against work undertaken pursuant to the
      agreement. The contract also provides for minimum annual assay testing
      requirements over a three year period ending January 2009. The minimum amount
      of
      revenue to be recognized during the term, which will expire in January 2009,
      will be $6,500,000. Revenue recognized under this agreement for the year ended
      December 31, 2006 and December 31, 2007, was $2,374,800 and $2,818,288,
      respectively. GSK retains the rights to any intellectual property resulting
      from
      our performance of the testing activities contemplated under the agreement,
      and
      we have agreed to cooperate with and assist GSK with taking any steps necessary
      for obtaining copyright protection for such intellectual property. We retain
      all
      intellectual property rights to our proprietary testing and gene production
      processes and all related patents.




Both
      parties have agreed to indemnify one another mutually against any liabilities
      to
      third parties arising from a party’s negligence or failure to perform activities
      contemplated under the agreement or as a result of any material breaches of
      the
      agreement by a party, or an employee or affiliate of that party. The initial
      term of the agreement will extend until January 2009, at which point, GSK has
      the right to extend the agreement for up to two one-year periods. Subsequently,
      the parties have the option to extend the agreement for one-year renewal periods
      upon their mutual written consent. GSK has the right to terminate the agreement
      or any particular study to be performed under the agreement, with or without
      cause, upon prior written notice to us. Either party may terminate the agreement
      upon written notice, for uncured material breach or for cause, as defined under
      the agreement.




***Master
      Laboratory Test Services Agreement with GlaxoSmithKline Biologicals (“GSK
      Bio”)***




In
        December 2006, we entered into an agreement with GSK Bio, the vaccine division
        of GlaxoSmithKline, pursuant to which we will provide testing services,
        principally in relation to profiling the expression of various genes from
        a
        range of human cancers, primarily through a laboratory we are establishing
        in
        Scotland, in part using funding provided by GSK Bio. We will conduct the
        testing
        services on tissue specimens provided by GSK Bio pursuant to various statements
        of work governed by this agreement and GSK Bio will pay us for the testing
        services based on pricing schedules outlined in part in the agreement and
        further in each of those statements of work. The agreement required that
        GSK Bio
        make an upfront payment of $2,620,000 which we received in December 2006.
        The
        agreement further specifies that GSK Bio will pay annual minimum payments
        in
        2007, 2008 and 2009 and that the upfront payment made in December 2006 will
        be
        credited against the annual minimum payments in 2007 and 2008. The agreement
        also provides that any differences between the annual minimum payments made
        in
        2007, 2008 or 2009 and the amounts due to us for testing services performed
        on
        specimens submitted by GSK Bio during the years the three years ended December
        31, 2009 be credited towards services performed during the year ending December
        31, 2010, the final year of the agreement. In December 2007 we amnded our
        agreement with GSK Bio whereby GSK Bio would make the remaining minimum payments
        under the agreement in one lump sum. This payment was received in January
        2008.
        The minimum amount of revenue to be recognized during the term of this contract,
        which will expire in December 2010, is approximately $7,300,000. The timing
        of
        the recognition of these amounts is dependent upon when GSK submits the
        specimens for testing. We did not recognize any revenue from this agreement
        in
        2006. We recognized $938,701 of revenue under this agreement for the year
        ended
        December 31, 2007.




GSK
        Bio
        retains intellectual property rights to all inventions, improvements and
        data
        resulting from the testing services and bears the full expense of patent
        prosecution and enforcement, trademark prosecution and otherwise securing
        the
        intellectual property rights of such inventions, improvements and data. We
        retain all intellectual property rights related to our testing services,
        proprietary processes and all associated intellectual property and bear the
        full
        responsibility for prosecuting and maintaining our intellectual property
        rights.
        We have agreed to joint ownership by us and GSK Bio of any improvements to
        our
        intellectual property that occur in the course of our providing the testing
        services. GSK Bio has the discretion to seek patent protection for the joint
        intellectual property at its own expense and if it declines to do so, we
        have
        the right to seek patent protection at our expense. All intellectual property
        owned by either party on the date of this agreement remains the exclusive
        property of the owning party. We and GSK Bio have agreed to mutually indemnify
        one another against all claims arising based on the agreement.




16




The
      agreement continues until December 31, 2010 or until the completion of the
      recruitment phase of a specific trail of GSK Bio, as contemplated by the
      agreement. GSK Bio has the right to terminate the agreement at anytime, upon
      prior written notice to us. Either party may terminate the agreement for uncured
      material breach, if the other party enters into bankruptcy or similar
      proceedings, or if the other party is unable to perform its obligations under
      the agreement for a period of more than three months due to force
      majeure.




***Service
      Provider Agreement with Affymetrix***




In
      September 2006, we entered into an agreement with Affymetrix, pursuant to which
      Affymetrix has granted us a non-exclusive, non-transferable, non-sublicensable
      license to use its GeneChip(R) microarrays to provide our pharmacogenomic
      testing services to our academic, biotech and other industrial clients. Under
      this agreement, we work with Affymetrix pursuant to a formal service provider
      arrangement. Prominent among the features of this arrangement is that each
      party
      has the right to use the other party’s trademarks and logos in the course of
      advertising and marketing their own products and services. However, such right
      may be terminated at the option of either party if the other party’s use does
      not meet the first party’s usage policy. Except as expressly agreed to,
      Affymetrix retains all rights or licenses to any patents or other intellectual
      property owned or licensable by it. This agreement also greatly expands our
      right to market and sell the results of our pharmacogenomic testing using
      Affymetrix’s proprietary probe arrays. We pay Affymetrix based on the number of
      their probe arrays we use on a quarterly basis, pursuant to pricing schedules
      broken down by the type of client to whom we are providing our services. In
      addition, our clients also may purchase probe arrays directly from Affymetrix
      and direct that Affymetrix ship those probe arrays to us, for dedicated use
      in
      conducting pharmacogenomic testing services for such clients. During the years
      ended December 31, 2006 and December 31, 2007, we paid $375,522 and $379,702,
      respectively, to Affymetrix under this agreement.




We
      have
      agreed to grant Affymetrix a non-exclusive, worldwide, fully sublicensable,
      fully paid-up, royalty-free, irrevocable, perpetual license to all product
      improvements that result from our use of the probe arrays. We have the right
      to
      request that Affymetrix design and manufacture, under terms of strict
      confidentiality, custom probe arrays or custom nucleic acid probe panels for
      specific sets of nucleic acid target sequences. We agree to indemnify Affymetrix
      for all liabilities to third-parties arising from or relating to such target
      sequences or their use.




This
      agreement has an initial term of one year, with the option for renewal for
      an
      additional one-year term upon mutual agreement of the parties. Affymetrix has
      the right to terminate the agreement for cause, upon 30 days written notice,
      (i)
      if it receives two or more substantial client complaints in a one-year period
      regarding the services we are providing to our clients, (ii) if it determines
      that we have failed to maintain a high level of service, or (iii) if it
      determines that we have failed to successfully meet the requirements of any
      reasonable technical or scientific audits administered by
      Affymetrix.




***Arrangement
      with Applied Biosystems***




In
        December 2005, we entered into an arrangement with Applied Biosystems pursuant
        to which we will purchase from them certain RT-PCR assay kits and associated
        primers and probes for use in our pharmacogenomic tests. Using its proprietary
        technology, Applied Biosystems designs and manufactures a variety of products
        for use in various genetic and related analytic assays. Under this arrangement,
        we purchase assay kits built around standard oligonucleotide sequences (short
        fragments of DNA) and we can request that Applied Biosystems produce kits
        containing custom oligonucleotide sequences for us. Specifically, we have
        been
        purchasing the Taqman assay kit, one of the primary tools used in our
        pharmacogenomic tests from Applied Biosystems. We pay for the kits per-order,
        based on pricing terms published and updated regularly by Applied Biosystems.
        Payments are due 30 days from the date of the invoice but the term of payment
        may be extended on credit. Applied Biosystems retains the right at all times
        to
        change any payment and credit arrangements and, if it determines we have
        become
        uncreditworthy, to refuse payment on credit and to assess late payment charges
        for any outstanding amounts. This agreement is terminable at will by either
        party. During
        the years ended December 31, 2006 and 2007, we paid $352,805 and $385,835,
        respectively, to applied Biosystems under this
        agreement.




Applied
      Biosystems’ terms of sale provide that Applied Biosystems will indemnify us from
      and against any infringement damages finally awarded based on claims by third
      parties that the manufacture or sale of the purchase infringe patent or other
      intellectual property rights of such third parties. With regard to alleged
      infringement claims, Applied Biosystems has the option either to procure for
      us
      the right to continue using the product; or to replace or modify the product
      so
      that it becomes non-infringing; or to require us to return the product and
      refund the price actually paid, less a reasonable amount for any use, damage
      or
      obsolescence; or to substitute another suitable non-infringing product for
      the
      infringing product.




17




Applied
      Biosystems retains the rights to any inventions, discoveries, improvements,
      and
      other intellectual property that are conceived, developed, reduced to practice,
      or generated by Applied Biosystems or jointly with us that relate to the design
      or manufacture of assay kits and associated primers and probes. Applied
      Biosystems agrees to maintain the confidentiality of any confidential
      information we disclose to them for a period of seven years following
      disclosure.




***Agreement
      with Shanghai BioChip***




In
      March
      2007, we entered into a collaboration agreement with Shanghai BioChip Company,
      Ltd. (“SBC”) pursuant to which SBC will provide pharmacogenomic testing services
      in China using our RGI-1 extraction technology. Under this agreement, we work
      with SBC pursuant to a formal statement of work (“SOW”) arrangement. This
      agreement greatly expands our ability to provide our services globally,
      particularly in China. Specifically, this agreement allows us to collaborate
      with some of our current clients in the pharmaceutical industry as we can now
      process specimens collected during clinical trials that are based in China.
      Additionally, this agreement allows us to offer our services to companies within
      China.




Pursuant
      to the agreement, we have granted SBC an exclusive license in China to provide
      services in China using our proprietary RGI-1 RNA extraction technology. Subject
      to consent from the University of Southern California, we will grant SBC an
      exclusive sublicense to patents licensed from the University of Southern
      California for distribution of testing services in China. In turn, SBC will
      perform RNA extraction from FFPE tissue specimens exclusively for us during
      the
      term of the agreement. SBC must perform all testing services pursuant to our
      instructions and we retain the right to generate and report all final results.
      All proposed contracts from SBC using our testing services must be explicitly
      approved in writing by us. We have also retained the rights to any intellectual
      property which result from the performance of this collaboration
      agreement.





Outside
      of certain shared costs, as specified in the agreement, we and SBC each are
      individually and separately responsible for our own costs. Specifically, we
      are
      responsible for costs related to royalty payments to third parties under
      existing licensing agreements, license fees for our intellectual property and
      the salary of the General Manager of the facility, costs associated with the
      analysis of raw data from test results, costs associated with generating final
      reports to customers, costs of responding to customer inquiries regarding the
      results of analysis the data and the report of test results, and costs
      associated with providing training and assistance with laboratory setup.




SBC
      is
      responsible for expenses related to the initial cost of laboratory equipment,
      as
      well as the cost of any additional equipment necessary as a result of increases
      in volume of business; maintenance or service fees and expenses for the existing
      testing equipment; the cost of reagents; the cost of qualified laboratory space,
      including any rent for such space; expenses and salaries associated with
      laboratory personnel, including the Vice-General Manager and necessary FTE
      personnel to perform collaboration services; the costs of responding to customer
      inquiries regarding the performance of the testing, storage of the samples
      and
      other record keeping; and the costs associated with training and commencement
      of
      operations.




Our
      agreement with SBC has an initial term of five years, with an automatic renewal
      for an additional three-year term unless either party gives 90 days notice
      in
      advance of the renewal date of its intent not to renew. We may terminate the
      agreement on the occurrence of: (i) errors in SBC’s processing of samples that
      exceeds levels in our other facilities; (ii) the inability to achieve laboratory
      qualifications within 12 months; (iii) the failure to adequately address quality
      concerns raised by two or more customers; and (iv) refusal by SBC to agree
      on a
      reasonable request for a SOW. Either party may terminate this agreement for
      uncured material breach, insolvency or bankruptcy, or substantial use of the
      name of the other party without consent.




**Agreement
      with****Hitachi
      Chemical Co., Ltd.**




On
        July
        26, 2007, we entered into a collaboration agreement with Hitachi Chemical
        Co.,
        Ltd. (“Hitachi”), a leading diagnostics manufacturer in Japan (the “Hitachi
        Agreement”). Under the terms of this agreement, Hitachi will begin using our
        proprietary and patented techniques to extract genetic information from
        formalin-fixed paraffin-embedded (FFPE) tissue samples collected in Southeast
        Asia, Australia and New Zealand. As part of this collaboration agreement,
        we
        will provide Hitachi with the technical information and assistance necessary
        to
        perform the testing services. Hitachi also plans to introduce us to potential
        new testing services customers in the region to expand the testing of FFPE
        clinical samples in Asia. The Southeast Asian countries covered under this
        agreement include Japan, North Korea, South Korea, Taiwan, Mongolia, Pakistan,
        Bangladesh, Sri Lanka, Nepal, Singapore, Malaysia, Indonesia, Brunei, Thailand,
        Myanmar, Laos, Cambodia, Vietnam and the Philippines (the
“Territory”).





Our
        agreement with Hitachi has an initial term of three years, expiring on March
        31,
        2010, with an automatic renewal for one year at the end of the original period
        under the same terms and conditions. Pursuant to the agreement, Hitachi will
        receive a percentage of the revenue, as provided in the agreement, collected
        from our clients in the Territory, for its testing services performed.





Hitachi
        is responsible for expenses related to the cost of laboratory equipment and
        modification to the laboratory facilities, as well as the cost of reagents.
        We
        are responsible for costs related to additional laboratory equipment which
        shall
        be provided to Hitachi according to a separate equipment lease agreement
        which
        is not currently in effect.




18




**Intellectual
      Property**




We
      rely
      on a combination of patents, trade secret, copyright and trademark laws, license
      agreements, nondisclosure and other contractual provisions and technical
      measures to protect our intellectual property rights in our products, technology
      and processes. We have proprietary rights in four areas.




First,
      we
      exclusively license from USC the use of the RGI-1 extraction method, which
      has
      been patented in the United States. Currently, this exclusive license includes
      four United States patents related to this technology. We use this patented
      method when processing specimens, particularly isolating RNA from FFPE tissue,
      as part of our contractual obligations with various clients, including Taiho
      and
      Roche. We also have proprietary rights in additional variations on the RGI-1
      extraction technology, for which patent applications are pending in the United
      States and abroad. We also use or intend to use these proprietary methods when
      meeting our contractual obligations with various clients and when developing
      diagnostic tests for cancer. We intend to protect these proprietary
      technologies, including our RGI-2 extraction method, by filing patent
      applications in the United States and abroad.




Next,
      we
      have identified and are in the process of identifying tumor response markers,
      which provide an indication of an anti-cancer drug’s effectiveness or
      ineffectiveness based upon the level of such determinant in a particular tumor.
      We intend to protect these proprietary developments to the extent allowable
      under current law. We have patented and have patent applications pending related
      to certain tumor response markers in the United States and abroad. For example,
      we have patented methods of quantifying expression of response markers from
      tumor tissue, which provide guidance in determining appropriate chemotherapeutic
      regimens for patients that are candidates for treatment with particular
      chemotherapies. Currently, we have eleven United States patents that relate
      to
      certain tumor markers.
      Such markers include thymidylate synthase (TS), dihydropyrimidine dehydrogenase
      (DPD), excision repair gene CC1 (ERCC1), glutathione-s transferase pi (GST-π),
      epidermal growth factor receptor (EGFR) and HER2/neu gene. We use some of these
      patented methods
      as part of our contractual obligations with various clients. Additionally,
      we
      are in the process of licensing the use of our HER2/neu method to
      clients.




Additionally,
      we have proprietary rights in our database, in which we have compiled the
      results of our analysis of archived paraffin-embedded tissue specimens, clinical
      trials, and recently received patient tissue specimens in establishing response
      determinants for anti-cancer drugs, and in which we are continuing to compile
      data. We have protected and will continue to protect this database as a trade
      secret.




Finally,
      we have proprietary rights and know-how in the factors which allow us to
      standardize the quantitative gene expression levels used in our database, and
      the computation of such values from the readings provided by the laboratory
      equipment used in the analysis of the mRNA extracted from a patient’s tumor,
      using our proprietary conversion factors.







We
      have
      and will continue to pursue the registration of our trademarks in the United
      States and internationally. Response Genetics, RGIonline.com, Danenberg Tumor
      Profile, Man in Circle Design, and DTP are registered trademarks in the United
      States. We intend to protect additional marks by filing trademark applications
      in the United States and abroad. We currently hold the domain names www.responsegenetics.com and
      www.responsedx.com.




We
      intend
      to broaden the scope of our intellectual property and consider our technologies
      and proprietary know-how to be critical to our future success.




**Regulation**




***CLIA***




The
        Clinical Laboratory Improvement Amendments of 1988, or CLIA, provide for
        the
        regulation of clinical laboratories by the United States Department of Health
        and Human Services (DHHS). This law requires the certification of clinical
        laboratories that perform
        tests for the purpose of diagnosing, preventing or treating any disease or
        condition affecting humans and imposes specific conditions for
        certification. CLIA is intended to ensure the accuracy, reliability and
        timeliness of patient test results performed in clinical laboratories in
        the
        United States by mandating specific standards in the areas of personnel
        qualification, administration participation in proficiency testing, patient
        test
        management, quality control, quality assurance and inspections. CLIA regulations
        also contain guidelines for the qualification, responsibilities, training,
        working conditions and oversight of clinical laboratory employees. In addition,
        specific standards are imposed for each type of test that is performed in
        a
        laboratory. The categorization of commercially marketed in vitro diagnostic
        tests under CLIA is the responsibility of the FDA. The FDA will assign
        commercially marketed test systems into one of three CLIA regulatory categories
        based on their potential risk to public health. Tests will be designated
        as
        waived, of moderate complexity or of high complexity. CLIA and the regulations
        promulgated thereunder are enforced through quality inspections of test methods,
        equipment, instrumentation, materials and supplies on a periodic basis.




We
      are
      subject to governmental regulation at the federal, state, and local levels
      as a
      clinical laboratory. We are subject to DHHS regulations, which mandate that
      all
      clinical laboratories be certified to perform testing on human specimens and
      provide specific conditions for certification. CLIA and related regulations
      thereunder are enforced through survey and inspections every two years.
      Moreover, CLIA inspectors may make random inspections of our laboratory. We
      are
      CLIA registered and any change in CLIA or regulations thereunder or in the
      interpretation thereof could have a material adverse effect on our business.




19




***Other
      Laboratory Regulations***




CLIA
        does
        not preempt state laws that are more stringent than federal law. Since March
        26,
        2007, we have been a licensed clinical laboratory in California. This license
        is
        valid until March 14, 2009. We have submitted the necessary paperwork to
        extend
        our license for another year. California laws establish standards for day-to-day
        operation of our clinical laboratory, including the training and skills required
        of personnel and quality control. Moreover, several states require that we
        hold
        licenses to test specimens from patients residing in those states. We are
        in the
        process of submitting our applications in several states, including Florida,
        New
        York and Pennsylvania. We may elect to provide tests in other states
        that have similar requirements and other states may adopt similar
        requirements in the future. Finally, we may be subject to regulation in foreign
        jurisdictions if we seek to expand offering our tests or distribution of
        our
        tests internationally.




If
        we
        lose our California license, we would not be able to sell tests for prospective
        clinical trials which would limit our revenues and harm our business. If
        we were
        unable to obtain or lost necessary licenses in other states, we would not
        be
        able to test specimens from those states.




***HIPAA
      Compliance and Privacy Protection***




The
        Health Insurance Portability and Accountability Act of 1996 (HIPAA) established
        comprehensive federal protection for the privacy and security of health
        information. The HIPAA standards apply to three types of organizations: health
        plans, health care clearing houses, and health care providers who conduct
        certain health care transactions electronically, or “Covered Entities.” Covered
        Entities must have in place administrative, physical and technical standards
        to
        guard against the misuse of individually identifiable health information.
        Additionally, some state laws impose privacy protections more stringent than
        HIPAA’s. There are also international privacy laws, such as the European Data
        Directive, that impose restrictions on the access, use, and disclosure of
        health
        information. All of these laws may impact our business. As of December 31,
        2007,
        we were not a Covered Entity subject to HIPPA privacy and security standards.
        Subsequent to this filing, however, we expect to become a Covered Entity
        as we
        anticipate that our testing services will become reimburseable by insurance
        payors prompting us to conduct covered healthcare transactions electronically.
        We are in the process of forming an active program designed to address HIPAA
        regulatory compliance. Regardless of our own Covered Entity status, HIPPA
        presently applies to many of the facilities and physicians from which we
        obtain
        tissue specimens and associated clinical information. In addition to the
        federal
        privacy regulations, our activities must also comply with other applicable
        state
        laws regarding privacy and confidentiality of health information that are
        applicable to clinical laboratories. We believe we have taken the steps required
        for us to comply with health information privacy and confidentiality statutes
        and regulations under both federal and applicable state jurisdictions. However,
        we may not be able to maintain compliance in all jurisdictions where we do
        business. Our failure to comply with these privacy laws or significant changes
        in the laws restricting our ability to obtain tissue specimens and associated
        patient information could significantly impact our business and our future
        business plans.


***FDA***
  The
          type
          of regulation to which our products will be subject will depend in large
          part on
          how we or our partners intend to commercialize them. Products that will
          be
          commercialized as *in
          vitro* diagnostic kits will be subject to review by the FDA and must be cleared
          or
          approved before they can be marketed. Tests that are available as clinical
          laboratory services have historically not been subject to regulation by
          the FDA
          but will be subject to other requirements and may become subject to FDA
          regulation.
 
 The
          FDA
          regulates the sale or distribution of medical devices, including *in
          vitro* diagnostic test kits. The information that must be submitted to the FDA
          in order
          to obtain clearance or approval to market a new medical device varies depending
          on how the medical device is classified by the FDA. Medical devices are
          classified into one of three classes on the basis of the controls deemed
          by the
          FDA to be necessary to reasonably ensure their safety and effectiveness.
          Class I
          devices are subject to general controls, including labeling, pre-market
          notification and adherence to the FDA’s quality system regulation, which are
          good manufacturing practice regulations for medical devices. Class II devices
          are subject to general controls and special controls, including performance
          standards and post-market surveillance. Class III devices are subject to
          most of
          the previously identified requirements as well as to pre-market approval.
          Most *in
          vitro* diagnostic kits are regulated as Class I or II devices and are either exempt
          from pre-market notification or require a 510(k) submission.
  ***510(k)
          Pre-Market Notification***
  A
          510(k)
          notification requires the sponsor to demonstrate that a medical device
          is
          substantially equivalent to another marketed device that is legally marketed
          in
          the United States and for which a pre-market approval, or PMA, was not
          required.
          It does not generally require supporting clinical data, but a 510(k) for
          a
          diagnostic device will need to contain, at a minimum, performance data.
          A device
          is substantially equivalent to a predicate device if it has the same intended
          use and technological characteristics as the predicate or has the same
          intended
          use but different technological characteristics, where the information
          submitted
          to the FDA does not raise new questions of safety and effectiveness and
          demonstrates that the device is at least as safe and effective as the legally
          marketed device.
  The
          FDA’s
          goal is to review a 510(k) application in 90 days from the date of receipt
          of
          the submission. However, in practice, clearance may take longer. The FDA
          may
          require information regarding clinical data in order to make a decision
          regarding the claims of substantial equivalence. If the FDA does not believe
          the
          device is substantially equivalent to a predicate device, it will issue
          a “Not
          Substantially Equivalent,” or NSE, decision and designate the device as Class
          III, which will require approval of a PMA application before the device
          may be
          marketed. Alternatively, depending on the nature of the device, the recipient
          of
          an NSE decision may petition the FDA to make a risk-based determination
          of the
          new device and reclassify the new device in Class I or II. This process
          is
          referred to as the de novo process. If the FDA agrees with the petition,
          the new
          device will be reassigned to the appropriate lower Class. If it does not
          agree,
          the sponsor will have to submit a PMA.
 
 ***Pre-Market
          Approval***
  The
          PMA
          process consists of a scientific and regulatory review to evaluate the
          safety
          and effectiveness of Class III medical devices. The PMA process is considerably
          more time consuming and expensive than the 510(k) route, and the application
          must be supported by scientific evidence, including clinical data, to
          demonstrate the safety and efficacy of the medical device for its intended
          purpose.
  The
          FDA’s
          goal is to review a PMA in 180 days, although in practice this review time
          is
          longer. Questions from the FDA, requests for additional data and referrals
          to
          advisory committees may delay the process considerably. Indeed, the total
          process may take several years and there is no guarantee the PMA will ever
          be
          approved, or if approved, the FDA may limit the market to which the device
          may
          be marketed. The FDA may also request additional clinical data as a condition
          of
          approval or after the PMA is approved. Any changes to the medical device
          may
          require a PMA supplement to be submitted and approved.
  ***Laboratory
          Developed Tests***
  The
          FDA
          has consistently claimed that it has the regulatory authority to regulate
          laboratory-developed tests that are validated by the developing laboratory.
          However, it has generally exercised enforcement discretion in not otherwise
          regulating most tests developed by CLIA-certified laboratories. Recently,
          the
          FDA indicated that it was reviewing the regulatory requirements that will
          apply
          to laboratory-developed tests, and in July 2007, it published a revised
          draft
          guidance document, or the Draft Guidance, that may be relevant to tests
          developed by us. The Draft Guidance describes the FDA’s current thinking about
          potential regulation of *In
          Vitro* Diagnostic Multivariate Index Assays, or IVDMIAs,
          and provided examples of the types of tests that would be subject to
          the Draft Guidance. An IVDMIA is defined by the FDA as a device that combines
          the values of multiple variables using an interpretation function to yield
          a
          single patient-specific result intended for use in the diagnosis of a disease
          or
          other condition or is used in the cure, mitigation, treatment, or prevention
          of
          disease, and provides a result whose derivation is non-transparent and
          cannot be
          independently derived or verified by the end user. The FDA has indicated
          that it
          believes that most IVDMIAs will be either Class II or III devices.
 
 The
          first
          version of the Draft Guidance and related discussions about IVDMIAs have
          attracted the attention of the U.S. Congress and in March 2007, the Laboratory
          Test Improvement Act was introduced in the U.S. Senate. The bill, if enacted
          into law, would mandate that all providers of laboratory-developed tests
          provide
          evidence to the FDA that verifies the analytical validity of such tests.
          It
          would also require the development of a mechanism for the enhanced reimbursement
          of cleared and approved *in
          vitro* diagnostic products and laboratory-developed tests. The bill was referred
          to
          committee and no further action has been taken as of the date of this
          prospectus.


20




***Federal
          and State self-referral Laws***
  Our
            relationships with surgeons, hospitals and other providers are subject
            to
            scrutiny under various federal anti-kickback, self-referral, false claims
            and
            similar laws, often referred to collectively as healthcare fraud and
            abuse laws.
            Healthcare fraud and abuse laws are complex, and even minor, inadvertent
            violations can give rise to claims that the relevant law has been violated.
            Possible sanctions for violation of these fraud and abuse laws include
            monetary
            fines, civil and criminal penalties, exclusion from federal and state
            healthcare
            programs, including Medicare and Medicaid, and forfeiture of amounts
            collected
            in violation of such prohibitions. Certain states in which we intend
            to market
            our products have similar fraud and abuse laws, imposing substantial
            penalties
            for violations. Any government investigation or a finding of a violation
            of
            these laws would likely result in a material adverse effect on the market
            price
            of our common stock, as well as our business, financial condition and
            results of
            operations.
  Anti-kickback
            laws and regulations prohibit any knowing and willful offer, payment,
            solicitation or receipt of any form of remuneration in return for the
            referral
            of an individual or the ordering or recommending the use of a product
            or service
            for which payment may be made by Medicare, Medicaid or other
            government-sponsored healthcare programs. We have structured our physician
            relationships with the intention of complying with all applicable laws,
            including the federal ban on physician self-referrals, commonly known
            as the
“Stark
            Law,”
            state
            anti-referral laws and other applicable anti-kickback laws, it is possible
            that
            regulatory or enforcement agencies or courts may in the future view these
            relationships as prohibited arrangements that must be restructured or
            for which
            we would be subject to other significant civil or criminal penalties,
            or
            prohibit us from accepting referrals from these physicians. This could
            harm our
            reputation and the reputations of our physician collaborators. In addition,
            the
            cost of non-compliance with these laws could be substantial since we
            could be
            subject to monetary fines, civil or criminal penalties and we could also
            be
            excluded from federally-funded healthcare programs, including Medicare
            and
            Medicaid, for non-compliance.
   The
            scope
            and enforcement of all of these laws is uncertain and subject to rapid
            change.
            There can be no assurance that federal or state regulatory or enforcement
            authorities will not investigate or challenge our current or future activities
            under these laws. Any investigation or challenge could have a material
            adverse
            effect on our business, financial condition and results of operations.
            Any state
            or federal regulatory or enforcement review of us, regardless of the
            outcome,
            would be costly and time consuming. Additionally, we cannot predict the
            impact
            of any changes in these laws, whether these changes are retroactive or
            will have
            effect on a going-forward basis only.
  ***Corporate
          Practice of Medicine***
  California
            law prohibits business corporations from practicing medicine and from
            employing
            or engaging physicians to practice medicine on their behalf. This prohibition,
            commonly referred to as a prohibition against the corporate practice
            of
            medicine, is intended to prevent interference in the medical decision-making
            process by non-physicians. Violations of this prohibition may result
            in civil or
            criminal fines, as well as sanctions imposed against us or the physician,
            or
            both, through licensing proceedings. We believe that we have structured
            our
            relationships with physicians in such a way that is permissible under
            California
            law and that does not violate corporate practice prohibitions. However,
            there
            can be no guarantee that regulators will find our arrangements suitable.


***Good
      Laboratory Practice (GLP)***




We
      are
      subject to various regulatory requirements designed to ensure the quality and
      integrity of our testing processes. Our standard operating procedures are
      written in accordance with applicable regulations and guidelines for operating
      in the United States. The industry standards for conducting preclinical
      laboratory testing are embodied in Good Laboratory Practice regulations, or
      GLP,
      regulations promulgated by the FDA. In the United States, non-clinical studies
      intended for FDA submission must be conducted in accordance with GLP; foreign
      governments may require our North American clients to comply with certain
      regulatory requirements of other countries (in order to gain approval within
      these countries), such as regulations promulgated by the Japanese Ministry
      of
      Health, Labor and Welfare and Ministry of Agriculture, Forestry and Fisheries,
      and in Europe, the Organisation for Economic Co-operation and Development.
      GLP
      regulations specify requirements for facilities, equipment, and professional
      staff and standardized procedures for conducting studies, including procedures
      for recording and reporting data and for managing study materials and records.
      In addition, we have established a required quality assurance program that
      monitors ongoing compliance with GLP regulations by auditing test data and
      reporting and conducting inspections of testing procedures.




Our
      business is also subject to regulation under state and federal laws regarding
      environmental protection and hazardous substances control, such as the Federal
      Occupational Safety and Health Act, the Environmental Protection Act, and Toxic
      Substances Control Act. These regulations, among other things, require work
      practice controls, protective clothing and equipment, training and other
      measures designed to minimize exposure to chemicals and transmission of
      pathogens. We believe that we are in compliance with these and other applicable
      laws and that the costs of our ongoing compliance will not have a material
      adverse effect on our business. However, statutes and regulations applicable
      to
      our business may be adopted which impose substantial costs to assure compliance
      or otherwise materially adversely affect our operations.




***Reimbursement
        and Coverage***




Revenues
        for clinical laboratory testing services come from a variety of sources and
        depend significantly on the availability of third-party reimbursement, including
        from Medicare and Medicaid programs, commercial insurers and managed care
        organizations. We are in the process of becoming a Medicare laboratory services
        provider and intend to become a Medicaid laboratory services provider. We
        anticipate that third-party payors may provide reimbursement for our testing
        services. However, we believe that the majority of our payors will pay
        for our testing services at varying levels that may differ
        from our list prices. Obtaining reimbursement from third-party payors will
        be
        both time consuming and expensive. Payment from third-payors may not
        be sufficient to allow us to sell our services on a profitable and
        competitive basis.




A
        significant percentage of our revenues from the sales
        of ResponseDX testing services will be derived from the Medicare program.
        Therefore, the reimbursement rules are important to our
        operations. Once Medicare has determined that it will cover a particular
        test, that is provided it as a benefit, payment is generally made under the
        Clinical laboratory Fee Schedule with amounts assigned to specific procedure
        billing codes. Each Medicare carrier jurisdiction has a fee
        schedule that establishes the price for each specific laboratory billing
        code. As a Medicare-participating laboratoy based in California, we will
        bill
        the Medicare program's California contractors and will have to comply with
        this
        contractor's coverage and payment policies.




**Manufacturing**




We
      currently intend to rely on contract manufacturers or collaborative partners
      to
      produce materials necessary for our research and development efforts and to
      produce our diagnostic tests. We plan to continue to rely on these manufacturers
      and collaboration partners to manufacture these materials if any of our
      diagnostic tests is approved for marketing by the FDA or any foreign regulatory
      authority. We do not have manufacturing experience. We may not be able to
      identify or enter into satisfactory agreements with collaborative partners.




**Information
      Technology**




We
      have
      implemented an internally developed database system that is used to perform
      tracking, evaluation, and reporting of laboratory specimens as they are
      analyzed. The database system is maintained using application software
      consisting of a multi-tier MS SQL Server application using Thin Crystal reports
      for data reporting. Analysis results are imported from TaqMan(R) PCR
      instruments. The application platform consists of a Windows 2000 server on
      the
      back end, with Windows XP Professional workstations as clients operating within
      the corporate Local Area Network (“LAN”). We also make use of commercial
      software applications that allow biostatistical analysis of data generated
      from
      chip array studies. These systems will be used in the facilities developed
      overseas by us to ensure that results from sample processing are consistent
      from
      location to location.




21




Pursuant
      to a services agreement with Jubilant Biosys Ltd. (“Jubilant”), we have
      purchased software that allows us to integrate all of our laboratory database
      systems. Additionally, this software enables us to have a unified database
      system in all of our locations, particularly those located overseas, and to
      provide worldwide bioinformatics services. This unified database system replaced
      the previous RGI laboratory database systems.




We
      employ
      a LAN configured as a switched Ethernet network over the TCP/IP protocol
      supporting the responsegenetics.com domain. This LAN hosts the basic business
      functions for us including office applications, electronic mail, general
      ledger/accounting software, internet connectivity etc. A similar configuration
      will be established in our new facilities as needed to support business
      efficiency.




Specimen
      storage equipment consists of lockable cabinets that are catalogued for the
      storage of paraffin-embedded specimens for our clients. Our database provides
      locator information in order to retrieve these archived specimens as needed.
      In
      addition, we maintain freezers to store frozen tissue specimens. These freezers
      are monitored via computerized probes on a continuous basis to ensure that
      temperatures are maintained at levels necessary to keep these specimens frozen.
      Should temperatures in any of the freezers move out of range due to mechanical
      failure an emergency alert is sent to us for response. These freezers are also
      supported by a freestanding emergency backup generator that will engage in
      the
      event of a general power outage to in order to maintain freezer temperatures
      at
      necessary levels. As we expand globally, similar storage systems will be
      developed at our facilities as necessary to safeguard tissue
      specimens.




**Competition**




We
      provide services in a segment of the healthcare industry that is highly
      fragmented and extremely competitive. Any failure to respond to technological
      advances and emerging industry standards could impair our ability to attract
      and
      retain clients. This industry is characterized by rapid technological change.
      Our actual and potential competitors in the United States and abroad may include
      major pharmaceutical, biotechnology, genomic and diagnostic companies such
      as
      Genomic Health, Inc., and Clinical Data, Inc., large clinical laboratories,
      such
      as Quest Diagnostics, Inc., universities and other research institutions. Many
      of our potential competitors have considerably greater financial, technical,
      marketing, research and other resources than we do, which may allow these
      competitors to discover important information and technology before we do.
      It is
      anticipated that competition will continue to increase due to such factors
      as
      the perceived potential for commercial applications of biotechnology and the
      continued availability of investment capital and government funding for
      cancer-related research. Our competitors may succeed in developing diagnostic
      products that circumvent our technologies or product candidates. Also, our
      competitors may succeed in developing technologies or products that are more
      effective than those that will be developed by us or that would render our
      technology or product candidates less competitive or obsolete.




In
      addition, we are developing our services and product candidates to impact
      certain methods for treating cancer. If those methods change, it is likely
      that
      the demand for our services and product candidates would significantly decline
      or cease altogether. The development of new or superior competing technologies
      or products, or a change in the methodology of treating cancer, could affect
      our
      competitive position and harm our business. Moreover, these competitors may
      offer broader product lines and have greater name recognition than us and may
      offer discounts as a competitive tactic.




Additionally,
      several development-stage companies are currently making or developing product
      candidates that compete with or will compete with our potential products.
      Competitors may succeed in developing, obtaining approval from the FDA or
      marketing technologies or products that are more effective or commercially
      attractive than our potential products or that render our technologies and
      current or potential products obsolete. Competitors may also develop proprietary
      positions that may prevent us from commercializing product
      candidates.




**Employees**




As
        of
        December 31, 2007, we had 43 full-time and part-time employees. We employ
        27 full-time and six part-time employees. Our wholly-owned subsidiary,
        Response Genetics, Ltd. employs 10 full time employees. Our employees
        are not represented by any collective bargaining organizations and we consider
        our relations with our employees to be good.


**Reports
        to Security Holders**
  We
          are a
          Delaware corporation with our principal executive offices located at 1640
          Marengo Street, 6 th Floor,
          Los Angeles, CA 90033. Our telephone number is (323) 224-3900 and our web
          site
          address is www.responsegenetics.com. We make available free of charge
          through the Investor Relations section of our web site our quarterly reports
          on
          Form 10-QSB, our Annual Report on Form 10-KSB, and all amendments to those
          reports as soon as reasonably practicable after such material is electronically
          file with or furnished to the Securities and Exchange
          Commission.




**Item
      2. Description of Property**




Our
        corporate headquarters are located at 1640 Marengo St., Los Angeles, California,
        90033. We sublease 11,271 square feet of space, adjacent to the University
        of
        Southern California, where we perform research and development and
        administrative functions. Our current lease expires on January 31, 2010.
        We
        believe that our facility is sufficient for our U.S. operations in the near
        term. We also sub-lease 180 square feet of space at 103 South Carroll Street,
        Suite 2b, Frederick, Maryland 21701, for administrative purposes. Our current
        lease expires on August 31, 2008.




22




Our
        subsidiary, Response Genetics Ltd., maintains its headquarters at Chancellor’s
        Building, Royal Infirmary of Edinburgh, 49 Little France Crescent, Edinburgh
        Scotland EH16 5JB. We lease 490 square meters of space (approximately 5,275
        square feet of space), where we perform administrative functions and
        laboratory functions. Our current lease expires on March 31, 2010. We believe
        that our facility is sufficient for our European operations in the near
        term.




**Item
      3. Legal Proceedings.**




We
      are
      not a party to any legal proceedings.




**Item
      4. Submission of Matters to a Vote of Security Holders.**




None.




**Part
      II**




**Item
      5. Market for Common Equity and Related Stockholder Matters and Small Business
      Issuer Purchases of Equity Securities.**




Our
          Common Stock is traded on the NASDAQ Capital Market under the symbol "RGDX"
          and
          has been trading since
          our
          initial public offering on June 4, 2007. The following table sets forth
          the
          range of high and low sales prices of
          our
          Common Stock, based on the closing price of our Common Stock on a given
          day, in
          each quarter since our Common Stock
          began trading.


2007First
              
              Second
              
              Third
              
              FourthQuarter
              
              Quarter
              
              Quarter
              
              QuarterStock
                  price - High
              
              
              n/a
              
              $
              7.14
              
              $
              6.95
              
              $
              5.22Stock
                  price - Low
              
              
              n/a
              
              $
              6.95
              
              $
              3.26
              
              $
              2.99




***Recent
        sales of Unregistered Securities; Use of Proceeds from Registerd
        Securities***




On
      June
      8, 2007 we completed our initial public offering of 3,000,000 shares of our
      common stock at $7.00 per share. Net proceeds from the initial public offering
      after deducting underwriting commissions and fees but before expenses were
      $18,950,000. On closing of our initial public offering all of our outstanding
      shares of our preferred stock, including accrued but unpaid dividends,
      automatically converted into 4,360,467 shares of our common stock and all of
      our
      outstanding notes payable, including accrued but unpaid interest, automatically
      converted into 152,489 shares of our common stock. Both of these conversions
      were based on the initial public offering price of $7.00.




We
          expect
          to use the proceeds from our initial public offering for research and
          development, business expansion, and working capital and other general
          purposes.
          Pending such use, the net proceeds from the offering have been invested
          in
          interest-bearing money market accounts. None of the net proceeds from the
          offering were paid directly or indirectly to any of our directors or officers
          (or their associates) or persons owning 10% or more of any class of our
          equity
          securities or to any other affiliate, other than in the form of wages or
          salaries, fees and bonuses paid out in the ordinary course of business.
          We will
          retain broad discretion over the use of the net proceeds received from
          our
          initial public offering. The timing and amount of our actual expenditures
          may
          vary significantly depending on a number of factors, including the successful
          early clinical development of our lead product candidates, cash flows from
          operations and the anticipated growth of our business. We have incurred
          the
          following costs as they relate to our use of proceeds including research
          and
          development costs of $1,217,829, business expansion costs primarily related
          to
          the set up and operation of our European lab of $2,698,927,and $298,974
          of cost
          to establish investor relations and public relations activities necessary
          for a
          public company.
  There
            were no additional sales of unregistered equity securities by the
            Company in the period covered by this annual report.


*Purchases
        of Equity Securities*




The
        Company made no purchases of its equity securities
        in the period covered by this annual report.




**Item
          6. Management's Discussion and Analysis**
  **Selected
          Financial Data**
  The
          following selected consolidated statement of operations data for the years
          ended
          December 31, 2007 and 2006 and the balance sheet data at December 31, 2007
          and
          2006 have been derived from our audited consolidated financial statements,
          which
          are included elsewhere in this report. Historical results are not necessarily
          indicative of the results of operations for future periods. The following
          data
          is qualified in its entirety by and should be read in conjunction with the
          rest of the information contained in this section and our
          consolidated financial statements and related notes included elsewhere
          in this
          report.
  **Consolidated
          Statement of Operations Data:**
  Year
                    ended
                
                Year
                    ended**December 31,**
                  **2007**
                
                **December 31,**
                  **2006******Revenue
                
                $
                7,789,789
                
                $
                6,017,025Operating
                    Expenses:Cost
                    of revenue
                
                $
                4,045,715
                
                $
                2,456,071General
                    and administrative
                
                $
                6,786,890
                
                $
                3,933,660Research
                    and development
                
                $
                2,455,044
                
                $
                1,261,981Operating
                    (loss)
                
                $
                (5,497,860
                )
                $
                (1,634,687
                )Net
                    (loss)
                
                $
                (5,052,907
                )
                $
                (1,357,643
                )Net
                    (loss) per common share:Basic
                
                $
                (0.78
                )
                $
                (0.84
                )Diluted
                
                $
                (0.78
                )
                $
                (0.84
                )Weighted
                    average common shares outstanding:Basic
                
                
                6,987,092
                
                
                2,726,320Diluted
                
                
                6,987,092
                
                
                2,726,320
  **Consolidated
          Balance Sheet data:**
  The
          following table presents balance sheet data as of December 31, 2007 and
          2006 and
          includes:
  ·  the
          conversion of all of our outstanding shares of preferred stock, including
          accrued but unpaid dividends, into 4,360,467 shares of our common stock
          upon
          closing of our initial public offering price of $7.00 per share which occurred
          on June 8, 2007; and
  ·  the
          conversion of all of our outstanding notes payable, including accrued but
          unpaid
          interest, into 152,488 shares of our common stock upon closing of our initial
          public offering price of $7.00 per share which occurred on June 8, 2007;
          and.
  · the
          sale
          of 3,000,000 shares of our common stock upon closing of our initial public
          offering price of $7.00 per share which occurred on June 8, 2007;
          and
  · reflects
          a 0.8-for-1 reverse stock split of the outstanding shares of common
          stock effected upon closing of our initial public offering price of $7.00
          per share which occurred on June 8, 2007.
 **December
                    31,**
                  **2007**
                
                **December
                    31,**
                  **2006****Consolidated
                    Balance Sheet Data:**
                
                ****
                
                ****Cash
                    and cash equivalents
                
                $
                17,024,209
                
                $
                4,930,123Total
                    assets
                
                $
                24,414,033
                
                $
                8,259,681Notes
                    payable to stockholders, including accrued
                    interest
                
                $
                -
                
                $
                1,045,890Accrued
                    dividends on preferred stock
                
                $
                -
                
                $
                6,097,579Convertible
                    preferred stock
                
                $
                -
                
                $
                15,380Total
                    stockholders’ (deficit) equity
                
                $
                15,105,775
                
                $
                (5,502,368
                )




**Managements
        Discussions and Analysis**




Certain
          statements in this report constitute “forward-looking statements.” These
          forward-looking statements involve known or unknown risks, uncertainties
          and
          other factors that may cause the actual results, performance, or achievements
          of
          Response Genetics, Inc. to be materially different from any future results,
          performance or achievements expressed or implied by the forward-looking
          statements. Specifically, the actions of competitors and customers and
          our
          ability to execute our business plan, and our ability to increase revenues
          is
          dependent upon our ability to continue to expand our current business and
          to
          expand into new markets, general economic conditions, and other factors.
          You can
          identify forward-looking statements by terminology such as “may,” “will,”
“should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,”
“predicts,” “potential,” “continues,” or the negative of these terms or other
          comparable terminology. Although we believe that the expectations reflected
          in
          the forward-looking statements are reasonable, we cannot guarantee future
          results, levels of activity, performance or achievements. We undertake
          no
          obligations to publicly update or review any forward-looking statements,
          whether
          as a result of new information, future developments or
          otherwise.
  The
          following discussion of our financial condition and results of operation
          should
          be read in conjunction with our audited financial statements and related
          notes
          to the financial statements included elsewhere in this Annual Report on
          Form
          10-KSB as of December 31, 2007 and 2006 and our audited financial statements
          for
          the year ended December 31, 2005 included in our registration statement
          on Form
          SB-2 previously filed with the SEC. This discussion contains forward-looking
          statements that relate to future events or our future financial performance.
          These statements involve known and unknown risks, uncertainties and other
          factors that may cause our actual results, levels of activity, performance
          or
          achievements to be materially different from any future results, levels
          of
          activity, performance or achievements expressed or implied by these forward
          looking statements.
  **Overview**
  Our
          goal
          is to provide cancer patients and their physicians with a means to make
          informed, individualized treatment decisions based on genetic analysis
          of tumor
          tissues. Our pharmacogenomic analysis of clinical trial specimens for the
          pharmaceutical industry may provide data that will lead to a better
          understanding of the molecular basis for response to specific drugs and,
          therefore lead to individualized treatment. We are focusing our efforts
          in the
          following areas:
 •
                  Launching
                      our ResponseDX tests;
 •
                Developing
                    diagnostic tests for assessing the risk of cancer recurrence,
                    prediction
                    of chemotherapy response and tumor classification in cancer
                    patients;
 
 •
                Expanding
                    our pharmacogenomic testing services business and creating a
                    standardized
                    and integrated testing platform into the major markets of the
                    healthcare
                    industry including outside of the United States;
                    and
  We
          anticipate that, over the next 12 months, a substantial portion of our
          capital
          resources and efforts will be focused on research and development to bring
          to
          market a series of diagnostic tests for cancer patients, to establish a
          pharmacogenomics database that is of commercial value, to establish laboratories
          overseas in collaboration with certain of our current pharmaceutical clients
          and
          for other general corporate purposes.
  Research
          and development expenses represented 16.5 % and 18.3 % of our total operating
          expenses for the years ended December 31, 2006 and December 31, 2007,
          respectively. Major components of the $2,455,044 in research and development
          expenses for the year ended December 31, 2007 included supplies and reagents
          for
          our research activities, personnel costs, occupancy costs, equipment warranties
          and service, patent fees, stock-based compensation and sample procurement
          costs.


23




On
                March
                5, 2007, we entered into a commission agreement with Shanghai Biochip
                (“SBC”).
                As part of the agreement, we will provide SBC with an exclusive license
                in China
                to provide services in China using our RGI-1 technology. In
                turn,
                SBC will perform RNA extraction from FFPE tissue specimens exclusively
                for us
                during the term of the agreement. SBC must perform all testing services
                pursuant
                to our instructions and we retain the right to generate and report
                all final
                results. Our agreement with SBC has an initial term of five years,
                with an
                automatic renewal for an additional three-year term unless either
                party gives 90
                days notice in advance of the renewal date of its intent not to renew. Pursuant
                to the agreement, SBC will receive a percentage of the revenue collected
                from
                clients. Outside
                of certain shared costs, as specified in the agreement, we and SBC
                each are
                individually and separately responsible for our own costs.
  On
                June
                8, 2007 we completed our initial public offering of 3,000,000 shares
                of our
                common stock at $7.00 per share. Net proceeds from the initial public
                offering
                after deducting underwriting commissions and fees and direct expenses
                was
                approximately $17.2 million. Upon the closing of our initial public
                offering all
                of our outstanding shares of our preferred stock, including accrued
                but unpaid
                dividends, automatically converted into 4,360,467 shares of our common
                stock and
                all of our outstanding notes payable, including accrued but unpaid
                interest,
                automatically converted into 152,489 shares of our common stock.
                Both of these
                conversions were based on the initial public offering price of
                $7.00.
  On
            July
            26, 2007, we entered into an agreement with Hitachi Chemical Co., Ltd.
            (“Hitachi”), a leading diagnostics manufacturer in Japan (the “Hitachi
            Agreement”). Under the terms of this agreement, Hitachi will begin using our
            proprietary and patented techniques to extract genetic information from
            formalin-fixed paraffin-embedded (“FFPE”) tissue samples collected in Southeast
            Asia, Australia and New Zealand. As part of this agreement, we will provide
            Hitachi with the technical information and assistance necessary to perform
            the
            testing services. Hitachi also plans to introduce the Company to potential
            new
            testing services customers in the region to expand the testing of FFPE
            clinical
            samples in Asia. The Southeast Asian countries covered under this agreement
            include Japan, North Korea, South Korea, Taiwan, Mongolia, Pakistan,
            Bangladesh,
            Sri Lanka, Nepal, Singapore, Malaysia, Indonesia, Brunei, Thailand, Myanmar,
            Laos, Cambodia, Vietnam and the Philippines. This Agreement has an initial
            term
            expiring on March 31, 2010, with an automatic renewal for one year at
            the end of
            the original period under the same terms and conditions. Pursuant to
            the
            agreement, Hitachi will receive a percentage of the revenue, as provided
            in the
            agreement, collected from the Company's clients in the territory covered
            by the
            agreement, for its testing services performed. Hitachi is responsible
            for
            expenses related to the cost of laboratory equipment and modification
            to the
            laboratory facilities, as well as the cost of reagents. The Company is
            responsible for costs related to additional laboratory equipment which
            shall be
            provided to Hitachi according to a separate equipment lease
            agreement.
  On
            August
            24, 2007, the board of directors increased the size of the board to six
            members
            and elected Gary Nusbaum to the board as a director of the Company. The
            board
            also determined that Mr. Nusbaum is an “independent director” pursuant to the
            requirements for memberships established by NASD Market place Rule 4350(c)(4).
            We filed a Form 8-K on September 6, 2007 reporting this
            event.
  On
            November 1, 2007 we announced plans to make our test for Excision-Repair
            Cross-Complementing 1 (ERCC-1) gene expression for platin-based chemotherapy
            resistance available to selected institutions and clinical practice groups
            in
            the first quarter of 2008. The test will be offered only through our
            CLIA-certified laboratory in California. The initial launch will provide
            additional information about the clinical utility of ERCC-1 in the treatment
            of
            Non-Small Cell Lung Cancer (NSCLC); clinical practice activities such
            as sample
            acquisition, logistics, patient and physician communication; and the
            use of the
            test in normal clinical practice related to NSCLC.
  Previously,
            we had announced the publication of results from a prospective study
            published
            in the July 1, 2007 issue of the Journal of Clinical Oncology. The data
            indicated that high expression of ERCC-1 in patients with advanced NSCLC
            predicts resistance to platin-based chemotherapy. These findings suggest
            that
            the measurement of ERCC-1 levels would play a role in individualizing
            treatment
            therapies for certain lung cancer patients. The multi-center, randomized
            study
            was designed to determine the overall response rate (complete plus partial
            responses) of patients with stage IIIb or IV NSCLC to cisplatin-based
            therapy by
            determining levels of the biomarker ERCC-1 mRNA in a paraffin-embedded
            tissue
            biopsy before administering treatment. We believe that this is the first
            prospective study using a biomarker to predict chemotherapy response
            in lung
            cancer. At this time we cannot reasonably estimate the expected impact,
            if any,
            or that our ERCC-1 test will have on our liquidity and future realization
            of
            revenues.


24




**Critical
          Accounting Policies and Significant Judgments and
          Estimates**
  This
          discussion and analysis of our financial condition and results of operations
          is
          based on our financial statements, which have been prepared in accordance
          with
          U.S. generally accepted accounting principles. The preparation of these
          financial statements requires management to make estimates and judgments
          that
          affect the reported amounts of assets, liabilities and expenses and the
          disclosure of contingent assets and liabilities at the date of the financial
          statements, as well as revenues and expenses during the reporting periods.
          We
          evaluate our estimates and judgments on an ongoing basis. We base our estimates
          on historical experience and on various other factors we believe are reasonable
          under the circumstances, the results of which form the basis for making
          judgments about the carrying value of assets and liabilities that are not
          readily apparent from other sources. Actual results could therefore differ
          materially from those estimates under different assumptions or conditions.
          We
          believe the following critical accounting policies reflect our more significant
          estimates and assumptions used in the preparation of our financial
          statements.
  ***Revenue
          Recognition***
  Revenues
          are derived from services provided to pharmaceutical companies and are
          recognized on a contract specific basis pursuant to the terms of the related
          agreements. Revenue is recognized in accordance with SEC Staff Accounting
          Bulletin No. 104, Revenue Recognition, which requires that four basic criteria
          must be met before revenue can be recognized: (1) persuasive evidence that
          an
          arrangement exists; (2) delivery has occurred and title and the risks and
          rewards of ownership have been transferred to the client or services have
          been
          rendered; (3) the price is fixed or determinable; and (4) collectibility
          is
          reasonably assured.
  Revenues
          are recorded on an accrual basis as the contractual obligations are completed
          and as a set of assays is processed through our laboratory under a specified
          contractual protocol. Certain contracts have minimum assay requirements
          that, if
          not met, result in payments that are due upon the completion of the designated
          period. In these cases, revenues are recognized when the end of the specified
          contract period is reached.
  On
          occasion, we may enter into a contract that requires the client to provide
          an
          advance payment for specimens that will be processed at a later date. In
          these
          cases, we record this advance as deferred revenue and recognize the revenue
          as
          the specimens are processed or at the end of the contract period, as
          appropriate.
  We
          are
          subject to potentially significant variations in the timing of revenue
          recognized from period to period due to a variety of factors including:
          (1) the
          timing of when specimens are submitted to us for testing; and (2) the specific
          terms, such as minimum assay requirements in any given period, advance
          payment
          requirements, and term of agreement, as set forth in each contract we have
          with
          significant clients.
  ***License
          Fees***
  We
          have
          licensed technology for the extraction of RNA and DNA from FFPE tumor specimens
          from USC in exchange for royalty fees on revenue generated by use of this
          technology. These royalties are calculated as a fixed percentage of revenue
          that
          we generate from use of the technology licensed from USC. Total license
          fees due
          under the royalty agreement to USC were $160,674 and $152,502 for the years
          ended December 31, 2006 and December 31, 2007, respectively. We also maintain
          a
          non-exclusive license to use Roche’s polymerase chain reaction (PCR), homogenous
          PCR, and reverse transcription PCR processes. We pay Roche a fixed percentage
          royalty fee for revenue that we generate through use of this technology.
          Royalties due under this agreement totaled $221,861 and $219,721 for the
          years
          ended December 31, 2006 and December 31, 2007, respectively. These royalties
          are
          recorded as a component of cost of revenues in the statements of operations.
          We
          are subject to potentially significant variations in royalties recorded
          in any
          period. While the amount paid is based on a fixed percentage from revenues
          of
          specific tests pursuant to terms set forth in the agreements with USC and
          Roche, the amount due is calculated based on the revenue we recognize using
          the
          respective licensed technology. As discussed above, this revenue can vary
          from
          period to period as it is dependent on the timing of the specimens submitted
          by
          our clients for testing.


25




***Accounts
          Receivable***
  We
          invoice clients as specimens are processed and any other contractual obligations
          are met. Our contracts with clients typically require payment within 45
          days of
          the date of invoice. We maintain allowances for doubtful accounts for estimated
          losses resulting from the inability of our clients to make required payments.
          We
          specifically analyze accounts receivable and historical bad debts, client
          credit, current economic trends and changes in client payment trends when
          evaluating the adequacy of the allowance for doubtful accounts. Account
          balances
          are charged-off against the allowance when it is probable the receivable
          will
          not be recovered. To date, our clients have primarily been large pharmaceutical
          companies. As a result, bad debts to date have been minimal.
  ***Income
          Taxes***
  We
          estimate our tax liability through calculations we perform for the determination
          of our current tax liability, together with assessing temporary differences
          resulting from the different treatment of items for tax and accounting
          purposes.
          These differences result in deferred tax assets and liabilities, which
          are
          recorded in our balance sheets. Our management then assesses the likelihood
          that
          deferred tax assets will be recovered in future periods through future
          operating
          results. To the extent that we cannot conclude that it is more likely than
          not
          that the benefit of such assets will be realized, we establish a valuation
          allowance to adjust the net carrying value of such assets. The carrying
          value of
          our net deferred tax assets assumes that we will be able to generate sufficient
          future taxable income, based on management’s estimates and assumptions. These
          estimates and assumptions take into consideration future taxable income
          and
          ongoing feasible tax strategies in determining recoverability of such assets.
          Our valuation allowance is subject to significant change based on management’s
          estimates of future profitability and the ultimate realization of the deferred
          tax assets.
  **Results
          of Operations**
  ***Years
          Ended December 31, 2007 and December 31, 2006***
  *Revenues.* Revenues
          were $7,789,789 for the year ended December 31, 2007, as compared to $6,017,025
          for the comparable period in 2006, an increase of $1,772,764, or 30%. This
          growth was generated by revenue from our existing pharmaceutical company
          contracts and the initiation of fluorescent in situ hybridization,
          immunohistochemistry (or IHC) and bioinformatics services by us that commenced
          in the first quarter of 2007. Revenue from fluorescent in situ hybridization,
          IHC and bioinformatics services provided by us totaled $373,630, $375,119
          and
          $957,000, respectively, for the year ended December 31, 2007. For the year
          ended
          December 31, 2007, two of our clients, GSK and Taiho, accounted for
          approximately 73 % of our revenue, as compared to approximately 85 % of
          our
          revenue for the year ended December 31, 2006.
  *Cost
          of Revenues.* Cost
          of revenues for the year ended December 31, 2007 were $4,045,715 as compared
          to
          $2,456,071 for the year ended December 31, 2006, an increase of $1,589,644
          or
          65%. The increase resulted from increased volume of work from our various
          clients and costs associated with processing FISH and IHC assays. The primary
          components of these increased costs include a $582,107 increase in costs
          associated with fluorescent in situ hybridization and immunohistochemistry
          services which costs did not exist in 2006, expense associated with the
          issuance
          of stock options to employees and consultants totaling $414,692 which costs
          did not exist in 2006, $86,034 in depreciation and facility related costs,
          $185,768 in expense for laboratory reagents and supplies, $81,402 in patent
          fees
          and annuities and $99,200 in expenses associated with
          bioinformatics.
  *Research
          and Development Expenses.* Research
          and development expenses were $2,455,044 for the year ended December 31,
          2007,
          as compared to $1,261,981 for the same period in 2006, an increase of $1,193,063
          or 95 %. This increase resulted primarily from share-based compensation
          related
          to stock options issued to employees and consultants of $236,297 which
          costs did
          not exist in 2006, an increase of $78,481, in equipment related expenses,
          an
          increase in patent costs of $613,121, which were previously accounted for
          as
          part of general and administrative expenses in 2006, an increase in personnel
          expenses of $143,625, and expense associated with an academic research
          collaboration of $73,329. We expect research and development expenses to
          increase as we work to develop additional aspects of our technology and
          to study
          diagnostic indicators for various forms of cancer.


26




*General
          and Administrative Expenses.* General
          and administrative expenses totaled $6,786,890 for the year ended December
          31,
          2007, as compared to $3,933,660 for the comparable period in 2006, an increase
          of $2,853,230 or 73%. This increase resulted primarily from $1,494,174
          in
          expenses incurred to establish our laboratory in Scotland which costs did
          not
          exist in 2006, an increase in audit and accounting fees of $66,606 associated
          with our various business efforts and preparation for becoming a public
          company,
          an increase in our business consulting expenses of $79,915, share-based
          compensation expense of $898,666 related to stock options granted to our
          employees which was not part of our costs in 2006 and an increase of $119,235
          in
          various corporate taxes. Our travel and business expenses increased $214,995
          based on our international business development efforts and initial public
          offering. We expect general and administrative expenses to increase as
          a result
          of the need to hire additional administrative personnel and due to higher
          legal,
          accounting, compliance and related expenses associated with being a public
          company.
  *Interest
          Income.* Interest
          income was $517,645 for the year ended December 31, 2007, compared with
          $138,598
          for the same period in 2006. This $379,047 increase was due to higher average
          cash balances and higher rates of return during the period ending December
          31,
          2007.
  *Interest
          Expense.* Interest
          expense was $28,668 for the year ended December 31, 2007 and $57,537 for
          the
          same period in the preceding year. This expense consists largely of a fixed
          amount on notes payable from our stockholders. The notes payable and accrued
          interest related to these notes payable was converted into shares of our
          common
          stock upon the closing of our recent public offering. Refer to Liquidity
          and
          Capital Resources below for further discussion regarding this
          matter.
  *Other
          Income.*  During the year ended December 31, 2006, the Company
          entered into an agreement with a client to provide certain testing services.
          In
          order to perform such testing services within the timeframe required by
          the
          client, which was by no later than June 30, 2006, the Company was required
          to
          purchase additional laboratory equipment totaling $179,000 which was reimbursed
          by the client pursuant to the terms of the agreement. This equipment was
          used to
          perform the services pursuant to this agreement and will continue to be
          used by
          the Company in its on-going operations over the useful life of the equipment
          which is estimated to be five years. Upon the purchase of the equipment,
          the
          Company recorded the $179,000 reimbursement of the equipment purchase,
          which is
          non-recurring in nature, as other non-operating income during the three
          months
          ended March 31, 2006.
  ***Income
          Taxes***
  As
          of
          December 31, 2007 and 2006, a full valuation allowance has been recorded
          for the
          deferred tax assets since we do not believe the recoverability of the deferred
          income tax assets in the near future is more likely then not. Accordingly,
          an
          income tax provision/benefit has not been recognized during the years ended
          December 31, 2007 and 2006.
  ***Liquidity
          and Capital Resources***
  We
          incurred net losses of $1,357,643 and $5,052,907 during the year ended
          December
          31, 2006 and the year ended December 31, 2007, respectively. Since our
          inception
          in September 1999, we have incurred cumulative losses and as of December
          31,
          2007, we had an accumulated deficit of $20,320,191. We expect that our
          research
          and development, and general and administrative expenses will continue
          to
          increase and, as a result, we will need to generate significant revenues
          to
          achieve profitability.
  Following
          is a summary of material agreements we have entered into during fiscal
          year 2006
          and fiscal year 2007 and the expected impact these agreements will or have
          had
          on our liquidity and future realization of revenues.
 
 •
                In
                    January 2006, we entered into an agreement with GSK pursuant
                    to which we
                    provide services in connection with profiling the expression
                    of various
                    genes from a range of human cancers. Under the agreement,
                    we will provide GSK with testing services as described in individual
                    protocols and GSK will pay us for such services based on the
                    pricing
                    schedule established for each particular protocol. GSK is obligated
                    to
                    make minimum annual payments to us under the agreement and also
                    was
                    obligated to make a non-refundable upfront payment to us, to
                    be credited
                    against, of which $600,000 was recognized in 2006 work undertaken
                    pursuant
                    to the agreement. In January 2006, we received an upfront payment
                    of $2
                    million. The contract also provides for minimum annual assay
                    testing
                    requirements over a three year period ending January 2009. The
                    minimum
                    amount of revenue to be recognized during the term, which will
                    expire in
                    January 2009, will be $6,500,000. The timing of the recognition
                    of these
                    amounts is dependent upon when GSK submits the specimens for
                    testing.
                    During the year ended December 31, 2006 and the year ended December
                    31,
                    2007, we recognized $2,374,800 and $2,818,288 respectively, of
                    revenue
                    under this agreement.
  •
                In
                    December 2006, we entered into an agreement with GSK Bio pursuant
                    to which
                    we will provide testing services, principally in relation to
                    profiling the
                    expression of various genes from a range of human cancers. We
                    will conduct
                    the testing services on tissue specimens provided by GSK Bio.
                    The
                    agreement required that GSK Bio make an upfront payment of $2,620,000
                    which was received by us in December 2006. The agreement further
                    specifies
                    that GSK Bio will pay annual minimum payments in 2007, 2008 and
                    2009 and
                    that the upfront payment made in December 2006 will be credited
                    against
                    the annual minimum payments in 2007 and 2008. The agreement also
                    provides
                    that any differences between the annual minimum payments made
                    in 2007,
                    2008 or 2009 and the amounts due to us for testing services performed
                    on
                    specimens submitted by GSK Bio during the three years ended December
                    31,
                    2009 be credited towards services performed during the year ending
                    December 31, 2010, the final year of the agreement. In December
                    2007 we
                    amnded our agreement with GSK Bio whereby GSK Bio would make
                    the remaining
                    minimum payments under the agreement in one lump sum. This payment
                    was
                    received in January 2008. The minimum amount of revenue to be
                    recognized
                    during the term of this contract, which will expire in December
                    2010, is
                    approximately $7,300,000. The timing of the recognition of these
                    amounts
                    is dependent upon when GSK submits the specimens for testing.
                    We
                    recognized $938,701 of revenue under this agreement during the
                    year ended
                    December 31, 2007. There was no revenue recognized under this
                    agreement
                    for 2006.
 •
                    In
                        March 2007, we entered into a commission agreement with Shanghai
                        Biochip
                        (“SBC”). Pursuant to the agreement, SBC will provide testing services
                        in
                        China using our RGI-1 extraction technology. Under this agreement,
                        we will
                        provide SBC with an exclusive license in China to provide
                        services in
                        China using our technology. Pursuant to the agreement, SBC
                        will receive a
                        percentage of the revenue collected from clients. Our agreement
                        with SBC
                        has an initial term of five years. At this time, we cannot
                        reasonably
                        estimate the expected impact, if any, that this agreement
                        will have on our
                        liquidity and future realization of
                        revenues.
 •
                In
                  July 2007, we entered into a commission agreement with Hitachi.
                  Under the
                  agreement, we will provide Hitachi with the technical information
                  and
                  assistance necessary to perform testing services. Hitachi will
                  use our
                  proprietary and patented techniques to extract genetic information
                  from
                  FFPE tissue samples collected in Southeast Asia, Australia and
                  New
                  Zealand. Pursuant to the agreement, Hitachi will receive a percentage
                  of
                  the revenue collected from our clients. Our agreement with Hitachi
                  has an
                  initial term of three years, ending March 31, 2010. At this time,
                  we
                  cannot reasonably estimate the expected impact, if any, that this
                  agreement will have on our liquidity and future realization of
                  revenues.
  We
          expect
          to use our capital to fund research and development and to make capital
          expenditures to keep pace with the expansion of our research and development
          programs and to scale up our commercial operations. The amount and timing
          of
          actual expenditures may vary significantly depending upon a number of factors,
          such as the progress of our product development, regulatory requirements,
          commercialization efforts, and the amount of cash used by operations. We
          expect
          that we will continue to generate revenue through our pharmacogenomic testing
          services business provided to pharmaceutical companies, but these revenues
          are
          not guaranteed and are not expected to substantially offset the costs associated
          with our expansion efforts.
  We
          lease
          office and laboratory space for our location in Los Angeles under noncancelable
          operating leases that expire through March 2010. Additionally, in 2007,
          the
          Company entered into an agreement to lease office and laboratory space
          for our
          operations in Scotland. This is an operating lease which expires in March,
          2010.
          Rent expense for our facilities was $270,674 and $587,669 for the years
          ended
          December 31, 2007 and 2006, respectively. Future minimum lease payments
          aggregate to approximately $1,535,540 over the next three years through
          the
          expiation of the leases.in, 2010.
  ***Comparison
          of Years Ended December 31, 2007 and 2006***
  As
          of
          December 31, 2007, we had $17,024,209 in cash and cash equivalents, working
          capital of $13,275,967 and an accumulated deficit of
          $20,320,191.
  ***Cash
          flows provided by operating activities***
  During
            the year ended December 31, 2007, the Company generated negative cash
            flows from
            operations of $3,485,000 compared to a positive cash flow of $3,177,000
            in
            operations in the year ended December 31, 2006. The reasons for the change
            in
            cash flows of $6,662,000 from positive cash flow to negative cash flow
            was due
            mainly to the increase in net loss of $3,695,000, in combination of an
            increase
            in receivables, a decrease in prepaid expenses, accounts payable, accrued
            expenses, accrued payroll, bonus and related liabilities, and an increase
            in
            deferred revenue.
  The
            increase in accounts receivable, of $2,919,000, and deferred revenue,
            of
            $3,033,000, related mainly to 1 receivable for deferred revenue related
            to an
            amendment entered into in the fourth quarter of 2007 to the contract
            with GSK
            Bio. This amendment changed the Company receiving monthly payments of
            153,922
            Euros( $210,873 using the average conversion rate for the year ended
            December
            31, 2007) to a single advance payment amounting to $2.4 million prior
            to
            December 31, 2007, which was not received until subsequent to year end.
            In
            addition, the Company has had in increase in deferred revenue of $332,000
            related to an increase in advance billings to Taiho, which under the
            Company’s
            contract with Taiho, the Company is allowed to bill for services upon
            receipt of
            the sample, and Taiho is liable to the Company at the time of the sample
            being
            provided.
  The
            decrease in prepaid expenses and accrued expenses is related to the completion
            of the IPO process at which point $614,000 of prepaid IPO costs incurred
            in the
            year ended December 31, 2006 were utilized in the year ended December
            31, 2007,
            and $301,000 of accrued expenses as of December 31, 2006 were paid with
            the
            proceeds of the IPO in June 2007. The change related to accounts payable
            is due
            to the ability of the Company to pay its payables within 30 days of incurring
            the charges, due to increased cash on hand related to funds received
            in the IPO
            process, resulting in an overall decrease in accounts payable.
  The
            change in accrued payroll, bonus and related liabilities is due to the
            slight
            decrease in bonuses granted and accrued as of December 31, 2006 of $500,000
            versus accrued bonuses of $415,000 as of December 31, 2007. The bonuses
            accrued
            as of December 31, 2006 were a 100% increase in accrued bonuses as none
            were
            granted and accrued for the year ended December 31, 2005.


27




***Cash
          flows used in investing activities***
  Net
          cash
          used in investing activities was $1,980,435 for the year ended December
          31, 2007
          and $880,720 for the year ended December 31, 2006. This increase in the
          use of
          cash of $1,099,715 was primarily attributable to the increased purchase
          of
          laboratory equipment in connection with establishing the testing facility
          in the
          UK. Laboratory equipment purchased included additional microarray capability,
          fluorescent in situ hybridization equipment and robotic polymerase chain
          reaction equipment.
  ***Cash
          flows used in financing activities***
  Net
          cash
          provided by financing activities increased $17,593,512, as a result of
          our
          initial public offering which was completed on June 8, 2007.
  ***Off-Balance
          Sheet Arrangements***
  We
          do not
          have any off-balance sheet arrangements.
  ***Recent
          Accounting Pronouncements***
  On
          July
          13, 2006, the FASB issued FASB Interpretation No. 48, which interprets
          SFAS No.
          109, “Accounting for Income Taxes.” FIN 48 clarifies the accounting for
          uncertainty in income taxes recognized in an enterprise’s financial statements
          in accordance with FASB Statement No. 109, Accounting for Income Taxes.
          FIN 48
          also prescribes a recognition threshold and measurement attribute for the
          financial statement recognition and measurement of a tax position taken
          or
          expected to be taken in a tax return that results in a tax benefit.
          Additionally, FIN 48 provides guidance on de-recognition, income statement
          classification of interest and penalties, accounting in interim periods,
          disclosure, and transition. This interpretation is effective for fiscal
          years
          beginning after December 15, 2006. The adoption of FIN 48 did not have
          a
          material impact on our financial position, results of operations or cash
          flows.
  In
          September 2006, the FASB issued SFAS No. 157, *Fair
          Value Measurements* . SFAS
          No. 157 establishes a framework for measuring fair value in generally accepted
          accounting principles, and expands disclosures about fair value measurements.
          The standard applies whenever other standards require (or permit) assets
          or
          liabilities to be measured at fair value. The standard does not expand
          the use
          of fair value in any new circumstances. SFAS No. 157 is effective for financial
          statements issued for fiscal years beginning after November 15, 2007, and
          interim periods within those fiscal years. Earlier application is encouraged.
          We
          are currently evaluating the effect that adoption of SFAS No. 157 will
          have on
          our financial position, results of operations or cash flows.
  In
        February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
        Financial Assets and Financial Liabilities — Including an amendment of FASB
        Statement No. 115”. SFAS 159 permits companies to choose to measure certain
        financial instruments and other items at fair value. SFAS 159 also establishes
        presentation and disclosure requirements designed to facilitate comparison
        between entities that choose different measurement attributes for similar
        types
        of assets and liabilities. The standard is effective for fiscal years beginning
        after November 15, 2007. We are evaluating the impact of the adoption of
        SFAS
        159 on our consolidated financial statements.  In
            December 2007, FASB issued SFAS No. 141(R), “Business Combinations”, an
            amendment of SFAS No. 141, which improves the relevance, representational
            faithfulness, and comparability of the information that a reporting entity
            provides in its financial reports about a business combination and its
            effects.
            SFAS 141(R) applies for all business combinations for which the acquisition
            date
            is on or after the beginning of the first annual reporting period beginning
            on
            or after December 15, 2008. We do not expect adoption of SFAS 141(R)
            to have a
            material impact on the Company’s financial statements.
  In
            December 2007, FASB issued SFAS No. 160, “Noncontrolling Interests in
            Consolidated Financial Statements *-* an
            amendment of Accounting Research Bulletin No. 51 ,”
which
            amends ARB 51 to establish accounting and reporting standards for the
            noncontrolling interest in a subsidiary and for the deconsolidation of
            a
            subsidiary. SFAS 160 is effective for fiscal years beginning on or after
            December 15, 2008. We do not expect adoption of SFAS 160 to have a material
            impact on the Company’s financial statements.
  In
            March
            2008, FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and
            Hedging Activities—an amendment of FASB Statement No. 133” which establishes the
            disclosure requirements for derivative instruments and for hedging activities.
            This Statement amends and expands the disclosure requirements of Statement
            133
            with the intent to provide users of financial statements with an enhanced
            understanding of derivative instruments and hedging activities. SFAS
            61 is
            effective for financial statements issued for fiscal years and interim
            periods
            beginning after November 15, 2008, with early adoption encouraged. We
            do not
            expect adoption of SFAS 160 to have a material impact on the Company’s financial
            statements.


**Item
      7. Financial Statements.**




Our
        consolidated financial statements and related notes
        are included in this annual report beginning on page F-1.


**Item
        8. Changes in and Disagreements With Accountants on Accounting and Financial
        Disclosure**





None.




28





**Item
      8(A)(T).**




This
          annual report does not include a report of management’s assessment regarding
          internal control over financial reporting or an attestation of the Company’s
          registered public accounting firm due to a transition period established
          by the
          rules of the Securities and Exchange Commission for newly public
          companies.


**Item
        8B. Other Information.**





None.





**Part
      III**





**Item
      9. Directors, Executive Officers, Promoters, Control Persons and Corporate
      Governance; Compliance With Section 16(a) of the Exchange Act.**




Our
      executive officers and directors and their respective ages and positions as
      of
      December 31, 2007 are as follows:




**Name**
              ****
              **Age**
              ****
              **Position******Tom
                  DeMeester, M.D.
              
              69
              
              Chairman
                  of the BoardKathleen
                  Danenberg
              
              60
              
              Director,
                  Chief Executive Officer and PresidentDavid
                  M. Smith
              
              41
              
              Vice
                  Chairman of the BoardMichael
                  Serruya
              
              44
              
              DirectorHubertus
                  Spierings
              
              63
              
              DirectorGary
                  D. Nusbaum
              
              41
              
              DirectorThomas
                  Stankovich
              
              47
              
              Vice
                  President, Chief Financial Officer and SecretaryJames
                  Clark
              
              39
              
              Vice
                  President and Chief Operating OfficerDenise
                  McNairn
              
              40
              
              Vice
                  President and General Counsel




The
      following is a brief summary of the background of each of our executive
      officers, and directors. There are no family relationships among any of the
      executive officers or directors.




***Tom
        R. DeMeester, M.D.*** has been
        the Chairman of our board of directors since March 2000. Dr. DeMeester has
        been the Chairman of the Department of Surgery and Professor of General and
        Cardiothoracic Surgery at the USC School of Medicine since 1990. From 1984
        to
        1990, Dr. DeMeester served as Chairman and Professor of the Department of
        Surgery at Creighton University School of Medicine. Dr. DeMeester received
        his M.D. from the University of Michigan School of Medicine and a B.A. from
        Calvin College.




***Kathleen
        Danenberg*** has been
        our Chief Executive Officer and President since 2002. Prior to that, she
        served
        as our Vice President and Chief Scientific Officer from December 2000 to
        December 2002. Ms. Danenberg has served as one of our board members since
        March 2000. Ms. Danenberg’s began her career in molecular research and
        developed broad expertise in a variety of areas and applications. While at
        USC,
        Ms. Danenberg invented a breakthrough patented method to extract RNA from
        formalin-fixed paraffin embedded tissue specimens which became the basis
        for the
        establishment of Response Genetics, Inc. Prior to her work at USC, Ms. Danenberg
        received her B.S. in biochemistry from the University of Wisconsin. Ms.
        Danenberg has over 100 scientific publications to her credit.




29




***David
      M. Smith*** is
      a
      founder and has served as Vice Chairman and a Director of our board of directors
      since December 1999. From 1998 until 2005, Mr. Smith was an Executive Vice
      President and Director, and later, Chief Operating Officer of CoolBrands
      International Inc. (TSE:COB.A), and from 1993 until 2006, he was a Director,
      and
      later the Chairman and Chief Executive Officer, of Calip Dairies, a privately
      held consumer products company. Mr. Smith was also the Chairman and Chief
      Executive Officer of Hempstead Capital Corporation, a private holding company,
      until it was acquired in 2006. Mr. Smith is currently the founder and Managing
      Partner of Smith Global Ventures, a privately held venture firm. Mr. Smith
      received a B.A. degree and graduated with honors from Boston
      University.




***Michael
      Serruya*** has
      served on our board of directors since March 2000. Since February 2000, Mr.
      Serruya has been Chairman of Yogen Fruz World Wide Incorporated, and from 1995
      to February 2000 he was President, Chief Executive Officer and Chairman of
      Yogen
      Fruz, a consumer products company. Mr. Serruya was also a member of the Ontario
      Jobs and Investment Board, an Ontario government organization. Mr. Serruya
      is
      currently the President and Chief Executive Officer of CoolBrands International
      Inc. (TSE:COB.A). Mr. Serruya attended Ryerson Polytechnical
      Institute.




***Hubertus
        Spierings*** has
        served on our board of directors since June 4, 2007. From 1992 until 2002,
        Mr.
        Spierings served as a non-executive chairman of the board of Cargill
        International S.A., a subsidiary of a privately held agricultural management
        company, and from 1999 until 2002, he served as executive vice president
        of
        Cargill, Inc, a privately held agricultural management company. Mr. Spierings
        is
        currently serving as a director on the board of directors of the International
        Management Institute-Kyiv, a private Ukranian professional school. Mr. Spierings
        earned a degree in economics from Nyenrode N.O.I.B. (an international business
        college in the Netherlands).




***Gary
        D. Nusbaum*** has
        served on our board of directors since August 24, 2007. From
        1989-2002, Mr. Nusbaum was at the Private Equity firm Warburg Pincus, where
        he
        was a Managing Director, and from 2003 until 2005, Mr. Nusbaum was a Managing
        Director at Aetos Capital, an asset management firm. At Aetos Capital, Mr.
        Nusbaum was the firm’s Chief Financial Officer, and also headed its private
        equity business. In 2006, Mr. Nusbaum joined Palladium Equity Partners, LLC,
        as
        a Managing Director. Mr. Nusbaum received his Bachelor of Science in Economics and
        Master of Business Administration degrees from The Wharton School of the
        University of Pennsylvania. He has been a board member of several public
        and
        private companies.




***Thomas
        Stankovich*** has
        served as our Vice President, Chief Financial Officer and Secretary in November
        2006. Mr. Stankovich has gained financial and business experience over the
        past 20 years working in both domestic and international operations with
        publicly-traded companies in the pharmaceutical and biotechnology industries.
        Mr. Stankovich most recently was Executive Vice President and Chief
        Financial officer at Cobalis Corp. (Nasdaq: CLSC) from December 2005 until
        he
        joined us. Subsequent to Mr. Stankovich's departure from Cobalis in December,
        2006, Cobalis declared Chapter 11 bankruptcy in October, 2007. Prior to his
        position at Cobalis Corp., he worked at MP Biomedicals, LLC where he served
        as
        Senior Vice President and Chief Financial Officer from July 2003 to December
        2005. From January 2003 through July 2003 Mr. Stankovich worked as a financial
        consultant. He served as Senior Vice President and Chief Financial Officer
        for
        Ribapharm, Inc. (NYSE: RNA) from December 2001 to January 2003 (now part
        of
        Valeant Pharmaceuticals International) (NYSE: VRX) where he helped complete
        an
        initial public offering in April 2002. Since 1986, Mr. Stankovich has
        served in various executive financial management positions for ICN
        Pharmaceuticals, Inc. (NYSE: ICN) (now renamed Valeant Pharmaceuticals
        International) including Vice President, Chief Financial Officer for ICN
        International A.G., and Vice President and Controller for ICN Europe.
        Mr. Stankovich holds Bachelor of Science degrees in both accounting and
        finance from California State University, Northridge.




***James
        Clark*** has
        served as our Vice President and Chief Operating Officer in October 2006.
        From
        June 1, 2003 to August 31, 2006, Dr. Clark served as head of the Cancer
        Molecular Biology, Technology group at  GlaxoSmithKline — Biologicals
        (NYSE: GSK). From 1995 to 2003, Dr. Clark served as a Senior Research Fellow
        within the Department of Medicine, University of Glasgow, where he began
        his
        career developing molecular techniques and applications for the study of
        the
        immune response to breast cancer. Dr. Clark received his B.S.c from Heriot-Watt
        University, Edinburgh, Scotland and his Ph.D. from the Department of
        Biochemistry, University of Glasgow, Scotland.




***Denise
        McNairn*** has
        served as our Vice President and General Counsel in February 2007. Prior
        to
        joining us, from 2001 to 2007, Ms. McNairn was an attorney at Kenyon &
Kenyon LLP. Prior to working for Kenyon & Kenyon, Ms. McNairn worked as a
        Technology Transfer Specialist at the National Cancer Institute Technology
        Transfer Branch, where she began her career in drafting and negotiating
        transactional agreements. Ms. McNairn received her B.S. from Virginia
        Polytechnic Institute and State University, an M.S. from Johns Hopkins
        University and her J.D. from the University of Maryland School of
        Law.




30




There
      is
      no pending litigation or proceeding involving any of our directors, officers,
      employees or agents in which indemnification will be required or permitted.
      We
      are not aware of any threatened litigation or proceeding that may result in
      a
      claim for such indemnification.




**Compliance
      with Section 16(a) of the Exchange Act**




Our
          records reflect that all reports which were required to be filed pursuant
          to
          Section 16(a) of the Exchange Act were filed on a timely basis, except
          that a
          total of 14 reports were inadvertently filed late by certain of our directors,
          executive officers and beneficial owners of more than 10% of our common
          stock which
          include David M. Smith (3), Susan Smith (3),Denise
          McNairn (1), Kathleen Danenberg(1),
          ClaraSerruya
          (1), Samuel Serruya (1), Michael Serruya (1), Gary Nusbaum (2), and Hubertus
          Spierings (1)during the fiscal year ended December 31,
          2007.




**Code
      of Ethics**




We
      have
      adopted a Code of Ethics that applies to all of our employees and directors,
      including our principal executive officer and our principal financial officer.
      The Code of Ethics is filed as Exhibit 14 to our Registration Statement on
      Form
      SB-2 (File No. 333-139534) and is also available on our website at www.responsegenetics.com .




**Audit
        Committee and Audit Committee Financial Expert**


Our
              Board
              has appointed an audit committee and has adopted a written audit committee
              charter. The audit committee does not have a financial expert and is
              not yet
              fully independent, because the Company is availing itself of the phase-in
              provisions afforded to us by NASDAQ Marketplace Rule 4350(a)(5). The
              Company
              does not believe that this will have a material effect on the committee’s
              ability to perform its obligations with regard to the preparation of
              and
              disclosure in the 10-KSB. The Company expects that it will have a
              fully independent audit committee and that it will have appointed
              and an audit committee financial expert by the expiration of the phase-in
              period.
  **Nominating
            and Governance Committee**
  The
            Company has a nominating and governance committee and has adopted a written
            nominating and governance charter. The nominating and governance committee
            has
            adopted procedures for Company shareholders to submit recommendations
            for
            nomination to the Company’s Board of Directors (the “Board”). As required by
            these procedures, all shareholder nominating recommendations must be
            in writing,
            addressed to the Committee care of the Company’s corporate secretary at the
            Company’s principal offices. Submissions must be made by mail, courier or
            personal delivery. A nominating recommendation must also be accompanied
            by the
            following information concerning each recommending shareholder: the name
            and
            address, including telephone number, of the recommending shareholder;
            the number
            of the Company’s shares owned by the recommending shareholder and the time
            period for which such shares have been held; if the recommending shareholder
            is
            not a shareholder of record, a statement from the record holder of the
            shares
            (usually a broker or bank) verifying the holdings of the shareholder
            and a
            statement from the recommending shareholder of the length of time that
            the
            shares have been held; and a statement from the shareholder as to whether
            the
            shareholder has a good faith intention to continue to hold the reported
            shares
            through the date of the Company’s next annual meeting of shareholders. In
            addition, a nominating recommendation must be accompanied by the following
            information concerning the proposed nominee: the information required
            by Item
            401 of Regulation S-K (generally providing for disclosure of the name,
            address,
            and business experience for the past five years of the proposed nominee,
            as well
            as information regarding certain types of legal proceedings within the
            past five
            years involving the nominee); the information required by Item 403 of
            Regulation
            S-K (generally providing for disclosure regarding the proposed nominee’s
            ownership of securities of the Company); and the information required
            by Item
            404 of Regulation S-K (generally providing for disclosure of transactions
            between the Company and the proposed nominee valued in excess of $60,000
            and
            certain other types of business relationships with the Company). These
            procedures are provided as Appendix B to the committee charter and are
            available
            on the Investor Relations section of our website at www.responsegenetics.com .
 31


**Item
        10. Executive Compensation.**




The
      following summary compensation table sets forth summary information as to
      compensation earned during the year ended December 31, 2007 by our Chief
      Executive Officer, Chief Financial Officer, Chief Operating Officer and General
      Counsel, who we collectively refer to as our “Named Executive officers”
elsewhere.




**Summary
      Compensation Table**


**Name
                    and Principal Position**
                
                **Year**
                
                **Salary
                    ($)**
                
                **Bonus.($)**
                
                **Stock****Options
                    ($) A**
                
                **All
                    Other Compensation (B)**
                
                
                **Total****($)**Kathleen
                    Danenberg, President and CEO
                
                
                2007
                
                $
                350,000
                
                $
                175,000
                
                
                689,836
                
                $
                90,673
                
                $
                1,305,5092006
                
                $
                354,000
                
                $
                903,700
                
                
                
                
                $
                
                
                $
                1,257,700Thomas
                    Stankovich, Vice President, Chief Financial Officer and
                    Secretary
                
                
                2007
                
                $
                220,000
                
                $
                80,000
                
                
                44,387
                
                $
                
                
                $
                344,387James
                    Clark, Vice President, Chief Operating Officer
                
                
                2007
                
                $
                237,600
                
                $
                80,000
                
                
                44,314
                
                $
                -
                
                $
                361,914Denise
                    McNairn, Vice President, General Counsel
                
                
                2007
                
                $
                225,000
                
                $
                80,000
                
                
                44,576
                
                $
                
                
                $
                349,576




(A)
              Represents
                  the compensation expense related to outstanding stock options we
                  recognized for the year ended December 31, 2007 under Statement
                  of
                  Financial Accounting Standards 123R to our named executive officers.
                  Assumptions used in the calculation of these amounts are included
                  in Note
                  11 to our financial statements for the year ended December 31,
                  2007.


(B)
                “All
                        Other Compensation” includes (i) clothing expenses that total a net of
                        $86,622; and (ii) miscellaneous personal services of $
                        4,051.


All
          bonuses for 2007 were awarded on February 12, 2008 and paid on February 19,
          2008.


Employment
      Agreements and Change in Control Arrangements




***The
      Danenberg Employment Agreement***




We
      entered into an employment agreement with Ms. Danenberg on December 11, 2000.
      This previous agreement was superceded by a new employment agreement, which
      we
      entered into as of October 26, 2006, as amended on December 14, 2006 and on
      May
      29, 2007, for the position of President and Chief Executive Officer. The
      agreement has an initial term of three years, with automatic one-year renewal
      terms thereafter. Ms. Danenberg is to receive an initial base salary of
      $350,000 per year, subject to annual adjustments at the discretion of the Board.
      Ms. Danenberg also is eligible to earn a minimum of 40% of her base salary
      as an annual bonus based upon our meeting certain performance targets and her
      meeting personal objectives as determined by our board of
      directors.




We
        granted Ms. Danenberg non-qualified stock option under the 2006 Stock Plan,
        in an amount equal to 3% of the number of shares of our common stock outstanding
        on October 26, 2006 on a fully diluted basis  or 212,577 options at an
        exercise price equal to $7.00, which was the initial public offering price
        of our common stock (the "IPO Price"). One third of these options will vest
        immediately upon the issuance of the options and the remainder shall vest
        in two
        equal installments on the first and second anniversary of the date of
        Ms. Danenberg’s employment agreement (October 26, 2006). The options
        will vest immediately upon a change in control. Ms. Danenberg will be
        eligible for future option grants as approved by our board of directors.
        We will
        provide Ms. Danenberg with a monthly allowance of $1,000 to cover
        miscellaneous business expenses and a $1,000 monthly automobile allowance.
        We
        agreed to cover up to $5,000 of Ms. Danenberg’s legal fees incurred in the
        negotiation of her employment agreement and up to $1,000 of Ms. Danenberg’s
        legal fees incurred in the negotiation of the amendment to her employment
        agreement.




32




In
      the
      event that Ms. Danenberg’s employment is terminated without cause or for
      good reason, as defined under the agreement, we are obligated to pay her
      severance equivalent to the greater of (a) one full year of base pay and
      benefits; or (b) the base pay and benefits for the remaining term of the
      employment agreement. In addition, within forty-five days of her termination,
      we
      are obligated to pay her the pro rata portion of the bonus earned as of her
      termination date. In addition the portion of Ms. Danenberg’s options that
      are vested as of the date of her termination shall be exercisable for one year
      from the date of her termination. In the event the employment agreement is
      terminated because of Ms. Danenberg’s death, or because of a disability as
      defined in the employment agreement, Ms. Danenberg or her estate will be
      entitled to receive her base pay and pro rata bonus earned as of the date of
      death or disability, and we will provide benefits coverage for a period of
      12
      months following the date of such death or disability to Ms. Danenberg or
      her heirs as the case may be.




In
      the
      event a change in control occurs during Ms. Danenberg’s employment, she has
      agreed not to resign her employment voluntarily for a period of six months
      following the effective date of the change in control. If she is terminated
      within such six-month period without cause or she resigns for good reason,
      in
      addition to any other benefits to which she is entitled and provided she
      executes a release of claims, Ms. Danenberg will be entitled to a lump sum
      payment equivalent to a month of base pay at her then current annual rate for
      each month during such six-month period for which she has yet to complete
      service to us at the time of such termination, within forty-five days following
      such termination. The employment agreement also places certain confidentiality,
      assignment of inventions and non-solicitation obligations on
      Ms. Danenberg.




***The
      Stankovich Employment Agreement***




We
      have
      entered into an Employment Agreement with Thomas Stankovich, dated as of October
      25, 2006, as amended on May 29, 2007 for the position of Vice President and
      Chief Financial Officer. He commenced employment on November 27, 2006. The
      agreement has an initial term of three years with automatic one-year renewal
      terms thereafter. The agreement provides for Mr. Stankovich to receive an
      initial base salary of $220,000 per year. Mr. Stankovich also is eligible
      to earn an annual bonus based upon our meeting certain performance targets
      and
      his meeting personal objectives as agreed upon with the CEO and approved by
      our
      board of directors.




We
        granted Mr. Stankovich a non-qualified stock option under the 2006 Stock
        Plan, in an amount equal to 1% of the number of shares of our common stock
        outstanding on November 27, 2006, on a fully diluted basis, or 70,976 options,
        at an exercise price equal to the IPO Price. The shares vest in equal annual
        amounts over a four-year period, beginning on the first anniversary of the
        initial grant date. The options will vest immediately upon a change in control.
        Mr. Stankovich will be eligible for additional option grants as approved by
        our board of directors. In the event that a change in control occurs within
        the
        first year of Mr. Stankovich’s employment, and regardless of whether he is
        terminated, we are obligated to give him a cash payment equal to six months
        salary at his base salary rate at the time of change in control, as defined
        in
        the employment agreement. In the event that a change in control occurs within
        the second or third years of his employment, regardless of whether he is
        terminated, we are obligated to give him a cash payment equal to nine months
        salary at his base salary rate at the time of the change in control. In the
        event that Mr. Stankovich’s employment is terminated without cause or he
        resigns for good reason as defined under the agreement, during the first
        year of
        his employment, we are obligated to pay him severance equal to six months
        salary
        at his base salary rate at the time of termination. In the event that
        Mr. Stankovich’s employment is terminated without cause or he resigns for
        good reason within the second or third years of his employment, we are obligated
        to pay him severance equal to nine months salary at his base salary rate
        at the
        time of termination. In the event of Mr. Stankovich’s termination without
        cause, the portion of the his options that are vested as of the date of his
        termination shall be exercisable for one year from the date of his termination.
        The employment agreement also places certain confidentiality, assignment
        of
        inventions and non-solicitation obligations on
        Mr. Stankovich.




***The
      Clark Employment Agreement***




We
      have
      entered into an Employment Agreement with James Clark, dated as of October
      26,
      2006, for the position of Vice President and Chief Operating Officer. The
      agreement provides for Dr. Clark to receive an initial base salary of
£120,000 (approximately $230,000) per year. Dr. Clark also is eligible to
      earn an annual bonus based upon our meeting certain performance targets and
      his
      meeting personal objectives as agreed upon with the CEO and approved by our
      board of directors. Dr. Clark is eligible to participate in our employee
      benefit plans and we are required to reimburse him for reasonable
      business-travel expenses.




33




Should
      either Dr. Clark or we give the other notice of the intention to terminate
      Dr. Clark’s employment, we may elect to terminate his employment
      immediately and we will be obligated, upon so electing, to pay to Dr. Clark
      a sum equal to his base salary exclusive of any contractual bonus or benefit
      in
      kind for the unexpired portion of the contractual notice entitlement. This
      obligation ceases if Dr. Clark commences alternate employment within the
      entitled notice period.




We
        granted Dr. Clark a non-qualified stock option under the 2006 Stock
        Plan, in an amount equal to 1% of the number of shares of our common stock
        outstanding on November 1, 2006 on a fully diluted basis or 70,859 options,
        at
        an exercise price equal to the IPO Price. The shares vest in equal annual
        amounts over a four-year period, beginning on the first anniversary of the
        initial grant date. The options will vest immediately upon a change in control.
        Dr. Clark will be eligible for additional option grants as approved by our
        board of directors. In the event of Dr. Clark’s termination without cause
        or for good reason, the portion of his options that are vested as of the
        date of
        his termination shall be exercisable for one year from the date of his
        termination. The employment agreement with Dr. Clark contains
        confidentiality, non-competition and non-solicitation
        provisions.




***The
      McNairn Employment Agreement***




We
      have
      entered into an Employment Agreement with Denise McNairn, dated as of February
      20, 2007, as amended on May 29, 2007 for the position of Vice President and
      General Counsel. The agreement has an initial term of three years with automatic
      one-year renewal terms thereafter. The agreement provides for Ms. McNairn to
      receive an initial base salary of $225,000 per year. Ms. McNairn also is
      eligible to earn an annual bonus of up to 35% of her base salary based upon
      our
      meeting certain performance targets and her meeting personal objectives as
      agreed upon with the CEO and approved by our board of directors. Ms. McNairn
      is
      eligible to participate in our employee benefit plans.




We
        granted Ms. McNairn a non-qualified stock option under the 2006 Stock Plan,
        in
        an amount equal to 1% of the number of shares of our common stock outstanding
        on
        February 20, 2007 on a fully diluted basis, or 71,278 options, at an exercise
        price equal to the IPO Price. The shares vest in equal annual amounts over
        a
        four-year period, beginning on the first anniversary of the initial grant
        date.
        The options will vest immediately upon a change in control. Ms. McNairn will
        be
        eligible for additional option grants as approved by our board of directors.




In
      the
      event that a change in control occurs within the first year of Ms. McNairn’s
      employment, and regardless of whether she is terminated, we are obligated to
      make cash payments to her equal to six months salary at her base salary rate
      at
      the time of change in control, as defined in the employment agreement. In the
      event that a change in control occurs within the second or third years of her
      employment, regardless of whether she is terminated, we are obligated to make
      cash payments equal to nine months salary at her base salary rate at the time
      of
      the change in control. In the event that Ms. McNairn’s employment is terminated
      without cause or she resigns for good reason, as defined under the agreement,
      during the first year of her employment we are obligated to pay her severance
      equal to six months salary at her base salary rate at the time of termination.
      In the event that Ms. McNairn’s employment is terminated without cause or she
      resigns for good reason within the second or third years of her employment,
      we
      are obligated to pay her severance equal to nine months salary at her base
      salary rate at the time of termination. In the event of Ms. McNairn’s
      termination without cause, the portion of her options that are vested as of
      the
      date of her termination shall be exercisable for one year from the date of
      her
      termination. The employment agreement also places certain confidentiality,
      assignment of inventions and non-solicitation obligations on Ms.
      McNairn.




34




**Outstanding
      Equity Awards at 2007 Fiscal Year-End**




Name
                  and Principal Position
              Grant
                  Date
              Number
                  of Securities Underlying Unexercised Options (#)
                  Exercisable
              Number
                  of Securities Underlying Unexercised Options (#)
                  Unexercisable
              Options
                  Exercise Price ($)
              Option
                Expiration
                  DateKathleen
                  Danenberg
                President
                  and CEO
              6/4/07
              70,859
              141,718
              7.00
              6/4/17Thomas
                  Stankovich,
                Chief
                  Financial Officer
              6/4/07
              -
              70,976
              7.00
              6/4/17James
                  Clark,
                Chief
                  Operating Officer
              6/4/07
              -
              70,859
              7.00
              6/4/17Denise
                  McNairn,
                General
                  Counsel
              6/4/07
              -
              71,278
              7.00
              6/4/17




We
          granted Ms. Danenberg non-qualified stock option under the 2006 Stock Plan,
          in an amount equal to 3% of the number of shares of our common stock outstanding
          on October 26, 2006 on a fully diluted basis or 212,577 options at an exercise
          price equal to the initial public offering price of our common stock. One
          third
          of Ms. Danenberg’s options will vest immediately upon the issuance of the
          options and the remainder shall vest in two equal installments on the first
          and
          second anniversary of the date of Ms. Danenberg’s employment agreement
          (October 26, 2006). The options will vest immediately upon a change in
          control.
  We
          granted Mr. Stankovich a non-qualified stock option under the 2006 Stock
          Plan, in an amount equal to 1% of the number of shares of our common stock
          outstanding on November 27, 2006, on a fully diluted basis, or 70,976 options,
          at an exercise price equal to the initial public offering price of our
          common
          stock. The shares vest in equal annual amounts over a four-year period,
          beginning on the first anniversary of the initial grant date. The options
          will
          vest immediately upon a change in control.
  We
          granted Dr. Clark a non-qualified stock option under the 2006 Stock
          Plan, in an amount equal to 1% of the number of shares of our common stock
          outstanding on November 1, 2006 on a fully diluted basis or 70,859 options,
          at
          an exercise price equal to the initial public offering price of our common
          stock. The shares vest in equal annual amounts over a four-year period,
          beginning on the first anniversary of the initial grant date. The options
          will
          vest immediately upon a change in control.
  We
          granted Ms. McNairn a non-qualified stock option under the 2006 Stock Plan,
          in
          an amount equal to 1% of the number of shares of our common stock outstanding
          on
          February 20, 2007 on a fully diluted basis, or 71,278 options, at an exercise
          price equal to the initial public offering price of our common stock. The
          shares
          vest in equal annual amounts over a four-year period, beginning on the
          first
          anniversary of the initial grant date. The options will vest immediately
          upon a
          change in control.




35




**Compensation
              of Directors**
  Director
              Compensation
  The
              table
              shows the compensation provided to our current non-employee directors
              for
              2007.
  **Name**
                    **Fees
                        earned or paid in cash**
                      **($)
                        (a)**
                    **Option
                        awards**
                      **($)
                        (b)**
                    **Total**
                      **($)**Hubertus
                        Spierings
                    13,000
                    7,161
                    20,161Gary
                        Nusbaum
                    12,500
                    2,720
                    15,220
 (a)  A
                full
                description of all fees paid to our directors is provided below.
                The cash
                portion of fees paid represent: 100% of the annual retainer and 100%
                of the
                committee meeting fees described below.
  (b) Represents
                  the compensation expense related to outstanding stock options we
                  recognized for
                  the year ended December 31, 2007 under Statement of Financial Accounting
                  Standards 123R to our named executive officers. Assumptions used
                  in the
                  calculation of these amounts are included in Note 11 to our financial
                  statements
                  for the year ended December 31, 2007.
  None
                of
                Mr. Smith, Mr. Serruya or Dr. DeMeester received compensation for
                serving as our
                directors in 2007.
  We
        paid
        Mr. Spierings and Mr. Nusbaum an annual retainer of $12,000 for their services
        on the board of directors. In addition, Mr. Spierings and Nusbaum received
        $500
        for participating in each audit committee meeting. We also granted Mr. Spierings
        a non-qualified option to purchase 11,500 shares of common stock at an exercise
        price equal to $7.00, the
        initial public offering price, which vests quarterly over a four year period.
        Mr. Nusbaum was granted a non-qualified option to purchase 11,500 shares
        of
        common stock at an exercise price equal to the exercise price of $4.29, which
        vests quarterly over a four year period. Each year the board of directors
        will
        grant Mr. Spierings an option to purchase an additional 11,500 shares of
        common
        stock, with an exercise price equal to the fair market value of the common
        stock
        on the date of grant, with the same vesting schedule and other terms and
        conditions as those options granted upon consummation of the initial public
        offering.
  On
        May
        29, 2007, the board of directors adopted a director compensation policy.
        Under
        the terms of this policy, all new directors, upon commencement of their service
        on the board and all current directors, beginning upon the commencement of
        our
        2008 fiscal year were to receive the following:
  · An
        annual
        retainer of $12,000.
  · An
        option
        to purchase 11,500 shares of our common stock at an exercise price equal
        to the
        fair market value of our common stock on the date of grant, vesting quarterly
        over a four-year period, and an option to purchase 11,500 shares of common
        stock, vesting quarterly over a period, each year thereafter. Continued vesting
        of the options is subject to continued service on the board of
        directors.
  All
        members of the audit committee of the board of directors also will receive
        a
        payment of $500 for each audit committee meeting attended.
  All
        directors will be reimbursed for reasonable expenses related to or in connection
        with each director’s service on our board of directors.
 
 On
        February 12, 2008, the Compensation Committee of the Board of Directors revised
        and adopted a director compensation policy. Under the terms of this policy,
        all
        new directors, upon commencement of their service on the board and all current
        directors, beginning with fiscal year 2008 will receive the
        following:
  An
        annual
        retainer of $20,000 (twenty thousand dollars) to be paid quarterly in arrears
        on
        the last day of the quarter.
  All
        members of the audit committee, the compensation committee and the nominating
        and governance committee of the board of directors also will receive a payment
        of $500 for each meeting of the respective committee attended, either in
        person
        or telephonically.
  The
        Chairman of each of the committees of the board of directors will receive
        a
        payment of $750 for each meeting of the committee meetings attended, either
        in
        person or telephonically.


Item
        11.
        Security Ownership of Certain Beneficial Owners and Management and Related
        Stockholder Matters.




The
      following table sets forth as of December 31, 2007 certain information regarding
      the beneficial ownership of our common stock by:




· each
      stockholder known by us to own beneficially more than five percent of our common
      stock;




· each
      of
      the executive officers named in the summary compensation table;




· each
      of
      our directors; and




· all
      of
      our current directors and executive officers as a group.




Beneficial
      ownership is determined in accordance with the rules of the SEC and includes
      voting or investment power with respect to the securities.




The
        number of shares of common stock and the percentage of common stock beneficially
        owned based on a total of 10,239,276 shares of common stock
        outstanding on February 27, 2008 and includes shares of common stock
        issuable within 60 days of February 29, 2008.




Except
      as
      indicated in the footnotes to this table, we believe that the stockholders
      named
      in this table have sole voting and investment power with respect to all shares
      of common stock shown to be beneficially owned by them, based on information
      provided to us by such stockholders. Unless otherwise indicated, the address
      for
      each director and executive officer listed is c/o Response Genetics, Inc.,
      1640
      Marengo St., 6th Floor, Los Angeles, CA 90033.




**Beneficial
                  Owner**
              ****
              **Number**
                **of Shares**
                **Beneficially**
                **Owned**
              ****
              ********Percentage of Shares****
                **Beneficially
                  Owned****Directors
                  and Executive Officers**David
                  M. Smith
              
              1,922,393
              (1)
              
              18.77
              %Mike
                  Serruya
              
              1,732,595
              (2)
              
              16.92
              %Kathleen
                  Danenberg
              
              426,108
              (3)
              
              4.16
              %Tom
                  DeMeester, MD
              
              372,845
              
              
              3.64
              %Hubertus
                  Spierings
              
              -
              
              
              -Gary
                  Nusbaum
              
              -
              
              
              -Thomas
                  Stankovich
              
              -
              
              
              -James
                  Clark
              
              -
              
              
              -Denise
                  McNairn
              
              -
              
              
              -All
                  current executive officers and directors as a group (7
                  persons)
              
              4,524,800
              
              
              44.19
              %**5%
                  or more stockholders**Susan
                  Smith
              
              1,922,393
              (4)
              
              18.77
              %Clara
                  Serruya
              
              1,732,595
              (5)
              
              16.92
              %Samuel
                  Serruya
              
              1,732,595
              (6)
              
              16.92
              %AWM
                  Investment Co., Inc.
              
              798,638
              (7)
              
              7.80
              %WSV
                  Management LLC
              
              514,440
              (8)
              
              5.02
              %


____________________


(1)
        Includes 536,164 shares of common stock owned by his mother, Susan Smith,
        as to
        which Mr. Smith disclaims beneficial ownership. (2)
            Includes 3,939 shares of common stock owned by Mr. Serruya, 864,328 shares
            of
            common stock owned by his father, Samuel Serruya, as to which Mr. Serruya
            disclaims beneficial ownership, 864,328 shares of common stock owned
            by his
            mother, Clara Serruya, as to which Mr. Serruya disclaims beneficial
            ownership.




36




(3)
          Includes of 426,108 shares of common stock jointly owned by Ms. Danenberg
          and her husband, Peter Danenberg.
 (4)
          Includes 1,386,229 shares of common stock owned by her son, David M. Smith,
          as
          to which Mrs. Smith disclaims beneficial ownership.
 (5)
          Includes 864,328 shares of common stock owned by her husband, Samuel Serruya,
          as
          to which Mrs. Serruya disclaims beneficial ownership and 3,939 shares of
          common
          stock her son, Michael Serruya, as to which Mrs. Serruya disclaims beneficial
          ownership.
 (6)
          Includes 864,328 shares of common stock owned by his wife, Clara Serruya,
          as to which Mr. Serruya disclaims beneficial ownership and 3,939 shares of
          common stock owned by his son, Michael Serruya, as to which Mr. Serruya
          disclaims beneficial ownership.
 (7)
          According to a Schedule 13G filed by AWM Investment Co. Austin W. Marxe
          and
          David M. Greenhouse have shared power to vote and dispose of or direct
          the
          disposition of 798,638 common shares. The principal address for AWM Investment
          Co. is 527 Madison Ave. #2600, New York, NY 10022.
 (8)
          According to a Schedule 13G filed by WSV Management, LLC, WSV Management,
          LLC,
          WS Ventures Management. L.P., Reid S. Walker, G. Stacy Walker, and Patrick
          P.
          Walker have shared power to vote and dispose of or direct the disposition
          of
          798,638 common shares. The principal address for WSV Management, LLC is
          300
          Crescent Court # 1100, Dallas, TX 75201.




37





**Securities
      Authorized For Issuance Under Equity Compensation Plans**





Plan
                  Category
              Number
                  of securities to be issued upon exercise of outstanding options,
                  warrants
                  and rights
                (a)
              Weighted-average
                  exercise price of outstanding options, warrants and rights
                (b)
              Number
                  of securities remaining available for future issuance under equity
                  compensation plans (excluding securities reflected in column(a))
                (c)Equity
                  compensation plans approved by security holders
              1,160,190
              $7.62
              1,183,810Equity
                  compensation plans not approved by security holders
              —
              —
              —Total
              1,160,190
              $7.62
              1,183,810




**Item
        12. Certain Relationships and Related Transactions, and Director Independence.**




The
        following is a description of transactions that were entered into with our
        executive officers, directors or 5% stockholders during the prior
        fiscal year. We believe that all of the transactions described below were
        made on terms no less favorable to us than could have been obtained from
        unaffiliated third parties. All future related party transactions will be
        approved by our audit committee or a majority of our independent directors
        who
        do not have an interest in the transactions and who will have access, at
        our
        expense, to our or independent legal counsel.




**Royalty
      Payment to the University of Southern California**




While
      employed at USC, Kathleen Danenberg, our President, Chief Executive Officer
      and
      a director, developed and patented (RGI-1). USC retains ownership of this patent
      but has exclusively licensed this technology to us. In consideration for this
      license, we are obligated to pay as royalties to USC a percentage of the net
      sales of products or services using the technology, and to meet a certain
      minimum in royalty payments. Pursuant to USC policy, the inventors of technology
      owned by the University and then licensed for commercialization are paid a
      portion of royalties received by the University from the licensed technology.
      USC therefore pays a portion of royalties received from us to Ms. Danenberg
      in recognition of her invention. Amounts paid to Ms. Danenberg by USC
      amounted to $18,574 and $34,658 respectively, for the years ended December
      31,
      2006 and 2007, respectively.





**Director
      Independence**





Our
      board
      of directors has determined that the following directors are independent in
      accordance with the applicable requirements of the SEC and the NASDAQ Stock
      Market Inc.:





Hubertus
      Spierings


Gary
      Nusbaum




**Committees
      of the Board of Directors**




In
        order
        to fulfill its responsibilities, our board of directors has delegated certain
        authority to its committees. There are three standing committees. During
        2007,
        our board held four meetings, one nominating and governance committee
        meeting and two audit committee meetings. Each of our directors
        attended at least 75% of the total number of meetings of the board of directors
        and the committees on which he served. We have utilized the phase-in provisions
        afforded to us by NASDAQ Marketplace Rule 4350(a)(5) and will be in compliance
        with the director and board committee independence requirements contained
        therein.




38




A
      brief
      description of each of the Board committees and their functions is described
      below. Additional information about the committees can be found in the committee
      charters, which are available on the Investor Relations section of our website
      at www.responsegenetics.com .
      Printed
      copies of these charters or the Code may be obtained without charge by writing
      to the Corporate Secretary.




***Audit
      Committee***




Our
      audit
      committee is composed of three members and is authorized to:




·
            assist
                the Board in monitoring the integrity of the financial statements
                of the
                Company and financial reporting procedures and the Company’s compliance
                with legal and regulatory
                requirements;




·
            approve
                and retain the independent auditors to conduct the annual audit of
                our
                books and records and inform the Board of any significant accounting
                matters, including accounting
                policies;




·
            review
                management’s accounting for the Company’s financial results and reviews
                the timeliness and adequacy of the reporting of those results and
                related
                judgments;




·
            review
                the proposed scope and results of the
                audit;




·
            review
                and pre-approve the independent auditor’s audit and non-audit services
                rendered;




·
            approve
                the audit fees to be paid;




·
            review
                accounting and financial controls with the independent auditors and
                our
                financial and accounting staff;




·
            review
                and approve transactions between us and our directors, officers and
                affiliates;




·
            recognize
                and prevent prohibited non-audit
                services;




·
            oversee
                internal audit functions and make inquiry into the audits of the
                Company’s
                books made internally and by outside independent registered public
                accounting firm;




·
            review
                the performance of the Audit
                Committee;




·
            establish
                procedures for the receipt, retention and treatment of complaints
                relating
                to accounting, internal accounting controls, and for the confidential,
                anonymous submission by employees of concerns regarding accounting
                or
                auditing matters;




·
            review
                and report to the Board on the Company’s management of its financial
                resources; and




·
            prepare
                the report of the audit committee that SEC rules require to be included
                in
                our annual meeting proxy statement.




Each
        of
        Mr. Spierings, Mr. Nusbaum and Mr. Serruya serves as a member of our audit
        committee. Mr. Serruya is not an independent director.




We
      engaged Singer Lewak Greenbaum and Goldstein LLP as our independent registered
      public accountants on June 9, 2006. Prior to this, we had not engaged an
      independent registered public accounting firm.




***Compensation
      Committee***




Our
      compensation committee is composed of three members and is authorized
      to:




·
            review
                and recommend the compensation arrangements for management, including
                the
                compensation for our president and chief executive
                officer;




·
            establish
                and review general compensation policies with the objective to attract
                and
                retain superior talent, to reward individual performance and to achieve
                our financial goals;




·
            administer
                our stock incentive plans; and




·
            prepare
                the report of the compensation committee that SEC rules require to
                be
                included in our annual meeting proxy
                statement.




Each
        of
        Mr. Spierings, Mr. Smith and Mr. Nusbaum serves as a member of our compensation
        committee. Mr. Smith is not an independent director.




***Governance
      and Nominating Committee***




Our
      nominating and governance committee is composed of three members and is
      authorized to:




·
            seek
                and identify individuals qualified to become Board members, and reviews
                and recommends possible candidates for Board membership, taking into
                account such criteria as independence, skills, diversity, occupation
                and
                experience in the context of the nees of the Board;




·
            review
                the structure of the Board, its committees and overall
                size;




·
            recommend
                for Board approval assignments of Board members to committees and
                selection of Board committee
                chairs;




39




·
            oversee
                the implementation of the Code of Business Conduct and Ethics and
                monitors
                compliance with the Code;




·
            determine
                a schedule for regular executive sessions of the Board in which
                non-management directors meet without management
                participation;




·
            develop
                and recommend to the Board corporate governance principles applicable
                to
                our company;




·
            oversee
                the process of succession planning for
                management;




·
            review
                and maintain oversight of matters relating to the independence of
                Board
                and committee members;




·
            review
                the performance of the nominating and governance committee;
                and




·
            oversee
                the annual performance evaluation of the board of directors and
                management.




Each
        of
        Mr. Spierings, Mr. Nusbaum and Dr. DeMeester serves as a member of our
        nominating and governance committee. Dr. DeMeester is not an independent
        director.





**Item
      13. Exhibits.**


3.1*
            
            Amended
                and Restated Certificate of Incorporation, as amended.3.2*
            
            Restated
                Bylaws of the Company.4.1*
            
            Warrant
                to purchase common stock issued to Maxim Group LLC and its
                designees.4.2*
            
            Form
                of Common Stock Certificate.10.1*†
            
            Master
                Agreement for the Supply of Laboratory Test Services by and between
                SmithKline Beecham Corporation (d.b.a. GlaxoSmithKline) and the Company,
                dated as of January 17, 2006.10.2*†
            
            Master
                Agreement for the Supply of Laboratory Services by and between
                GlaxoSmithKline Biologicals and the Company, dated as of December
                1,
                2006.10.3*†
            
            Services
                Agreement by and between Taiho Pharmaceutical Co., Ltd. And the Company,
                dated as of July 30, 2000.10.4*†
            
            License
                Agreement by and between Roche Molecular Systems, Inc. and the Company,
                dated as of November 23, 2004.10.5*†
            
            Patent
                License Agreement by and between Roche Molecular Systems Inc. and
                the
                Company, dated as of November 16, 2004.10.6*†
            
            Service
                Provider Agreement by and between Affymetrix, Inc. and the Company,
                dated
                as of September 29, 2006.10.7*†
            
            Option
                and License Agreement by and between the University of Southern California
                and the Company, as amended, dated as of April 19,
                2000.10.8*†
            
            Agreement
                by and between Applied Biosystems and the Company, dated December
                29,
                2005.10.9*#
            
            Employment
                Agreement by and between James Clark and the Company, dated as of
                October 26, 2006.10.10*#
            
            Employment
                Agreement by and between Thomas Stankovich and the Company, dated
                as
                of
              October
                25, 2006, as amended on May 29, 2007.10.11*#
            
            Employment
                Agreement by and between Kathleen Danenberg and the Company, dated
                as of
                October 26, 2006, as amended on December 14, 2006, and on
                May 29, 2007.10.12*#
            
            Employment
                Agreement by and between Denise McNairn and the Company, dated as
                of
                February 20, 2007, as amended on May 29,
                2007.10.13*#
            
            Response
                Genetics, Inc. 2006 Employee, Director and Consultant Stock
                Plan.10.14*
            
            Office
                Lease by and between Health Research Association and the Company,
                dated
                effective as of January 25, 2005.10.15*†
            
            Collaboration
                Agreement by and between the Company and Shanghai Biochip Company,
                Ltd.,
                dated as of March 5, 200710.16*
            
            Lease
                Agreement by and between the Company and the University Court of
                the
                University of Edinburgh, dated as of March 15,
                2007.10.17*#
            
            Executive
                Officer Form of Incentive Stock Option Agreement.10.18*#
            
            Executive
                Officer Form of Non-Qualified Stock Option Agreement.10.19@†
            
            Commission
                Agreement by and between Hitachi Chemical Co., LTD. and the Company,
                dated
                as of July 26, 2007.10.20#
            
            Director
              Compensation Policy.14*
            
            Code
                of Ethics.21*
            
            Subsidiaries
                of the Small Business Issuer.




40




31.1
              
              Certification
                  of Chief Executive Officer pursuant to Section 302 of the Sarbanes
                  Oxley
                  Act of 2002.31.2
              
              Certification
                  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 2002.32
              
              Certification
                  of Chief Executive Officer and Chief Financial Officer pursuant
                  to Section
                  906


——————


*
      Incorporated by reference to the Company’s Registration Statement on Form SB-2
      (File No. 333-139534).


@
      Incorporated by reference to the Company’s Quarterly Report on Form 10-QSB for
      the quarter ended September 30, 2007.


#
      Identifies a management contract or compensatory plan or agreement in which
      an
      executive officer or director of the Company participates.


†
      Confidential treatment requested as to certain portions, which portions have
      been filed separately with the Securities and Exchange Commission.





**Item
      14. Principal Accountant Fees and Services.**


Singer
          Lewak Greenbaum & Goldstein LLP (“SLGG”) has audited our financial
          statements since 2005. Good Swartz Brown & Berns LLP (“GSBB”) has provided
          us services for tax preparation, tax planning and consulting. Aggregate
          fees for
          professional services rendered for us by SLGG and GSBB were as
          follows:
 
 Services
                    Provided
                
                2007Audit
                    & audit related
                
                $
                300,025Tax
                    preparation, tax planning and consulting
                
                
                81,365Total
                
                $
                381,390


41




**SIGNATURES**


Pursuant
          to the requirements of Section 13 or 15(d) of the Securities Exchange Act
          of
          1934, the registrant has duly caused this report to be signed on its behalf
          by
          the undersigned, thereunto duly authorized **.**




**RESPONSE
                  GENETICS, INC.**Date:
                  March 31, 2008
              By:
              /s/
                Kathleen DanenbergKathleen
                  DanenbergPresident
                  and Chief Executive Officer






Pursuant
        to the requirements of the Securities Exchange Act of 1934, this report has
        been
        signed below by the following persons on behalf of the registrant and in
        the
        capacities indicated below and on the dates indicated.




Signatures
              
              Title
              DateBy:
              /s/
                    Kathleen Danenberg
              
              President
                  and Chief
              March
                  31, 2008Kathleen
                  Danenberg
              
              Executive
                  Officer (principal
                  executive
                    officer) and DirectorBy:
              /s/
                  Thomas Stankovich   -
              
              Vice
                  President and Chief
              March
                  31, 2008Thomas
                  Stankovich
              
              Financial
                  Officer (principal
                  financial
                    and accounting officer)By:
              /s/
                    Tom DeMeester, M.D.
              
              Chairman
                  of the Board****
              March
                  31, 2008Tom
                  DeMeester, M.D.By:
              /s/
                    Hubertus Spierings
              
              Director
              March
                  31, 2008Hubertus
                  SpieringsBy:
              /s/
                  Gary Nusbaum
              
              Director
              March
                  31, 2008Gary
                  NusbaumBy:
              /s/
                    Michael Serruya
              
              Director
              March
                  31, 2008Michael
                  SerruyaBy:
              /s/
                  David M. Smith
              
              Director
              March
                  31, 2008David
                  M. Smith


42




**FINANCIAL
      STATEMENTS**




**INDEX**




**Page**Report
                  of Independent Registered Public Accounting Firm
              
              
              F-2Consolidated
                  Balance Sheets as of December 31, 2006 and 2007
              
              
              F-3Consolidated
                  Statements of Operations for the Years Ended December 31, 2006
                  and
                  2007
              
              
              F-4Consolidated
                  Statements of Cash Flows for the Years Ended December 31, 2006
                  and
                  2007
              
              
              F-5Consolidated
                    Statements of Stockholders’ (Deficit) Equity and Comprehensive Loss for
                    the Years Ended December 31, 2006 and 2007
              
              
              F-6Notes
                  to Consolidated Financial Statements
              
              
              F-7
                  - F-23




F-1




**Report
            of Independent Registered Public Accounting Firm**
 
 To
            the Board of Directors and Stockholders
 Response
            Genetics, Inc.
 
 We
            have audited the consolidated balance sheets of Response Genetics, Inc.
            and
            subsidiaries (the “Company”) as of December 31, 2007 and 2006, and the related
            consolidated statements of operations, statement of stockholders’ (deficit)
            equity and comprehensive loss and cash flows for the years then ended.
            These
            financial statements are the responsibility of the Company's management.
            Our
            responsibility is to express an opinion on these financial statements
            based on
            our audits.
 
 We
            conducted our audits in accordance with the standards of the Public Company
            Accounting Oversight Board (United States). Those standards require that
            we plan
            and perform the audits to obtain reasonable assurance about whether the
            financial statements are free of material misstatement. An audit includes
            examining, on a test basis, evidence supporting the amounts and disclosures
            in
            the financial statements. An audit also includes assessing the accounting
            principles used and significant estimates made by management, as well
            as
            evaluating the overall financial statement presentation. We believe that
            our
            audits provide a reasonable basis for our opinion.
 
 In
            our opinion, the consolidated financial statements referred to above
            present
            fairly, in all material respects, the financial position of the Company
            as of
            December 31, 2007 and 2006, and the results of their operations and their
            cash
            flows for each of the years then ended, in conformity with U.S. generally
            accepted accounting principles.
 
 As
            discussed in Note 13 to the consolidated financial statements, the Company
            has
            adopted the provisions of Statement of Financial Accounting Standards
            Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an
            Interpretation of FASB Statement No. 109” on January 1, 2007.
 
 As
            discussed in Note 2 to the consolidated financial statements, the Company
            has
            adopted the provisions of Statement of Financial Accounting Standards
            No. 123
            (R), “Share-Based Payment” on January 1, 2006.
 
 /S/Singer
            Lewak Greenbaum and Goldstein LLP
 
 March
            28, 2008
 Singer
            Lewak Greenbaum and Goldstein LLP
 Los
            Angeles, California


F-2




**RESPONSE
      GENETICS, INC.**




**CONSOLIDATED
      BALANCE SHEETS**





**As
                  of****December 31,****2006**
              
              **2007******
              
              ******ASSETS**Current
                  assetsCash
                  and cash equivalents
              
              $
              4,930,123
              
              $
              17,024,209Accounts
                  receivable
              
              
              1,288,255
              
              
              4,206,765Prepaid
                  expenses and other current assets
              
              
              837,238
              
              
              562,403Total
                  current assets
              
              
              7,055,616
              
              
              21,793,377Property
                  and equipment, net
              
              
              1,184,963
              
              
              2,593,303Other
                  assets
              
              
              19,102
              
              
              27,353Total
                  assets
              
              $
              8,259,681
              
              $
              24,414,033**LIABILITIES
                  AND STOCKHOLDERS’ (DEFICIT) EQUITY**Current
                  liabilitiesAccounts
                  payable
              
              $
              404,008
              
              $
              234,705Accrued
                  expenses
              
              
              547,119
              
              
              305,517Accrued
                  royalties
              
              
              123,852
              
              
              264,551Accrued
                  payroll, bonus and related liabilities
              
              
              595,276
              
              
              521,123Deferred
                  revenue
              
              
              1,628,325
              
              
              7,191,514Total
                  current liabilities
              
              
              3,298,580
              
              
              8,517,410Notes
                  payable to stockholders
              
              
              716,854
              
              
              —Accrued
                  interest on notes payable to stockholders
              
              
              329,036
              
              
              —Accrued
                  dividends
              
              
              6,097,579
              
              
              —Deferred
                  revenue, net of current portion
              
              
              3,320,000
              
              
              790,848Total
                  liabilities
              
              
              13,762,049
              
              
              9,308,258**Commitments
                  and contingencies**Stockholders’
                  (deficit) equitySeries
                  B Convertible Preferred Stock, $0.01 par value; 1,038,048 and 0
                  issued and
                  outstanding (liquidation preference of $9 per share, or $9,342,432
                  plus
                  accrued but unpaid dividends) atDecember
                  31, 2006 and December 31, 2007, respectively
              
              
              10,380
              
              
              —Series
                  A Junior Convertible Preferred Stock, $0.01 par value; 500,000
                  and 0
                  issued and outstanding (liquidation preference of $5 per share,
                  or
                  $2,500,000) at December 31, 2006 and December 31, 2007,
                  respectively
              
              
              5,000
              
              
              —Common
                  stock, $0.01 par value; 20,000,000 and 50,000,000 shares authorized;
                  2,726,320 and 10,239,276 shares issued andoutstanding
                  at December 31, 2006 and December 31, 2007,respectively
              
              
              27,263
              
              
              102,393Additional
                  paid-in capital
              
              
              9,722,273
              
              
              35,356,569Accumulated
                  deficit
              
              
              (15,267,284
              )
              
              (20,320,191
              )Accumulated
                  other comprehensive loss
              
              
              —
              
              
              (32,996
              )Total
                  stockholders’ (deficit) equity
              
              
              (5,502,368
              )
              
              15,105,775Total
                  liabilities and stockholders’ (deficit) equity
              
              $
              8,259,681
              
              $
              24,414,033




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




F-3






**RESPONSE
      GENETICS, INC.**




**CONSOLIDATED
      STATEMENTS OF OPERATIONS**




**Year
                  Ended**
                **December
                  31,******
              
              **2006**
              
              **2007**Revenue
              
              $
              6,017,025
              
              $
              7,789,789Operating
                  expenses:Cost
                  of revenue
              
              
              2,456,071
              
              
              4,045,715General
                  and administrative
              
              
              3,933,660
              
              
              6,786,890Research
                  and development
              
              
              1,261,981
              
              
              2,455,044Total
                  operating expenses
              
              
              7,651,712
              
              
              13,287,649Operating
                  (loss)
              
              
              (1,634,687
              )
              
              (5,497,860
              )Other
                  (expense):Interest
                  expense
              
              
              (57,537
              )
              
              (28,669
              )Interest
                  income
              
              
              138,598
              
              
              517,645Other
              
              
              196,783
              
              
              —Loss
                  before income taxes
              
              
              (1,356,843
              )
              
              (5,008,884
              )Provision
                  for income taxes
              
              
              800
              
              
              44,023Net
                  income (loss)
              
              
              (1,357,643
              )
              
              (5,052,907
              )Preferred
                  stock dividends
              
              
              (934,244
              )
              
              (412,625
              )Net
                  Loss attributable to common stockholders
              
              $
              (2,291,887
              )
              $
              (5,465,532
              )Net
                  Loss per share — basic
              
              $
              (0.84
              )
              $
              (0.78
              )Net
                  Loss per share — diluted
              
              $
              (0.84
              )
              $
              (0.78
              )Weighted-average
                  shares — basic
              
              
              2,726,320
              
              
              6,987,092Weighted-average
                  shares — diluted
              
              
              2,726,320
              
              
              6,987,092




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




F-4






**RESPONSE
      GENETICS, INC.**




**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





**Year
                  Ended**
                **December
                  31,******
              
              **2006**
              
              **2007****Cash
                  flows from operating activities:**Net
                  loss
              
              $
              (1,357,643
              )
              $
              (5,052,907
              )Adjustments
                  to reconcile net loss to net cash provided by (used in) operating
                  activities:Depreciation
                  and amortization
              
              
              315,015
              
              
              572,095Share-based
                  compensation
              
              
              (17,115
              )
              
              1,549,655Gain
                  on sale of property and equipment
              
              
              (17,782
              )
              
              —Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              (577,420
              )
              
              (2,918,510
              )Prepaid
                  expenses and other current assets
              
              
              (615,872
              )
              
              (339,149
              )Other
                  assets
              
              
              —
              
              
              (8,251
              )Accounts
                  payable
              
              
              292,715
              
              
              (169,303
              )Accrued
                  expenses
              
              
              470,618
              
              
              (241,602
              )Accrued
                  royalties
              
              
              63,476
              
              
              140,699Accrued
                  payroll and related liabilities
              
              
              578,041
              
              
              (74,153
              )Accrued
                  interest on notes payable to stockholders
              
              
              48,746
              
              
              21,394Deferred
                  revenue
              
              
              3,994,450
              
              
              3,034,037Net
                  cash provided by (used in) operating activities
              
              
              3,177,229
              
              
              (3,485,995
              )**Cash
                  flows from investing activities:**Purchase
                  of property and equipment
              
              
              (912,987
              )
              
              (1,980,435
              )Proceeds
                  from sale of property and equipment
              
              
              32,267
              
              
              —Net
                  cash used in investing activities
              
              
              (880,720
              )
              
              (1,980,435
              )**Cash
                  flows from financing activities:**Proceeds
                  from issuance of common stock
              
              
              —
              
              
              21,000,000Transaction
                costs relating to issuance of common stock
              
              
              —
              
              
              (3,406,488
              )Net
                  cash provided by financing activities
              
              
              —
              
              
              17,593,512Effect
                  of foreign exchange rates on cash and cash equivalents
              
              
              —
              
              
              (32,996
              )Net
                  increase in cash and cash equivalents
              
              
              2,296,509
              
              
              12,094,086**Cash
                  and cash equivalents:**Beginning
                  of period
              
              
              2,633,614
              
              
              4,930,123End
                  of period
              
              $
              4,930,123
              
              $
              17,024,209**Cash
                  paid during the period for:**Income
                  taxes
              
              $
              800
              
              $
              16,754Interest
              
              $
              8,770
              
              $
              —


Supplemental
            non-cash financing activities
 
 The
            following non-cash transactions occurred in connection with the Company's
            June
            8, 2007 initial public offering:
 ·
                  Notes
                      payable of $716,854 and $350,430 of accrued interest were converted
                      to an
                      aggregate of 152,489 shares of common
                      stock ·
                  $6,510,204
                      of accrued but unpaid dividends on Series B Preferred Stock
                      automatically
                      converted into 1,760,467 shares of common
                      stock ·
                  $613,984
                      of transaction costs recorded in prepaid expenses at December
                      31, 2006
                      were reclassified as a reduction in the proceeds of the initial
                      public
                      offering ·
                  The
                      Company issued 100,000 warrants to purchase 100,000 shares
                      of its common
                      stock, for proceeds of $100, to the underwriters. The $329,000
                      fair value
                      of the warrants was recorded as a reduction in the proceeds
                      of the initial
                      public offering




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




F-5






**RESPONSE
      GENETICS, INC.**




**Consolidated
      Statement of Stockholders’ (Deficit) Equity and Comprehensive
      Loss**




**Series
                  B Convertible**
                **Preferred
                  Stock**
              
              
              **Series
                  A Convertible**
                **Preferred
                  Stock**
              
              
              **Common
                  Stock****Number
                  of**
                **Shares**
              
              
              **Amount**
              
              
              **Number
                  of Shares**
              
              
              **Amount**
              
              
              **Number
                  of**
                **Shares**
              
              
              **Amount**
              
              
              **Additional
                  Paid-in Capital**
              
              
              **Deferred
                  Compensation**
              
              
              **Accumulated
                  Deficit**
              
              
              **Accumulated**
                **Other**
                **Comprehensive**
                **Loss**
              
              
              **Total
                  Stockholders'**
                **(Deficit)
                  Equity**Balances
                  at December 31, 2005
              
              
              1,038,048
              
              $
              10,380
              
              
              500,000
              
              $
              5,000
              
              
              2,726,320
              
              $
              27,263
              
              $
              10,689,376
              
              $
              (15,744
              )
              $
              (13,909,641
              )
              $
              —
              
              $
              (3,193,366
              )Accrued
                  dividends on Series B Convertible Preferred Stock
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (934,244
              )
              
              —
              
              
              —
              
              
              —
              
              
              (934,244
              )Write-off
                  of deferred stock-based compensation
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (15,744
              )
              
              15,744
              
              
              —
              
              
              —
              
              
              —Adjustment
                  to stock based compensation expense for options subject to variable
                  accounting
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (17,115
              )
              
              —
              
              
              —
              
              
              —
              
              
              (17,115
              )Net
                  loss and comprehensive loss
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (1,357,643
              )
              
              —
              
              
              (1,357,643
              )Balance
                  at December 31, 2006
              
              
              1,038,048
              
              $
              10,380
              
              
              500,000
              
              $
              5,000
              
              
              2,726,320
              
              $
              27,263
              
              $
              9,722,273
              
              
              —
              
              $
              (15,267,284
              )
              $
              —
              
              $
              (5,502,368
              )Accrued
                  dividends on Series B Convertible Preferred Stock
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (412,625
              )
              
              —
              
              
              —
              
              
              —
              
              
              (412,625
              )Conversion
                  of Series A and Series B Preferred Stock, as further discussed
                  in Note
                  10
              
              
              (1,038,048
              )
              
              (10,380
              )
              
              (500,000
              )
              
              (5,000
              )
              
              4,360,467
              
              
              43,605
              
              
              6,481,979
              
              
              —
              
              
              —
              
              
              —
              
              
              6,510,204Conversion
                  of Notes Payable to Stockholders, as further discussed in Note
                  10
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              152,489
              
              
              1,525
              
              
              1,065,759
              
              
              —
              
              
              —
              
              
              —
              
              
              1,067,284Issuance
                  of common stock in connection with initial public offering, net
                  of
                  $4,020,472 of transaction costs, including warrants to purchase
                  100,000
                  shares of common stock, as further discussed in Note 10
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              3,000,000
              
              
              30,000
              
              
              16,949,528
              
              
              —
              
              
              —
              
              
              —
              
              
              16,979,528Adjustment
                  to stock-based compensation expense for options subject to variable
                  accounting
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (82,606
              )
              
              —
              
              
              —
              
              
              —
              
              
              (82,606
              )Share-based
                  compensation expense related to issuance of employee stock
                  options
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              1,632,261
              
              
              —
              
              
              —
              
              
              —
              
              
              1,632,261Unrealized
                  loss on foreign currency translation
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (32,996
              )
              
              (32,996
              )Net
                  loss
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (5,052,907
              )
              
              —
              
              
              (5,052,907
              )Comprehensive
                  loss
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (5,085,903
              )Balances
                  at December 31, 2007
              
              
              —
              
              $
              —
              
              
              —
              
              $
              —
              
              
              10,239,276
              
              $
              102,393
              
              $
              35,356,569
              
              
              —
              
              $
              (20,320,191
              )
              $
              (32,996
              )
              $
              15,105,775




F-6






**RESPONSE
        GENETICS, INC.**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **1.
        Organization, Operations and Basis of Accounting**
  Response
        Genetics, Inc. (the “Company”) was incorporated in the state of Delaware on
        September 23, 1999 as Bio Type, Inc. for the purpose of providing unique
        molecular profiling services of tumor tissue that has been formalin-fixed
        and
        embedded in paraffin wax. In August 2000, the Company changed its name to
        Response Genetics, Inc.
  The
        Company is a life science company engaged in the research, development,
        marketing and sale of pharmacogenomic tests for use in the treatment of cancer.
        Pharmacogenomics is the science of how an individual’s genetic makeup relates to
        drug response. Tests based on pharmacogenomics facilitate the prediction
        of a
        response to drug therapy or survival following surgery based on an individual’s
        genetic makeup. In order to generate pharmacogenomic information from patient
        specimens for these tests, the Company developed and patented enabling methods
        for maximizing the extraction and analysis of nucleic acids and, therefore,
        accessing the genetic information available from each patient sample. The
        Company’s platforms include analysis of single biomarkers using the polymerase
        chain reaction method as well as global gene interrogation using microarray
        methods from paraffin or frozen tissue specimens. The Company primarily derives
        its revenue by providing pharmacogenomic testing services to pharmaceutical
        companies in the United States, Asia and Europe.
  **2.
        Summary of Significant Accounting Policies**
  ***Basis
        of Consolidation***
  The
        consolidated financial statements include the accounts of Response Genetics,
        Inc. and its wholly owned subsidiary, Response Genetics, Ltd., a Scottish
        corporation, which was incorporated in October 2006. All significant
        intercompany transactions and balances have been eliminated in
        consolidation.
  ***Cash
        and Cash Equivalents***
  The
        Company considers all highly liquid investments with a maturity at date of
        purchase of three months or less to be cash equivalents. The carrying value
        of
        cash equivalents approximates fair value due to the short-term nature and
        liquidity of these instruments. The Company’s cash equivalents are comprised of
        cash on hand, deposits in banks and money market investments.
  ***Accounts
        Receivable***
  The
        Company invoices its clients as specimens are processed and any other
        contractual obligations are met. The Company’s contracts with clients typically
        require payment within 45 days of the date of invoice. The Company maintains
        allowances for doubtful accounts for estimated losses resulting from the
        inability of its clients to make required payments. The Company specifically
        analyzes accounts receivable and historical bad debts, client credit, current
        economic trends and changes in client payment trends when evaluating the
        adequacy of the allowance for doubtful accounts. Account balances are
        charged-off against the allowance when it is probable the receivable will
        not be
        recovered. To date, the Company’s clients have primarily been large
        pharmaceutical companies. As a result, bad debts to date have been minimal.
        There were no allowances for doubtful accounts recorded at December 31, 2006
        and
        2007.
  ***Supply
        Inventories***
  The
        Company purchases reagents, analyte specific reagents, and other supplies
        to
        conduct various laboratory tests on an as needed basis with turnover typically
        within 30 days of purchase. The Company’s primary product is data generated from
        its pharmacogenomic testing services. Hence, the Company does not record
        either
        product or supply inventories as part of its financial statements as these
        are
        considered immaterial to the Company’s financial position and results of
        operations.
  ***Property
        and Equipment***
  Property
        and equipment are carried at cost less accumulated depreciation and
        amortization. Depreciation and amortization are calculated using the double
        declining balance method over the estimated useful lives of the assets. The
        Company has determined the estimated useful lives of its property and equipment,
        as follows:
  Laboratory
                  equipment
              
              5
                  to 7 yearsFurniture
                  and Equipment
              
              5
                  to 7 yearsLeasehold
                  Improvements
              
              Shorter
                  of the useful life or the lease term (5 to 7
                  years)
 Maintenance
        and repairs are charged to expense as incurred. The cost and accumulated
        depreciation of assets sold or otherwise disposed of are removed from the
        related accounts and the resulting gain or loss is reflected in the statements
        of operations.





F-7






**RESPONSE
      GENETICS, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**2.
      Summary of Significant Accounting Policies
 - (continued)**




***Revenue
      Recognition***




Revenues
        are derived from pharmacogenomic testing services provided to pharmaceutical
        companies and are recognized on a contract specific basis pursuant to the
        terms
        of the related agreements. Revenue is recognized in accordance with SEC Staff
        Accounting Bulletin No. 104, *Revenue
        Recognition,* which
        requires that four basic criteria must be met before revenue can be recognized:
        (1) persuasive evidence of an arrangement exists; (2) delivery has occurred
        and
        title and the risks and rewards of ownership have been transferred to the
        client
        or services have been rendered; (3) the price is fixed or determinable; and
        (4)
        collectibility is reasonably assured.




Revenues
      are recorded on an accrual basis as the contractual obligations are completed
      and as a set of assays is processed through the Company’s laboratory under a
      specified contractual protocol. Certain contracts have minimum assay
      requirements that, if not met, result in payments that are due upon the
      completion of the designated period. In these cases, revenues are recognized
      when the end of the specified contract period is reached.




On
      occasion, the Company may enter into a contract that requires the client to
      provide an advance payment for specimens that will be processed at a later
      date.
      In these cases, the Company records this advance as deferred revenue and
      recognizes the revenue as the specimens are processed or at the end of the
      contract period, as appropriate.




***Cost
      of Revenue***




Cost
      of
      revenue represents the cost of materials, direct labor, costs associated with
      processing tissue specimens including pathological review, staining,
      microdissection, paraffin extraction, reverse transcription polymerase chain
      reaction, or (“RT-PCR”) and quality control analyses, license fees and delivery
      charges necessary to render an individualized test result. Costs associated
      with
      performing tests are recorded as the tests are processed.




***Other
      Income***




During
      the year ended December 31, 2006, the Company entered into an agreement with
      a
      client to provide certain testing services. In order to perform such testing
      services within the timeframe required by the client, which was by no later
      than
      June 30, 2006, the Company was required to purchase additional laboratory
      equipment totaling $179,000 which was reimbursed by the client pursuant to
      the
      terms of the agreement. This equipment was used to perform the services pursuant
      to this agreement and will continue to be used by the Company in its on-going
      operations over the useful life of the equipment which is estimated to be five
      years. Upon the purchase of the equipment, the Company recorded the $179,000
      reimbursement of the equipment purchase, which is non-recurring in nature,
      as
      other non-operating income during the year ended December 31, 2006.




***Patent
      License Fees***




The
      Company has licensed technology for the extraction of mRNA from formalin-fixed,
      paraffin-embedded tumor specimens from the University of Southern California
      (“USC”). Under the terms of the license agreement, the Company is required to
      pay royalties to USC based on the revenue generated by use of this technology.
      The Company maintains a non-exclusive license to use the polymerase chain
      reaction (“PCR”), homogenous PCR, and reverse transcription PCR processes of
      Roche Molecular Systems, Inc. (“Roche”). The Company pays Roche Molecular
      Systems a royalty fee based on revenue that the Company generates through use
      of
      this technology. The Company accrues for such royalties at the time revenue
      is
      recognized. Such royalties are included in cost of revenue in the accompanying
      statements of operations.




***Research
      and Development***




The
      Company expenses costs associated with research and development activities
      as
      incurred. Research and development costs are allocated on a pro rata basis
      using
      the number of research-only specimens that are processed by the Company versus
      specimens that are processed and paid for by various third parties via contract.
      Research and development costs include employee costs (salaries, payroll taxes,
      benefits, and travel), equipment depreciation and warranties and maintenance,
      laboratory supplies, primers and probes, reagents, patent costs and occupancy
      costs.




***Income
      Taxes***




Deferred
      tax assets and liabilities are determined based on differences between the
      financial reporting and tax bases of assets and liabilities and are measured
      using the enacted tax rates and laws that will be in effect when the differences
      are expected to reverse. Valuation allowances are established when necessary
      to
      reduce deferred tax assets to the amount expected to be realized.




The
            Company adopted the Financial Accounting Standards Board's Interpretation
            No.
            48, "Accounting for Uncertainty in Income Taxes, an interpretation of
            FASB
            Statement No. 109" ("FIN 48") effective January 1, 2007. FIN 48 clarifies
            the
            accounting for uncertainty in income taxes recognized in financial statements
            and requires the impact of a tax position to be recognized in the financial
            statements if that position is more likely than not of being sustained
            by the
            taxing authority. At the date of adoption, and as of December 31, 2007,
            the
            Company does not have a liability for unrecognized tax benefits.


F-8




**TABLE
      OF CONTENTS**




**RESPONSE
      GENETICS, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**2.
      Summary of Significant Accounting Policies
 - (continued)**




***Stock-Based
      Compensation***




The
        Company accounts for stock-based compensation under the guidance
        of Statement
        of Financial Accounting Standards No. 123(R), “Share-Based Payments,” (“SFAS
        123(R)”) which requires the measurement and recognition of compensation expense
        for all share-based payment awards based on estimated fair
        values.




Under
          the
          modified prospective method of SFAS No. 123(R), compensation expense was
          recognized during the years ended December 31, 2007 and 2006 and includes
          compensation expense for all stock-based payments granted prior to, but
          not yet
          vested as of January 1, 2006, based on the grant date fair value estimated
          in accordance with the original provisions of SFAS No. 123 and compensation
          expense for all stock based payments granted after January 1, 2006, based
          on the grant date fair value estimated in accordance with the provisions
          of SFAS
          No. 123(R). The Company’s financial results for the prior periods have not
          been restated. Stock-based
          compensation expense recognized under SFAS 123(R) was $15,383 and $1,549,655
          for
          the years ended December 31, 2006 and 2007, respectively. The Company accounts
          for equity instruments issued to non-employees in accordance with the provisions
          of Emerging Issues Task Force No. 96-18, *Accounting
          for Equity Instruments that are Issued to Other than Employees for Acquiring,
          or
          in Conjunction with Selling, Goods or Services* (“EITF
          96-18”). Under EITF 96-18, stock option awards issued to non-employees are
          accounted for at fair value using the Black-Scholes option-pricing
          model.




***Management
      Estimates***




The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States requires management to make estimates
      and assumptions that affect the reported amounts of assets and liabilities
      and
      disclosure of contingent assets and liabilities at the date of the financial
      statements and the reported amounts of revenues and expenses during the
      reporting period. Actual results could differ from those estimates. Management
      has identified revenue, the fair value of its preferred and common stock and
      the
      assessment of the realizability of deferred income tax assets as areas where
      significant estimates and assumptions have been made in preparing the financial
      statements.




***Long-lived
      Assets***




Long-lived
      assets are reviewed for impairment whenever events or changes in circumstances
      indicate that the carrying amount of an asset may not be recoverable. The
      Company evaluates potential impairment by comparing the carrying amount of
      the
      asset with the estimated undiscounted future cash flows associated with the
      use
      of the asset and its eventual disposition. Should the review indicate that
      the
      asset is not recoverable, the Company’s carrying value of the asset would be
      reduced to its estimated fair value, which is measured by future discounted
      cash
      flows.




***Foreign
      Currency Translation***




The
      financial position and results of operations of the Company’s foreign operations
      are determined using local currency as the functional currency. Assets and
      liabilities of these operations are translated at the exchange rate in effect
      at
      each period-end. Statement of operations amounts are translated at the average
      rate of exchange prevailing during the period. Translation adjustments arising
      from the use of differing exchange rates from period to period are included
      in
      accumulated other comprehensive loss in stockholders’ equity.




***Comprehensive
      Income (Loss)***




Comprehensive
      income (loss) encompasses the change in equity from transactions and other
      events and circumstances from non-owner sources and the Company’s net income
      (loss). There was no difference between comprehensive loss and net loss for
      the
      year ended December 31, 2006. Accumulated other comprehensive loss is comprised
      of foreign currency translation adjustments for the year ended December 31,
      2007.




***Fair
      Value of Financial Instruments***




The
      carrying amounts of the Company’s financial instruments, which include cash,
      cash equivalents, accounts receivable, accounts payable, and accrued expenses,
      approximate fair value due to the short term nature of these financial
      instruments. The carrying value of the notes payable to stockholders is
      considered to approximate fair value as the interest rates and other related
      terms of the notes approximate market rates.




F-9






**RESPONSE
      GENETICS, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**2.
      Summary of Significant Accounting Policies
 - (continued)**




***Concentration
      of Credit Risk and Clients and Limited Suppliers***




Cash
      and
      cash equivalents consist of financial instruments that potentially subject
      the
      Company to concentrations of credit risk to the extent recorded on the balance
      sheets. The Company maintains cash in United States financial institutions
      in
      excess of Federal Deposit Insurance Corporation limitations. In addition, the
      Company has invested its excess cash in money market instruments which are
      not
      insured under the Federal Deposit Insurance Corporation. The Company has not
      incurred any losses on these cash balances as of December 31, 2007. At December
      31, 2006 and 2007, the Company had cash on deposit that was in excess of the
      federally insured limit of $100,000. At December 31, 2007, approximately
      $512,000 of cash was held outside of the United States.




Clients
      that account for greater than 10 percent of revenue or accounts receivable
      are
      provided below.




**Year****Ended December 31,****2006**
              
              
              **2007****Revenue**
              
              
              **Percent
                  of Total**
                **Revenue**
              
              
              **Revenue**
              
              
              **Percent
                  of Total**
                **Revenue**Taiho
                  Pharmaceutical
              
              $
              2,745,125
              
              
              46
              %
              $
              2,864,425
              
              
              37
              %GlaxoSmithKline
              
              $
              2,374,800
              
              
              39
              %
              $
              2,818,288
              
              
              36
              %GlaxoSmithKlineBiologicals
              
              $
              —
              
              
              —
              %
              $
              938,701
              
              
              12
              %




**As
                of****December 31****2006**
            
            
            **2007****Receivable**
              **Balance**
            
            
            **Percent
                of**
              **Total**
              **Receivables**
            
            
            **Receivable**
              **Balance**
            
            
            **Percent
                of**
              **Total**
              **Receivables**Taiho
                Pharmaceutical
            
            $
            416,300
            
            
            33
            %
            $
            396,100
            
            
            9
            %GlaxoSmithKline
            
            $
            584,000
            
            
            47
            %
            $
            567,139
            
            
            14
            %GlaxoSmithKline
                Biologicals
            
            $
            —
            
            
            —
            
            $
            3,059,597
            
            
            73
            %




Many
      of
      the supplies and reagents used in the Company’s testing process are procured by
      a limited number of suppliers. Any supply interruption or an increase in demand
      beyond the suppliers’ capabilities could have an adverse impact on the Company’s
      business. Management believes it can identify alternative sources, if necessary,
      but it is possible such sources may not be identified in sufficient time to
      avoid an adverse impact on its business. Refer also to Notes 8 and 9 for further
      discussion regarding these supply agreements.




F-10






**RESPONSE
      GENETICS, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**2.
      Summary of Significant Accounting Policies
 - (continued)**




*Recent
        Accounting Pronouncements*




On
        July
        13, 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”),
        which
        interprets SFAS No. 109, “Accounting for Income Taxes.” FIN 48 clarifies the
        accounting for uncertainty in income taxes recognized in an enterprise’s
        financial statements in accordance with FASB Statement No. 109, Accounting
        for
        Income Taxes. FIN 48 also prescribes a recognition threshold and measurement
        attribute for the financial statement recognition and measurement of a tax
        position taken or expected to be taken in a tax return that results in a
        tax
        benefit. Additionally, FIN 48 provides guidance on de-recognition, income
        statement classification of interest and penalties, accounting in interim
        periods, disclosure, and transition. This interpretation is effective for
        fiscal
        years beginning after December 15, 2006. The adoption of FIN 48 did not have
        a
        material impact on the Company’s financial position, results of operations or
        cash flows.




In
        September 2006, the FASB issued SFAS No. 157, *Fair
        Value Measurements* .
        SFAS
        No. 157 establishes a framework for measuring fair value in generally accepted
        accounting principles, and expands disclosures about fair value measurements.
        The standard applies whenever other standards require (or permit) assets
        or
        liabilities to be measured at fair value. The standard does not expand the
        use
        of fair value in any new circumstances. SFAS No. 157 is effective for financial
        statements issued for fiscal years beginning after November 15, 2007, and
        interim periods within those fiscal years. Earlier application is encouraged.
        The Company does not believe that the adoption of SFAS No. 157 will have
        a
        material impact on its financial position, results of operations or cash
        flows.




In
        February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
        Financial Assets and Financial Liabilities — Including an amendment of
        FASB Statement No. 115. SFAS 159 permits companies to choose to measure certain
        financial instruments and other items at fair value. SFAS 159 also establishes
        presentation and disclosure requirements designed to facilitate comparison
        between entities that choose different measurement attributes for similar
        types
        of assets and liabilities. The standard is effective for fiscal years beginning
        after November 15, 2007. The Company does not believe the adoption of SFAS
        159
        will have a material impact on its consolidated financial
        statements.


In
          December 2007, FASB issued SFAS No. 141(R), “Business Combinations”, an
          amendment of SFAS No. 141, which improves the relevance, representational
          faithfulness, and comparability of the information that a reporting entity
          provides in its financial reports about a business combination and its
          effects.
          SFAS 141(R) applies for all business combinations for which the acquisition
          date
          is on or after the beginning of the first annual reporting period beginning
          on
          or after December 15, 2008. We do not expect adoption of SFAS 141(R) to
          have a
          material impact on the Company’s financial statements.
  In
          December 2007, FASB issued SFAS No. 160, “Noncontrolling Interests in
          Consolidated Financial Statements *-* an
          amendment of Accounting Research Bulletin No. 51 ,”
which
          amends ARB 51 to establish accounting and reporting standards for the
          noncontrolling interest in a subsidiary and for the deconsolidation of
          a
          subsidiary. SFAS 160 is effective for fiscal years beginning on or after
          December 15, 2008. We do not expect adoption of SFAS 160 to have a material
          impact on the Company’s financial statements.
   In
          March
          2008, FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and
          Hedging Activities—an amendment of FASB Statement No. 133” which establishes the
          disclosure requirements for derivative instruments and for hedging activities.
          This Statement amends and expands the disclosure requirements of Statement
          133
          with the intent to provide users of financial statements with an enhanced
          understanding of derivative instruments and hedging activities. SFAS 61
          is
          effective for financial statements issued for fiscal years and interim
          periods
          beginning after November 15, 2008, with early adoption encouraged. We do
          not
          expect adoption of SFAS 160 to have a material impact on the Company’s financial
          statements.


F-11






**RESPONSE
      GENETICS, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**3.
      Property and Equipment**




Property
      and equipment consists of the following:


**December
                31,****2006**
            
            **2007**Laboratory
                equipment
            
            $
            2,110,113
            
            $
            3,657,668Furniture
                and equipment
            
            
            391,239
            
            
            801,273Leasehold
                improvements
            
            
            118,603
            
            
            141,135Total
            
            
            2,619,955
            
            
            4,600,076Less:
                Accumulated depreciation and
                amortization
            
            
            (1,434,992
            )
            
            (2,006,773
            )Total
                property and equipment, net
            
            $
            1,184,963
            
            $
            2,593,303




Depreciation
        expense for the years ended December 31, 2006 and 2007 was $315,015 and $572,095
        respectively.




**4.
      Prepaid Expenses and Other Current Assets**




Prepaid
      expenses and other current assets consists of the following:


**December** **31,****2006**
              
              **2007**Direct
                  costs associated with initial public offering
              
              $
              613,984
              
              $
              —Prepaid
                  insurance
              
              
              28,173
              
              
              128,766Prepaid
                  maintenance contracts
              
              
              106,029
              
              
              237,277Other
              
              
              89,052
              
              
              196,360$
              837,238
              
              $
              562,403




On
      December 14, 2006, the Board of Directors approved the filing of a registration
      statement on Form SB-2 for the initial registration of the Company’s common
      stock. Accordingly, at December 31, 2006, the Company deferred certain direct
      and incremental costs related to this planned initial public offering. These
      costs were charged against the gross proceeds upon the completion of such
      offering on June 8, 2007.




**5.
      Accrued Expenses**




Accrued
      expenses consists of the following:


**December****31,****2006**
              
              **2007**Accrued
                  direct costs associated with initial public offering
              
              $
              300,723
              
              $
              —Accrued
                  other
              
              
              246,396
              
              
              305,517$
              547,119
              
              $
              305,517




**6.
      Notes Payable to Stockholders**




On
      March
      28, 2000, the Company issued notes payable in an aggregate principal amount
      of
      $716,854 to holders of the Company’s Series A Junior Convertible Preferred
      Stock. These notes payable accrued interest on the unpaid principal balances
      at
      the rate of 6.8% per annum, and under the original terms were payable on
      December 31, 2006. As of December 31, 2006, no principal or interest payments
      had been made. Total aggregate principal and accrued interest amounted to
      $1,045,890 at December 31, 2006.




On
      October 24, 2006, the Board of Directors of the Company approved an amendment
      to
      the terms of the notes payable to stockholders such that all outstanding notes
      payable to stockholders, plus accrued interest, would be automatically converted
      into shares of the Company’s common stock at a per share price equal to the
      initial public offering price. The Company completed its initial public offering
      on June 8, 2007 and the aggregate principal amount of notes payable of $716,854
      and $350,430 of accrued interest were converted to an aggregate of 152,489
      shares of the Company’s common stock based on a conversion price of $7.00, the
      initial public offering price.




F-12






**RESPONSE
      GENETICS, INC.** ****




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**7.
      Loss Per Share**




The
      Company calculates net loss per share in accordance with SFAS No. 128, *Earnings
      Per Share* (“SFAS
      No. 128”). Under the provisions of SFAS No. 128, basic net loss per share is
      computed by dividing the net loss attributable to common stockholders for the
      period by the weighted average number of shares of common stock outstanding
      for
      the period. Diluted net loss per share attributable to common stockholders
      is
      computed by dividing the net loss attributable to common stockholders by the
      weighted average number of shares of common stock and dilutive common stock
      equivalents then outstanding. Common stock equivalents consist of shares of
      common stock issuable upon the conversion of convertible preferred stock and
      upon the exercise of stock options.




The
      following table sets forth the computation for basic and diluted loss per
      share:





**Year
                  Ended December 31,******
              
              **2006**
              
              **2007**Numerator:Net
                  loss
              
              $
              (1,357,643
              )
              $
              (5,052,907
              )Series
                  B convertible preferred stockdividends
              
              
              (934,244
              )
              
              (412,625
              )Numerator
                  for basic earnings pershare - income
                  (loss) available to common stockholders
              
              
              (2,291,887
              )
              
              (5,465,532
              )Effect
                  of dilutive securities:Series
                  B convertible preferred stockdividends
              
              
              —
              
              
              —Numerator
                  for diluted earnings pershare — income
                  (loss) available to common stockholders
              
              $
              (2,291,887
              )
              $
              (5,465,532
              )Denominator:Denominator
                  for basic earnings pershare — weighted-average
                  shares
              
              
              2,726,320
              
              
              6,987,092Effect
                  of dilutive securities:Series
                  A Junior Convertible preferredstock
              
              
              —
              
              
              —Series
                  B Convertible preferred stock
              
              
              —
              
              
              —Dilutive
                  potential common shares
              
              
              —
              
              
              —Denominator
                  for diluted earnings pershare — adjusted
                  weighted-average shares and assumed conversions
              
              
              2,726,320
              
              
              6,987,092Basic
                  Loss per share
              
              $
              (0.84
              )
              $
              (0.78
              )Diluted
                  Loss per share
              
              $
              (0.84
              )
              $
              (0.78
              )




Outstanding
      stock options and warrants to purchase 216,000 shares and 1,260,190 shares
      for
      the years ended December 31, 2006, and 2007, respectively, were excluded from
      the calculation of diluted loss per share as their effect would have been
      antidilutive. The assumed conversion of the Series A Junior Convertible
      Preferred Stock and the Series B Convertible Preferred Stock were excluded
      from
      the calculation of diluted loss per share for the year ended December 31, 2006
      as their effect would have been antidilutive.





F-13






**RESPONSE
      GENETICS, INC.** ****




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**8.
      Commitments and Contingencies**




***Operating
      Leases***




The
        Company leases office and laboratory space under a noncancelable operating
        lease
        that expires on January 31, 2010. The lease contains two two-year options
        to extend the term of the lease and contains annual scheduled rate increases
        tied to the Consumer Price Index for the Los Angeles/Long Beach California
        metropolitan area. In March 2007, the Company entered into a noncancelable
        operating lease, which expires in March 2010, for office and laboratory space
        in
        Scotland. Rent expense was $270,564 and $587,669 for the years ended December
        31, 2006 and 2007, respectively.




Future
      minimum lease payments by year and in the aggregate, under the Company’s
      noncancelable operating leases, consist of the following at December 31,
      2007:


**Year
                  Ending December 31,**2008
              
              $
              660,1062009
              
              
              677,7302010
              
              
              197,703Total
              
              $
              1,535,539




***Employment
      Agreements***




The
        Company has employment contracts with several individuals, which provide
        for
        annual base salaries and potential bonuses. These contracts contain certain
        change of control, termination and severance clauses that require the Company
        to
        make payments to certain of these employees if certain events occur as defined
        in their respective contracts. Below are summaries of these
        agreements.




***The
        Danenberg Employment Agreement***
  We
        entered into an employment agreement with Ms. Danenberg on December 11, 2000.
        This previous agreement was superceded by a new employment agreement, which
        we
        entered into as of October 26, 2006, as amended on December 14, 2006 and
        on May
        29, 2007, for the position of President and Chief Executive Officer. The
        agreement has an initial term of three years, with automatic one-year renewal
        terms thereafter. Ms. Danenberg is to receive an initial base salary of
        $350,000 per year, subject to annual adjustments at the discretion of the
        Board.
        Ms. Danenberg also is eligible to earn a minimum of 40% of her base salary
        as an annual bonus based upon our meeting certain performance targets and
        her
        meeting personal objectives as determined by our board of
        directors.
  We
          granted Ms. Danenberg non-qualified stock option under the 2006 Stock Plan,
          in an amount equal to 3% of the number of shares of our common stock outstanding
          on October 26, 2006 on a fully diluted basis  or 212,577 options at an
          exercise price equal to $7.00, which was the initial public offering price
          of our common stock (the "IPO Price"). One third of these options will
          vest
          immediately upon the issuance of the options and the remainder shall vest
          in two
          equal installments on the first and second anniversary of the date of
          Ms. Danenberg’s employment agreement (October 26, 2006). The options
          will vest immediately upon a change in control. Ms. Danenberg will be
          eligible for future option grants as approved by our board of directors.
          We will
          provide Ms. Danenberg with a monthly allowance of $1,000 to cover
          miscellaneous business expenses and a $1,000 monthly automobile allowance.
          We
          agreed to cover up to $5,000 of Ms. Danenberg’s legal fees incurred in the
          negotiation of her employment agreement and up to $1,000 of Ms. Danenberg’s
          legal fees incurred in the negotiation of the amendment to her employment
          agreement.
  In
          the
          event that Ms. Danenberg’s employment is terminated without cause or for
          good reason, as defined under the agreement, we are obligated to pay her
          severance equivalent to the greater of (a) one full year of base pay and
          benefits; or (b) the base pay and benefits for the remaining term of the
          employment agreement. In addition, within forty-five days of her termination,
          we
          are obligated to pay her the pro rata portion of the bonus earned as of
          her
          termination date. In addition the portion of Ms. Danenberg’s options that
          are vested as of the date of her termination shall be exercisable for one
          year
          from the date of her termination. In the event the employment agreement
          is
          terminated because of Ms. Danenberg’s death, or because of a disability as
          defined in the employment agreement, Ms. Danenberg or her estate will be
          entitled to receive her base pay and pro rata bonus earned as of the date
          of
          death or disability, and we will provide benefits coverage for a period
          of 12
          months following the date of such death or disability to Ms. Danenberg or
          her heirs as the case may be.
  In
          the
          event a change in control occurs during Ms. Danenberg’s employment, she has
          agreed not to resign her employment voluntarily for a period of six months
          following the effective date of the change in control. If she is terminated
          within such six-month period without cause or she resigns for good reason,
          in
          addition to any other benefits to which she is entitled and provided she
          executes a release of claims, Ms. Danenberg will be entitled to a lump sum
          payment equivalent to a month of base pay at her then current annual rate
          for
          each month during such six-month period for which she has yet to complete
          service to us at the time of such termination, within forty-five days following
          such termination. The employment agreement also places certain confidentiality,
          assignment of inventions and non-solicitation obligations on
          Ms. Danenberg.
  ***The
        Stankovich Employment Agreement***
  We
          have
          entered into an Employment Agreement with Thomas Stankovich, dated as of
          October
          25, 2006, as amended on May 29, 2007 for the position of Vice President
          and
          Chief Financial Officer. He commenced employment on November 27, 2006.
          The
          agreement has an initial term of three years with automatic one-year renewal
          terms thereafter. The agreement provides for Mr. Stankovich to receive an
          initial base salary of $220,000 per year. Mr. Stankovich also is eligible
          to earn an annual bonus based upon our meeting certain performance targets
          and
          his meeting personal objectives as agreed upon with the CEO and approved
          by our
          board of directors.
  We
          granted Mr. Stankovich a non-qualified stock option under the 2006 Stock
          Plan, in an amount equal to 1% of the number of shares of our common stock
          outstanding on November 27, 2006, on a fully diluted basis, or 70,976 options,
          at an exercise price equal to the IPO Price. The shares vest in equal annual
          amounts over a four-year period, beginning on the first anniversary of
          the
          initial grant date. The options will vest immediately upon a change in
          control.
          Mr. Stankovich will be eligible for additional option grants as approved by
          our board of directors. In the event that a change in control occurs within
          the
          first year of Mr. Stankovich’s employment, and regardless of whether he is
          terminated, we are obligated to give him a cash payment equal to six months
          salary at his base salary rate at the time of change in control, as defined
          in
          the employment agreement. In the event that a change in control occurs
          within
          the second or third years of his employment, regardless of whether he is
          terminated, we are obligated to give him a cash payment equal to nine months
          salary at his base salary rate at the time of the change in control. In
          the
          event that Mr. Stankovich’s employment is terminated without cause or he
          resigns for good reason as defined under the agreement, during the first
          year of
          his employment, we are obligated to pay him severance equal to six months
          salary
          at his base salary rate at the time of termination. In the event that
          Mr. Stankovich’s employment is terminated without cause or he resigns for
          good reason within the second or third years of his employment, we are
          obligated
          to pay him severance equal to nine months salary at his base salary rate
          at the
          time of termination. In the event of Mr. Stankovich’s termination without
          cause, the portion of the his options that are vested as of the date of
          his
          termination shall be exercisable for one year from the date of his termination.
          The employment agreement also places certain confidentiality, assignment
          of
          inventions and non-solicitation obligations on
          Mr. Stankovich.
  ***The
          Clark Employment Agreement***
  We
          have
          entered into an Employment Agreement with James Clark, dated as of October
          26,
          2006, for the position of Vice President and Chief Operating Officer. The
          agreement provides for Dr. Clark to receive an initial base salary of
£120,000 (approximately $230,000) per year. Dr. Clark also is eligible to
          earn an annual bonus based upon our meeting certain performance targets
          and his
          meeting personal objectives as agreed upon with the CEO and approved by
          our
          board of directors. Dr. Clark is eligible to participate in our employee
          benefit plans and we are required to reimburse him for reasonable
          business-travel expenses.
  Should
          either Dr. Clark or we give the other notice of the intention to terminate
          Dr. Clark’s employment, we may elect to terminate his employment
          immediately and we will be obligated, upon so electing, to pay to Dr. Clark
          a sum equal to his base salary exclusive of any contractual bonus or benefit
          in
          kind for the unexpired portion of the contractual notice entitlement. This
          obligation ceases if Dr. Clark commences alternate employment within the
          entitled notice period.
  We
          granted Dr. Clark a non-qualified stock option under the 2006 Stock
          Plan, in an amount equal to 1% of the number of shares of our common stock
          outstanding on November 1, 2006 on a fully diluted basis or 70,859 options,
          at
          an exercise price equal to the IPO Price. The shares vest in equal annual
          amounts over a four-year period, beginning on the first anniversary of
          the
          initial grant date. The options will vest immediately upon a change in
          control.
          Dr. Clark will be eligible for additional option grants as approved by our
          board of directors. In the event of Dr. Clark’s termination without cause
          or for good reason, the portion of his options that are vested as of the
          date of
          his termination shall be exercisable for one year from the date of his
          termination. The employment agreement with Dr. Clark contains
          confidentiality, non-competition and non-solicitation
          provisions.
  ***The
          McNairn Employment Agreement***
  We
          have
          entered into an Employment Agreement with Denise McNairn, dated as of February
          20, 2007, as amended on May 29, 2007 for the position of Vice President
          and
          General Counsel. The agreement has an initial term of three years with
          automatic
          one-year renewal terms thereafter. The agreement provides for Ms. McNairn
          to
          receive an initial base salary of $225,000 per year. Ms. McNairn also is
          eligible to earn an annual bonus of up to 35% of her base salary based
          upon our
          meeting certain performance targets and her meeting personal objectives
          as
          agreed upon with the CEO and approved by our board of directors. Ms. McNairn
          is
          eligible to participate in our employee benefit plans.
  We
          granted Ms. McNairn a non-qualified stock option under the 2006 Stock Plan,
          in
          an amount equal to 1% of the number of shares of our common stock outstanding
          on
          February 20, 2007 on a fully diluted basis, or 71,278 options, at an exercise
          price equal to the IPO Price. The shares vest in equal annual amounts over
          a
          four-year period, beginning on the first anniversary of the initial grant
          date.
          The options will vest immediately upon a change in control. Ms. McNairn
          will be
          eligible for additional option grants as approved by our board of directors.
  In
          the
          event that a change in control occurs within the first year of Ms. McNairn’s
          employment, and regardless of whether she is terminated, we are obligated
          to
          make cash payments to her equal to six months salary at her base salary
          rate at
          the time of change in control, as defined in the employment agreement.
          In the
          event that a change in control occurs within the second or third years
          of her
          employment, regardless of whether she is terminated, we are obligated to
          make
          cash payments equal to nine months salary at her base salary rate at the
          time of
          the change in control. In the event that Ms. McNairn’s employment is terminated
          without cause or she resigns for good reason, as defined under the agreement,
          during the first year of her employment we are obligated to pay her severance
          equal to six months salary at her base salary rate at the time of termination.
          In the event that Ms. McNairn’s employment is terminated without cause or she
          resigns for good reason within the second or third years of her employment,
          we
          are obligated to pay her severance equal to nine months salary at her base
          salary rate at the time of termination. In the event of Ms. McNairn’s
          termination without cause, the portion of her options that are vested as
          of the
          date of her termination shall be exercisable for one year from the date
          of her
          termination. The employment agreement also places certain confidentiality,
          assignment of inventions and non-solicitation obligations on Ms.
          McNairn.




***Agreements
      with Suppliers***




The
      Company purchases certain supplies from Applied Biosystems, and Affymetrix
      Inc.
      Purchases from these companies accounted for approximately 86% of the Company’s
      reagent purchases in the years ended December 31, 2006 and 2007. The Company
      purchased from Applied Biosystems primers, probes and disposable supplies.




Under
      the
      supply agreement with Affymetrix, the Company pays an annual subscription fee
      and has access at predetermined prices to various probes, arrays, software
      and
      reagents necessary to support the Company’s work.




F-14






**RESPONSE
      GENETICS, INC.** ****




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**9.
      License and Collaborative Agreements**




***License
      Agreement with the University of Southern California
      (“USC”)***




In
      April
      2000, as amended in June 2002 and April 2005, the Company entered into a license
      agreement with USC. Under this agreement, USC granted the Company a worldwide,
      exclusive license with the right to sublicense, the patents for RGI-1 and
      related technology, for use in human and veterinary diagnostic laboratory
      services, the sale of clinical diagnostic products, and the sale of research
      products to the research community. USC retains the right under the agreement
      to
      use the technology for research and educational purposes.




In
      consideration for this license, the Company agreed to pay to USC royalties
      based
      on a percentage of the revenues generated by the use of RGI-1 and related
      technology. Royalty expense relating to this agreement amounted to $160,674
      and
      $152,502 for the years ended December 31, 2006 and 2007, respectively. Such
      expense is included in cost of revenue in the accompanying statements of
      operations.




***License
      Agreement with Roche Molecular Systems (“Roche”)***




In
      July
      2001, the Company entered into a diagnostic services agreement with Roche to
      provide the Company with access to Roche’s patented PCR technology. In November
      2004, this agreement was replaced by a non-exclusive license to use Roche’s PCR,
      homogenous PCR, and reverse transcription PCR processes. In consideration for
      these rights, the Company is obligated to pay royalties to Roche, based on
      a
      percentage of net sales of products or services that make use of the PCR
      technology. Royalty expense relating to this agreement amounted to $221,861
      and
      $219,721 for the years ended December 31, 2006 and 2007, respectively. Such
      expense is included in cost of revenue in the accompanying statements of
      operations.




In
      November 2004, the Company entered into an agreement with Roche, pursuant to
      which the Company is collaborating with Roche to produce commercially viable
      assays used in the validation of genetic markers for pharmaceutical companies.
      Specifically, the Company has licensed the rights to Roche to use the
      pre-diagnostic assays the Company develops in the course of using its
      RNA-extraction technologies to provide testing services to pharmaceutical
      companies and to produce diagnostic kits that then can be sold commercially
      to
      those pharmaceutical companies. Roche is required to pay the Company royalties
      of a certain percentage of net sales of such diagnostic kits sold to
      pharmaceutical companies. Through December 31, 2007, Roche has not been required
      to pay any royalties to the Company pursuant to this agreement.




***Services
      Agreement with Taiho Pharmaceutical Co., Ltd.
      (“Taiho”)***




In
      July
      of 2001, the Company entered into an agreement with Taiho pursuant to which
      it
      will provide Taiho with molecular-based tumor analyses for use in guiding
      chemotherapy treatment for cancer patients using the RGI-1 and for use in its
      business developing and marketing pharmaceutical and diagnostic products for
      use
      against cancer. Pursuant to the agreement, the Company appointed Taiho as the
      exclusive purchaser in Japan of tests and testing services based upon the RGI-1
      using gene expression for (i) any one or the combination of specified molecular
      markers, (ii) the therapeutic use of specified compounds, or (iii) the diagnosis
      or therapeutic treatment of specified precancerous and cancerous diseases.
      The
      Company also granted Taiho the right to be a non-exclusive purchaser in Japan
      of
      tests and testing services based upon the RGI-1 using gene expression, other
      than those for which Taiho has exclusivity, for, (i) any one or combination
      of
      molecular markers, (ii) the therapeutic use of any compound or biological
      product against cancer, or (iii) the diagnosis or therapeutic treatment of
      precancerous and cancerous diseases.




In
      consideration for the testing services provided, Taiho paid an upfront payment
      at the commencement of the agreement and is obligated to pay regular testing
      fees, covering the specific services performed on a monthly basis.




Taiho
      is
      obligated to purchase a minimum amount of testing services from the Company
      each
      calendar quarter. Revenue recognized under this agreement was $2,745,125 and
      $2,864,425 for the years ended December 31, 2006 and 2007,
      respectively.




***Services
      Agreement with SmithKline Beecham Corporation (d.b.a. GlaxoSmithKline or
“GSK”)***




In
      January 2006, the Company entered into an agreement with GSK pursuant to which
      the Company provides services in connection with profiling the expression of
      various genes from a range of human cancers. Under the agreement, the Company
      will provide GSK with testing services as described in individual protocols
      and
      GSK will pay the Company for such services based on the pricing schedule
      established for each particular protocol. GSK is obligated to make minimum
      annual payments to the Company under the agreement and also was obligated to
      make a non-refundable upfront payment to the Company, to be credited against
      work undertaken pursuant to the agreement. In January 2006, the Company received
      an upfront payment of $2,000,000, of which $600,000 was recognized as revenue
      during the year ended December 31, 2006. The contract also provides for minimum
      annual assay testing requirements over a three year period ending January 2009.
      The minimum amount of revenue to be recognized during the term, which will
      expire in January 2009, will be $6,500,000. The timing of the recognition of
      these amounts is dependent upon when GSK submits the specimens for testing.
      The
      Company recognized $2,374,800 and $2,818,288 of revenue during the years ended
      December 31, 2006 and 2007, respectively.




F-15






**RESPONSE
      GENETICS, INC.** ****




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**9.
      License and Collaborative Agreements
 - (continued)**




The
      initial term of the agreement will extend until January 2009, at which point,
      GSK has the right to extend the agreement for up to two one-year periods.
      Subsequently, the parties have the option to extend the agreement for one-year
      renewal periods upon their mutual written consent.




***Master
      Laboratory Test Services Agreement with GlaxoSmithKline Biologicals (“GSK
      Bio”)***




In
        December 2006, the Company entered into an agreement with GSK Bio pursuant
        to
        which it will provide testing services, principally in relation to profiling
        the
        expression of various genes from a range of human cancers. The Company will
        conduct the testing services on tissue specimens provided by GSK Bio. The
        agreement required that GSK Bio make an upfront payment of $2,620,000 which
        was
        received by the Company in December 2006. The agreement further specifies
        that
        GSK Bio will pay annual minimum payments in 2007, 2008 and 2009 and that
        the
        upfront payment made in December 2006 will be credited against the annual
        minimum payments in 2007 and 2008. The agreement also provides that any
        differences between the annual minimum payments made in 2007, 2008 or 2009
        and
        the amounts due to the Company for testing services performed on specimens
        submitted by GSK Bio during the three years ending December 31, 2009 be credited
        towards services performed during the year ending December 31, 2010, the
        final
        year of the agreement. The minimum amount of revenue to be recognized during
        the
        term of this contract, which will expire in December 2010, is approximately
        $7,300,000. In December 2007 we amended our agreement with GSK Bio whereby
        GSK
        Bio would make the remaining minimum payments under the agreement in one
        lump
        sum. This payment was received in January 2008. The timing of the recognition
        of
        these amounts is dependent upon when GSK submits the specimens for testing.
        The
        Company did not recognize any revenue from this agreement in 2006. The Company
        recognized $938,701 of revenue under this agreement during the year ended
        December 31, 2007.




***Collaboration
      Agreement with Shanghai BioChip Company, Ltd. (“SBC”)***




On
      March
      5, 2007, the Company entered into a collaboration agreement with SBC pursuant
      to
      which SBC will provide exclusive pharmacogenomic testing services to the
      Company’s clients in China.




Pursuant
      to the agreement, the Company has granted SBC an exclusive license in China
      to
      provide services in China using the Company’s proprietary RNA extraction
      technologies. Subject to consent from the USC, the Company will grant SBC an
      exclusive sublicense to patents licensed from the USC for distribution of
      testing services in China. In turn, SBC will perform RNA extraction from FFPE
      tissue specimens exclusively for the Company during the term of the
      agreement.




This
        agreement has an initial term of five years, with an automatic renewal for
        an
        additional three-year term unless either party gives 90 days notice in advance
        of the renewal date of its intent not to renew. Pursuant to the agreement,
        SBC
        will receive a percentage of the gross margin, as defined in the agreement,
        collected from the Company’s clients in China as compensation for its testing
        services performed.




***Commission
      Agreement with Hitachi Chemical Co., Ltd.***




On
      July
      26, 2007, the Company entered into a collaboration agreement with Hitachi
      Chemical Co., Ltd. (“Hitachi”), a leading diagnostics manufacturer in Japan (the
“Hitachi Agreement”). Under the terms of this agreement, Hitachi will begin
      using the Company's proprietary and patented techniques to extract genetic
      information from formalin-fixed paraffin-embedded (“FFPE”) tissue samples
      collected in Southeast Asia, Australia and New Zealand. As part of this
      collaboration agreement, the Company will provide Hitachi with the technical
      information and assistance necessary to perform the testing services. Hitachi
      also plans to introduce the Company to potential new testing services customers
      in the region to expand the testing of FFPE clinical samples in Asia. The
      Southeast Asian countries covered under this agreement include Japan, North
      Korea, South Korea, Taiwan, Mongolia, Pakistan, Bangladesh, Sri Lanka, Nepal,
      Singapore, Malaysia, Indonesia, Brunei, Thailand, Myanmar, Laos, Cambodia,
      Vietnam and the Philippines (the “Territory”).




This
      Agreement has an initial term expiring on March 31, 2010, with an automatic
      renewal for one year at the end of the original period under the same terms
      and
      conditions. Pursuant to the agreement, Hitachi will receive a percentage of
      the
      revenue, as provided in the agreement, collected from the Company's clients
      in
      the Territory, for its testing services performed.




Hitachi
      is responsible for expenses related to the cost of laboratory equipment and
      modification to the laboratory facilities, as well as the cost of reagents.
      The
      Company is responsible for costs related to additional laboratory equipment
      which shall be provided to Hitachi according to a separate equipment lease
      agreement.




F-16






**RESPONSE
      GENETICS, INC.** ****




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**9.
      License and Collaborative Agreements
 - (continued)**




***Collaboration
      Agreement with University of California, San Francisco
      (“UCSF”)***




On
      July
      20, 2007, the Company entered into a research study collaboration agreement
      with
      the University of California, San Francisco (“UCSF”) to develop diagnostic tests
      for pancreatic cancer. Under the terms of this agreement, the Company will
      fund
      research performed by and collaborate with UCSF concerning molecular marker
      profiling and the evaluation of diagnostic assays and test kits. The research
      program will be carried out through July 20, 2009. As consideration for UCSF’s
      services, the Company will pay UCSF an amount equal to its expenditures subject
      to a maximum amount of approximately $147,000. An initial payment of
      approximately $73,000 was paid upon execution of the collaboration agreement
      with the balance to be paid upon receipt of all samples and clinical
      data.




**10.
        Stockholders’ Equity (Deficit)**




***Common
      Stock***




On
      December 14, 2006, the Board of Directors approved, subject to stockholder
      approval, an amendment and restatement of the Company’s Certificate of
      Incorporation increasing the authorized common stock to 50,000,000
      shares.




***Preferred
      Stock***




The
        Company was authorized to issue 2,000,000 shares of Preferred Stock with
        a par
        value of $0.01 per share. Of the 2,000,000 shares, the Company has designated
        500,000 shares as Series A Junior Convertible Preferred Stock and 1,111,000
        shares as Series B Convertible Preferred Stock.




On
        December 14, 2006, the Board of Directors of the Company approved and in
        January
        2007, the stockholders approved to amend and restate the Company’s
        Certificate of Incorporation increasing the authorized Preferred Stock to
        5,000,000 shares.




***Series
      A Junior Convertible Preferred Stock***




In
      March
      2000, the Company issued 500,000 shares of Series A Junior Convertible Preferred
      Stock (“Series A Junior Preferred Stock”) with a par value of $0.01 per share
      for $5 per share (gross proceeds of $2,500,000). The Series A Junior Preferred
      Stock ranked senior to the Company’s common stock and junior to any other
      preferred stock with respect to dividend and liquidation rights. Each
      outstanding share of Series A Junior Preferred stock could be converted into
      5.2
      shares of common stock provided the holder waived any unpaid dividends relating
      to those shares upon conversion. No dividends were declared on the Series A
      Junior Preferred Stock through June 8, 2007, at which time all outstanding
      shares of Series A Junior Preferred Stock automatically converted into 2,600,000
      shares of common stock, as further discussed below upon closing of the initial
      public offering of the Company’s common stock on June 8, 2007.




***Series
      B Convertible Preferred Stock***




In
      March
      2000, the Company issued 1,038,048 shares of Series B Convertible Preferred
      stock (“Series B Preferred Stock”) with a par value of $0.01 per share at $9.00
      per share (gross proceeds of $9,342,432). Each outstanding share of Series
      B
      Preferred stock could be converted into one share of common stock. The Series
      B
      Preferred stock ranked senior to the common stock and any other issue of
      preferred stock which did not expressly provide that it ranked senior to the
      Series B preferred stock as to dividends, liquidation preferences or otherwise.
      Each outstanding share of Series B Preferred stock was entitled to receive
      cumulative dividends which accrued upon issuance and were payable at $.90 per
      annum. The Company had the option to pay the dividend in the form of common
      stock. Accrued dividends amounted to $6,097,579 and $0 at December 31, 2006
      and
      December 31, 2007, respectively.




On
        October 24, 2006, the Board of Directors of the Company approved and on
        June 1, 2007, the stockholders approved to amend and restate the
        Certificate of Incorporation to amend the rights and preferences of the Series
        B
        Preferred Stock providing that the Series B Preferred Stock, including accrued
        but unpaid dividends, would automatically convert into common stock upon
        the
        closing of the initial public offering. Each share of Series B Preferred
        Stock
        was to convert into 0.8 shares of common stock. The total accrued but unpaid
        dividends at the date of conversion were to convert into common stock based
        on
        the fair value of the stock on the date of conversion. All outstanding shares
        of
        Series B Preferred Stock including $6,510,204 of accrued but unpaid dividends
        automatically converted into 1,760,467 shares of common stock upon the closing
        of the initial public offering of the Company’s common stock on June 8, 2007, as
        further discussed below.




F-17






**RESPONSE
      GENETICS, INC.** ****




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**10.
      Stockholders’ Equity  - (continued)**




***Reverse
      Stock Split***




On
      May 1,
      2007, the Company’s Board of Directors approved an amendment to the Company’s
      Certificate of Incorporation to effect a 0.8-for-1 reverse stock split of the
      Company’s common stock. A majority of shareholders approved the stock split on
      May 31, 2007, and on June 4, 2007 the amendment to the Certificate of
      Incorporation was filed, which effected the stock split. All references to
      shares in the consolidated financial statements and the accompanying notes,
      including but not limited to the number of shares and per share amounts, unless
      otherwise noted, have been adjusted to reflect the reverse stock split on a
      retroactive basis. Previously awarded options to purchase shares of the
      Company’s common stock have been retroactively adjusted to reflect the stock
      split. Further, the stock split resulted in an adjustment to the conversion
      ratio of the Series B Convertible Preferred Stock and Series A Junior
      Convertible Preferred Stock.




***Initial
      Public Offering***




On
      June
      8, 2007, the Company completed an initial public offering of 3,000,000 shares
      of
      common stock at $7.00 per share. Total net proceeds from the initial public
      offering was approximately $17.2 million. Upon completion of the initial public
      offering, the following occurred:





•
            All
                of the outstanding Series B Convertible Preferred Stock and Series
                A
                Junior Convertible Preferred Stock, including accrued but unpaid
                dividends, automatically converted into 4,360,467 shares of common
                stocks
                based on the initial public offering price of
                $7.00.





•
            All
                of the outstanding notes payable to stockholders, including accrued
                but
                unpaid interest, automatically converted into 152,489 shares of common
                stock based on the initial public offering price of
                $7.00.




**11.
      Stock Option Plan**




In
      March
      2000, the Company adopted a Stock Option Plan (the “2000 Plan”) as approved by
      its board of directors. Under the 2000 Plan, the Company may grant options
      to
      acquire up to 1,600,000 shares of common stock. In connection with the adoption
      of the 2006 Employee, Director and Consultant Stock Plan, as further discussed
      below, the Company will grant no additional options under its 2000 Plan under
      which options to purchase 200,000 shares remained outstanding as of December
      31,
      2007. Although no more options may be granted under the 2000 Plan, the terms
      of
      the 2000 Plan continue to apply to all outstanding options. The Company also
      granted options to purchase 16,000 shares of common stock to two consultants
      which were granted under separate agreements outside of the 2000
      Plan.




On
        October 26, 2006, the Board of Directors of the Company approved, and on
        May 1,
        2007, reapproved, the adoption of the 2006 Employee, Director and Consultant
        Stock Plan (the “2006 Stock Plan”). The stockholders approved the 2006 Stock
        Plan on June 1, 2007. Under this plan, the Company may grant up to a maximum
        of
        2,160,000 options to purchase the Company’s common stock. As of December 31,
        2007, there were 1,183,810 options available to grant under the 2006 Stock
        Plan.




Employee
      options vest according to the terms of the specific grant and expire 10 years
      from the date of grant. Non-employee option grants to date vest typically over
      a
      2 to 3 year period. The Company had 1,160,190 options outstanding at a weighted
      average exercise price of $7.62 at December 31, 2007. There were 580,899
      nonvested stock options with a weighted average grant date fair value of $6.93
      outstanding at December 31, 2007.




The
      Company estimated share-based compensation expense for the year ended December
      31, 2007 using the Black-Scholes model with the following weighted average
      assumptions:




2007Risk
                  free interest rate
              
              
              5.03
              %Expected
                  dividend yield
              
              
              —Expected
                  volatility
              
              
              77.4
              %Expected
                  life (in years)
              
              
              10




There
        were no options granted during the year ended
        December 31, 2006.




F-18




**TABLE
      OF CONTENTS**




**RESPONSE
      GENETICS, INC.** ****




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**11.
      Stock Option Plan  - (continued)**




The
      following table summarizes the stock option activity for the year ended December
      31, 2007:




**Number
                of Shares**
            
            **Weighted
                Average**
              **Exercise
                Price**Outstanding,
                December 31, 2006
            
            
            216,000
            
            $
            10.69Granted
            
            
            955,190
            
            $
            6.93Exercised
            
            
            —
            
            $
            —Forfeited
            
            
            (11,000
            )
            $
            7.23Outstanding,
                December 31, 2007
            
            
            1,160,190
            
            $
            7.62




The
      following table provides information for options that were outstanding and
      exercisable as of December 31, 2007:




**Options
                  Outstanding**
              
              **Options
                  Exercisable****Exercise
                  Prices**
              
              **Number**
              
              **Weighted
                  Average Remaining Life in Years**
              
              **Weighted
                  Average**
                **Exercise
                  Price**
              
              **Number**
              
              **Weighted**
                **Average**
                **Exercise
                  Price**$11.25
              
              
              184,000
              
              
              2.97
              
              $
              11.25
              
              
              184,000
              
              $
              11.25$7.00
              
              
              953,190
              
              
              9.26
              
              $
              7.00
              
              
              241,858
              
              $
              7.00$4.25-$4.29
              
              
              23,000
              
              
              9.73
              
              $
              4.27
              
              
              8,050
              
              $
              4.271,160,190
              
              
              8.28
              
              $
              7.62
              
              
              433,908
              
              $
              8.31




The
      weighted average exercise prices, remaining contractual lives and aggregate
      intrinsic value for options granted, exercisable and expected to vest as of
      December 31, 2007 were as follows:




**Number
                  of Shares**
              
              
              **Weighted
                  Average Exercise Price**
              
              
              **Weighted
                  Average Remaining Contractual Life (Years)**
              
              
              **Aggregate
                  Intrinsic Value**Outstanding
              
              
              1,160,190
              
              $
              7.62
              
              
              8.28
              
              $
              —Expected
                  to vest
              
              
              617,340
              
              $
              6.94
              
              
              9.45
              
              $
              —Exercisable
              
              
              579,291
              
              $
              8.75
              
              
              7.10
              
              $
              —




Aggregate
      intrinsic value excludes those options that are “not-in-the-money” as of
      December 31, 2007. Awards that are expected to vest take into consideration
      estimated forfeitures for awards not yet vested.




Information
      about stock-based compensation included in the results of operations for the
      years ended December 31, 2006 and 2007 is as follows:




**Year
                Ended December 31,******
            
            **2006**
            
            **2007**Cost
                of revenue
            
            $
            —
            
            $
            414,692General
                and administrative
            
            
            15,383
            
            
            898,666Research
                and development
            
            
            —
            
            
            236,297Totals
            
            $
            15,383
            
            $
            1,549,655




F-19






**RESPONSE
      GENETICS, INC.** ****




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**12.
      Common Stock Warrants**




The
      Company issues warrants to purchase common shares of the Company either as
      compensation for services, or as additional incentive for investors who may
      purchase common stock. The value of warrants issued for compensation is
      accounted for as a non-cash expense to the Company at the fair value of the
      warrants issued. The value of warrants issued in conjunction with financing
      events is recorded as a reduction in paid in capital for common stock issuances.
      The Company values the warrants at fair value as calculated by using the
      Black-Scholes option-pricing model.




In
      June,
      2007, in conjunction with the initial public offering, the Company issued
      100,000 warrants to purchase 100,000 shares of its common stock, for proceeds
      of
      $100, to the underwriters as part of the initial public offering (see Note
      10).
      The fair value of the common stock warrants, in the amount of $329,000, was
      recorded as a reduction in the proceeds of the initial public
      offering.




The
        Company valued the warrants using the Black-Scholes pricing model. The following
        assumptions were used to determine the fair value of those
        warrants:




Expected
                volatility
            
            
            77.4
            %Expected
                dividends
            
            
            0.0
            %Expected
                term
            
            
            5.0
                yearsRisk-free
                rate
            
            
            5.03
            %




There
        were no warrants granted during the year
        ended December 31, 2006.




The
      following table summarizes all common stock warrant activity during the nine
      months ended December 31, 2007:





**Number
                of Shares**
            
            **Weighted
                Average Price**Outstanding,
                December 31, 2006
            
            
            —
            
            $
            —Granted
            
            
            100,000
            
            
            7.70Exercised
            
            
            —
            
            
            —Cancelled
            
            
            —
            
            
            —Outstanding,
                December 31, 2007
            
            
            100,000
            
            $
            7.70Exercisable,
                December 31, 2007
            
            
            100,000
            
            $
            7.70




The
      following table summarizes information about the warrants outstanding at
      December 31, 2007:




**Exercise
                Price**
            
            **Warrants**
              **Outstanding**
            
            **Remaining****Contractual**
              **Life****(years)**$7.70
            
            
            100,000
            
            
            5.00100,000




The
      Company accounts for its warrants in accordance with Emerging Issues Task Force
      Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to and
      Potentially Settled in a Company’s Own Stock” (“EITF 00-19”) which requires
      warrants to be classified as permanent equity, temporary equity or as assets
      or
      liabilities. In general, warrants that either require net-cash settlement or
      are
      presumed to require net-cash settlement are recorded as assets and liabilities
      at fair value and warrants that require settlement in shares are recorded as
      equity instruments. The Company’s warrants require settlement in shares and are
      accounted for as permanent equity.




F-20







**RESPONSE
      GENETICS, INC.** ****




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**13.
        Income Taxes**
  The
          components of the income tax provision for the years ended December 31,
          2006 and
          2007 were as follows:
  ****
                
                **2006**
                
                **2007**CurrentFederal
                
                $
                —
                
                $
                14,000Foreign
                
                
                —
                
                
                —State
                
                
                800
                
                
                30,023800
                
                
                44,023DeferredFederal
                
                
                —
                
                
                —Foreign
                
                
                —
                
                
                —State
                
                
                —
                
                
                ——
                
                
                —Provision
                    for income taxes
                
                $
                800
                
                $
                44,023
  For
          financial statement purposes, loss before income taxes for the years ended
          December 31, 2006 and 2007 includes the following components:
 
 **2006**
                
                **2007**Domestic
                
                $
                (1,356,843
                )
                $
                (3,514,709
                )Foreign
                
                
                —
                
                
                (1,494,175
                )$
                (1,356,843
                )
                $
                (5,008,884
                )
  A
          reconciliation of the expected income tax provision computed using the
          federal
          statutory income tax rate of 34% to the Company’s effective income tax rate is
          as follows:
  ****
                
                **2006**
                
                **2007**Income
                    tax expense (benefit) based on federal statutory rate
                
                $
                (475,000
                )
                $
                (1,703,000
                )State
                    income taxes, net of federal income tax
                
                
                (129,000
                )
                
                (227,000
                )Change
                    in deferred tax valuation allowance
                
                
                594,700
                
                
                1,919,000Foreign
                    income taxed at varying rates
                
                
                —
                
                
                60,000Other,
                    net
                
                
                10,100
                
                
                (4,977
                )Provision
                    for income taxes
                
                $
                800
                
                $
                44,023
  The
          tax
          effects of temporary differences that give rise to significant portions
          of the
          Company’s deferred tax assets and deferred tax liabilities at December 31, 2006
          and 2007 are presented below:
  ****
                
                **2006**
                
                **2007**Deferred
                    tax assets:Domestic
                    net operating loss carryforwards
                
                $
                2,255,000
                
                $
                1,711,000Foreign
                    net operating loss carryforwards
                
                
                —
                
                
                448,000Deferred
                    revenue
                
                
                1,962,,000
                
                
                2,134,000Federal
                    and state tax credit
                
                
                221,000
                
                
                224,000Deferred
                    stock compensation
                
                
                276,000
                
                
                892,000Capitalized
                    costs
                
                
                —
                
                
                1,241,000Other,
                    net
                
                
                —
                
                
                15,000Total
                    gross deferred tax assets
                
                
                4,684,000
                
                
                6,665,000Less
                    valuation allowance on deferred tax assets
                
                
                (4,622,000
                )
                
                (6,584,000
                )Net
                    deferred tax assets
                
                
                62,000
                
                
                81,000Deferred
                    tax liabilities:Plant
                    and equipment, principally accelerated depreciation
                
                
                (62,000
                )
                
                (81,000
                )Total
                    deferred tax liabilities
                
                
                (62,000
                )
                
                (81,000
                )Net
                    deferred taxes
                
                $
                —
                
                $
                —
  Deferred
          income taxes result from temporary differences between income tax and financial
          reporting computed at the effective income tax rate. The Company has established
          a valuation allowance against its net deferred tax asset due to the uncertainty
          surrounding the realization of such asset. Management periodically evaluates
          the
          recoverability of the deferred tax assets. At such time
          it
          is determined that it is more likely than not that deferred tax assets
          are
          realizable, the valuation allowance will be reduced.
  The
            Company adopted the Financial Accounting Standards Board’s Interpretation No.
            48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB
            Statement No. 109” (“FIN 48”) effective January 1, 2007. FIN 48 clarifies the
            accounting for uncertainty in income taxes recognized in financial statements
            and requires the impact of a tax position to be recognized in the financial
            statements if that position is more likely than not of being sustained
            by the
            taxing authority. At the date of adoption, and as of Decemebr 31, 2007,
            the
            Company does not have a liability for unrecognized tax benefits.
  We
            file
            U.S. federal, U.S. state, and foreign tax returns. Our major tax jurisdictions
            are U.S. federal and the State of California and are subject to tax examinations
            for the years 1999 through 2007.
 As
          of
          December 31, 2007, the Company had net operating loss carryforwards for
          federal
          and state income tax purposes of approximately $4.7 million and $1.7 million,
          respectively. If not utilized, the federal net operating loss and tax credit
          carryforwards will expire beginning in 2020. If not utilized, the state
          net
          operating loss carryforward will expire beginning in 2012.
  As
          of
          December 31, 2007, the Compnay had U.K. net operating loss carryforwards
          totaling approximately $1.5 million that may be carried forward indefinitely.
          A
          full valuation allowance has been provided against this asset.




F-21




**RESPONSE
      GENETICS, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**14.
      Defined Contribution Plan**




The
      Company maintains a defined contribution plan covering substantially all of
      its
      employees meeting minimum age and service requirements. Participation in the
      plan is optional. The Company paid administrative expenses on behalf of the
      plan
      amounting to $1,250 for years ended December 31, 2006 and 2007, respectively.
      At
      this time, the Company does not provide matching contributions to the defined
      contribution plan.




**15.
      Related Party Transactions**




While
      employed at USC, Kathleen Danenberg, president, chief executive officer and
      director, developed and patented (United States Patent 6,248,535;
*Danenberg* , et al., Method For Isolation of RNA From Formalin-Fixed
      Paraffin-Embedded Tissue Specimens) an extraction method that allowed reliable
      and consistent isolation of RNA from FFPE suitable for RT-PCR. USC retains
      ownership of this patent but has exclusively licensed this technology to the
      Company. In consideration for this license, the Company is obligated to pay
      royalties to USC, as a percentage of net sales of products or services using
      the
      technology, and to meet a certain minimum in royalty payments. Pursuant to
      USC
      policy, the inventors of technology owned by the University and then liensed
      for
      commercialization are paid a portion of royalties received by the University
      from the licensed technology. USC therefore pays a portion of royalties received
      from the Company to Ms. Danenberg in recognition of her invention. Amounts
      paid
      to Ms. Danenberg amounted to $18,574 and $34,658 for the years ended December
      31, 2006 and 2007, respectively.




**16.
      Segment Information**




The
      Company operates in a single reporting segment, with operating facilities in
      the
      United States and the United Kingdom.




The
      following enterprise wide disclosure was prepared on a basis consistent with
      the
      preparation of the financial statements. The following tables contain certain
      financial information by geographic area:




**Year
                Ended December 31,****Revenue:**
            
            
            **2006**
            
            
            **2007**United
                States
            
            $
            3,271,900
            
            $
            3,986,663Europe
            
            
            —
            
            
            938,701Japan
            
            
            2,745,125
            
            
            2,864,425$
            6,017,025
            
            $
            7,789,789






**December****31,****Long-lived
                  assets:**
              
              **2006**
              
              **2007**United
                  States
              
              $
              2,619,955
              
              $
              3,130,065United
                  Kingdom
              
              
              —
              
              
              1,474,705$
              2,619,955
              
              $
              4,604,770




F-22







**RESPONSE
      GENETICS, INC.** ****




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**






F-23