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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q





(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the Quarterly Period Ended March 31, 2011

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

Commission File Number 0-26483





diaDexus, Inc.

(Exact name of Registrant as Specified in its Charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 94-3236309                          
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer Identification No.)



|                                                           |  |           
|---------------------------------------------------------- |  | ----------
|343 Oyster Point Boulevard South San Francisco, California |  | 94080     
|(Address of principal executive offices)                   |  | (Zip Code)

(650)
246-6400

(Registrants telephone number, including area code)





Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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  x    No   ̈

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    No   ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one)



|                        |  |                                                  |  |                           |  |  
|----------------------- |  | ------------------------------------------------ |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈                                                |  | Accelerated filer         |  |  ̈
|                        |  |                                                  | 
|Non-accelerated filer   |  |  ̈  (Do not check if a smaller reporting company) |  | Smaller Reporting Company |  | x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ̈    No  x

The number
of shares outstanding of the registrants common stock, $0.01 par value per share, was 53,067,057 as of May 6, 2011.









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Explanatory Note

On July 28, 2010, VaxGen, Inc., a Delaware corporation, closed a merger transaction (the Reverse Merger) with diaDexus, Inc., a privately held Delaware corporation (Old
diaDexus), pursuant to an Agreement and Plan of Merger and Reorganization, dated as of May 28, 2010, as amended June 24, 2010 (the Merger Agreement), by and among VaxGen, Inc., Old diaDexus, Violet Acquisition
Corporation, a wholly owned subsidiary of VaxGen Inc. (Merger Sub I), Violet Acquisition, LLC, a wholly owned subsidiary of VaxGen, Inc. (Merger Sub II), and John E. Hamer, as the representative of Old diaDexus
stockholders. Pursuant to the Merger Agreement, Old diaDexus became a wholly owned subsidiary of VaxGen, Inc. through a merger of Merger Sub I with and into Old diaDexus, with Old diaDexus being the surviving company in the merger (Merger
I), and, immediately following the effectiveness of Merger I, the merger of Old diaDexus with and into Merger Sub II, with Merger Sub II being the surviving entity in the merger.

The Reverse Merger has been accounted for as a reverse acquisition. As such, the financial statements of Old diaDexus are treated as the historical financial statements of the combined company, with the
results of VaxGen, Inc. being included from July 28, 2010.

On November 1, 2010, VaxGen, Inc. merged Merger Sub II with and into
VaxGen, Inc. with VaxGen, Inc. being the surviving entity in the merger, and VaxGen, Inc. changed its name to diaDexus, Inc. pursuant to a merger effected under Section 253 of the Delaware General Corporation Law.

All references in this Quarterly Report on Form 10-Q to the Company, we, us and our refer to diaDexus,
Inc. (f/k/a VaxGen, Inc.), a Delaware corporation, and its consolidated subsidiaries for periods after the closing of the Reverse Merger, and to Old diaDexus and its consolidated subsidiaries for periods prior to the closing of the Reverse Merger
unless the context requires otherwise. References to Pre-Merger VaxGen mean VaxGen, Inc., a Delaware corporation, prior to the closing of the Reverse Merger.



2



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Table of Contents



|                               |  |                                                                                       |    |  |    | 
|------------------------------ |  | ------------------------------------------------------------------------------------- | -- |  | -- | 
|PART I  FINANCIAL INFORMATION | 
|                               |  |                                                                                      
|Item 1.                        |  | Financial Statements (Unaudited)                                                      |    |  |    | 
|                               |  | Condensed Consolidated Balance Sheets                                                 |    |  | 4  | 
|                               |  | Condensed Consolidated Statements of Operations                                       |    |  | 5  | 
|                               |  | Condensed Consolidated Statements of Cash Flows                                       |    |  | 6  | 
|                               |  | Notes to Condensed Consolidated Financial Statements                                  |    |  | 7  | 
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |    |  | 20 | 
|Item 3.                        |  | Quantitative and Qualitative Disclosures About Market Risk                            |    |  | 27 | 
|Item 4                         |  | Controls and Procedures                                                               |    |  | 28 | 
|                              
|PART II  OTHER INFORMATION    | 
|                               |  |                                                                                      
|Item 1.                        |  | Legal Proceedings                                                                     |    |  | 29 | 
|Item 1A.                       |  | Risk Factors                                                                          |    |  | 29 | 
|Item 2.                        |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |    |  | 36 | 
|Item 3.                        |  | Defaults Upon Senior Securities                                                       |    |  | 36 | 
|Item 4.                        |  | [Removed and Reserved]                                                                |    |  | 36 | 
|Item 5.                        |  | Other Information                                                                     |    |  | 36 | 
|Item 6.                        |  | Exhibits                                                                              |    |  | 37 | 
|Signatures                     |  |                                                                                       | 38 | 



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PART I  FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

DIADEXUS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)



|                                                                                                                                                                               |  |               |          |   |                  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                                               |  | March 31,2011 |          |   | December 31,2010 |  
|                                                                                                                                                                               |  | (unaudited)   |          |   | (Note 1)         |  
|Assets                                                                                                                                                                         |  |               |          |   |                  |   |          |  
|Current assets:                                                                                                                                                                |  |               |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                                                      |  | $             | 4,062    |   |                  | $ | 20,394   |  
|Short-term marketable securities                                                                                                                                               |  |               | 14,410   |   |                  |   |         |  
|Accounts receivable, net of allowance for doubtful accounts of $0 and rebate reserve of $13, respectively, and $0 and $0 at
March 31, 2011 and December 31, 2010, respectively |  |               | 1,185    |   |                  |   | 1,543    |  
|Receivable from related party                                                                                                                                                  |  |               |         |   |                  |   | 175      |  
|Inventories                                                                                                                                                                    |  |               | 170      |   |                  |   | 105      |  
|Restricted cash                                                                                                                                                                |  |               | 400      |   |                  |   |         |  
|Assets held for sale                                                                                                                                                           |  |               | 308      |   |                  |   | 308      |  
|Prepaid expenses and other current assets                                                                                                                                      |  |               | 1,185    |   |                  |   | 1,046    |  
|                                                                                                                                                                               |  |               |          |   |                  |   |          |  
|Total current assets                                                                                                                                                           |  |               | 21,720   |   |                  |   | 23,571   |  
|Restricted cash                                                                                                                                                                |  |               | 1,400    |   |                  |   | 1,800    |  
|Property and equipment, net                                                                                                                                                    |  |               | 455      |   |                  |   | 580      |  
|Other long-term assets                                                                                                                                                         |  |               | 35       |   |                  |   | 128      |  
|                                                                                                                                                                               |  |               |          |   |                  |   |          |  
|Total assets                                                                                                                                                                   |  | $             | 23,610   |   |                  | $ | 26,079   |  
|                                                                                                                                                                               |  |               |          |   |                  |   |          |  
|                                                                                                                                                                               |  |              
|Liabilities and Stockholders Equity                                                                                                                                           |  |               |          |   |                  |   |          |  
|Current liabilities:                                                                                                                                                           |  |               |          |   |                  |   |          |  
|Accounts payable                                                                                                                                                               |  | $             | 520      |   |                  | $ | 445      |  
|Deferred revenues, current portion                                                                                                                                             |  |               | 331      |   |                  |   | 305      |  
|Deferred rent, current portion                                                                                                                                                 |  |               | 70       |   |                  |   | 103      |  
|Unfavorable lease obligations                                                                                                                                                  |  |               | 394      |   |                  |   | 363      |  
|Accrued and other current liabilities                                                                                                                                          |  |               | 1,914    |   |                  |   | 1,930    |  
|                                                                                                                                                                               |  |               |          |   |                  |   |          |  
|Total current liabilities                                                                                                                                                      |  |               | 3,229    |   |                  |   | 3,146    |  
|Long-term deferred rent                                                                                                                                                        |  |               | 106      |   |                  |   | 52       |  
|Non-current portion of unfavorable lease obligation                                                                                                                            |  |               | 3,436    |   |                  |   | 3,555    |  
|Non-current portion of deferred revenue                                                                                                                                        |  |               | 759      |   |                  |   | 835      |  
|Other long term liabilities                                                                                                                                                    |  |               | 652      |   |                  |   | 646      |  
|                                                                                                                                                                               |  |               |          |   |                  |   |          |  
|Total liabilities                                                                                                                                                              |  |               | 8,182    |   |                  |   | 8,234    |  
|                                                                                                                                                                               |  |               |          |   |                  |   |          |  
|                                                                                                                                                                               |  |              
|Commitments and contingencies (Note 12)                                                                                                                                        |  |               |          |   |                  |   |          |  
|                                                                                                                                                                               |  |              
|Stockholders equity:                                                                                                                                                          |  |               |          |   |                  |   |          |  
|Preferred Stock, $0.01 par value, 19,979,500 shares authorized; none issued or outstanding                                                                                     |  |               |         |   |                  |   |         |  
|Common stock, $0.01 par value; 65,000,000 shares authorized; 53,067,057 shares issued and outstanding at March 31, 2011 and
December 31, 2010                                  |  |               | 531      |   |                  |   | 531      |  
|Additional paid-in capital                                                                                                                                                     |  |               | 204,868  |   |                  |   | 204,774  |  
|Accumulated other comprehensive loss                                                                                                                                           |  |               | (1       | ) |                  |   |         |  
|Accumulated deficit                                                                                                                                                            |  |               | (189,970 | ) |                  |   | (187,460 | )
|                                                                                                                                                                               |  |               |          |   |                  |   |          |  
|Total stockholders equity                                                                                                                                                     |  |               | 15,428   |   |                  |   | 17,845   |  
|                                                                                                                                                                               |  |               |          |   |                  |   |          |  
|Total liabilities and stockholders equity                                                                                                                                     |  | $             | 23,610   |   |                  | $ | 26,079   |  
|                                                                                                                                                                               |  |               |          |   |                  |   |          |  

See accompanying notes to condensed consolidated financial statements.



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DIADEXUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share data)



|                                                                               |  |                             |            |   |      |   |            |  
|------------------------------------------------------------------------------ |  | --------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                               |  | Three Months
EndedMarch 31, |           
|                                                                               |  | 2011                        |            |   | 2010 |  
|                                                                               |  | (unaudited)                 |           
|Revenues:                                                                      |  |                             |            |   |      |   |            |  
|License revenue                                                                |  | $                           | 76         |   |      | $ | 76         |  
|Royalty revenue                                                                |  |                             | 1,005      |   |      |   | 879        |  
|Product sales                                                                  |  |                             | 2,240      |   |      |   | 1,512      |  
|Product sales to related party                                                 |  |                             |           |   |      |   | 199        |  
|                                                                               |  |                             |            |   |      |   |            |  
|Total revenues                                                                 |  |                             | 3,321      |   |      |   | 2,666      |  
|                                                                               |  |                             |            |   |      |   |            |  
|Operating costs and expenses:                                                  |  |                             |            |   |      |   |            |  
|Product costs                                                                  |  |                             | 1,132      |   |      |   | 987        |  
|Sales and marketing                                                            |  |                             | 1,107      |   |      |   | 1,278      |  
|Research and development                                                       |  |                             | 1,492      |   |      |   | 932        |  
|General and administrative                                                     |  |                             | 2,114      |   |      |   | 725        |  
|                                                                               |  |                             |            |   |      |   |            |  
|Total operating costs and expenses                                             |  |                             | 5,845      |   |      |   | 3,922      |  
|                                                                               |  |                             |            |   |      |   |            |  
|Loss from operations                                                           |  |                             | (2,524     | ) |      |   | (1,256     | )
|                                                                               |  |                             |            |   |      |   |            |  
|                                                                               |  |                            
|Interest income, interest expense and other income (expense), net:             |  |                             |            |   |      |   |            |  
|Interest income                                                                |  |                             | 17         |   |      |   | 3          |  
|Interest expense                                                               |  |                             |           |   |      |   | (112       | )
|Other income (expense), net                                                    |  |                             |           |   |      |   | 2          |  
|                                                                               |  |                             |            |   |      |   |            |  
|Loss before income tax                                                         |  |                             | (2,507     | ) |      |   | (1,363     | )
|Income tax                                                                     |  |                             | (3         | ) |      |   | (5         | )
|                                                                               |  |                             |            |   |      |   |            |  
|Net loss                                                                       |  | $                           | (2,510     | ) |      | $ | (1,368     | )
|                                                                               |  |                             |            |   |      |   |            |  
|Basic and diluted net loss per share:                                          |  | $                           | (0.05      | ) |      | $ | (0.07      | )
|                                                                               |  |                             |            |   |      |   |            |  
|Weighted average shares used in computing basic and diluted net loss per share |  |                             | 53,067,057 |   |      |   | 19,059,144 |  
|                                                                               |  |                             |            |   |      |   |            |  

See accompanying notes to condensed consolidated financial statements.



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DIADEXUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                            |  |                             |         |   |      |   |        |  
|--------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------ | -
|                                                                            |  | Three Months EndedMarch 31, |        
|                                                                            |  | 2011                        |         |   | 2010 |  
|                                                                            |  | (unaudited)                 |        
|Operating activities:                                                       |  |                             |         |   |      |   |        |  
|Net loss                                                                    |  | $                           | (2,510  | ) |      | $ | (1,368 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                             |         |   |      |   |        |  
|Depreciation and amortization                                               |  |                             | 130     |   |      |   | 222    |  
|Stock-based compensation                                                    |  |                             | 94      |   |      |   | 30     |  
|Amortization on investments                                                 |  |                             | 61      |   |      |   | 11     |  
|Provision for rebate reserve                                                |  |                             | 13      |   |      |   | 12     |  
|Noncash other interest expense (income)                                     |  |                             | 6       |   |      |   | (1     | )
|Noncash interest associated with notes payable                              |  |                             |        |   |      |   | 31     |  
|Unfavorable lease                                                           |  |                             | (88     | ) |      |   |       |  
|Changes in operating assets and liabilities                                 |  |                             |         |   |      |   |        |  
|Accounts receivable                                                         |  |                             | 345     |   |      |   | (169   | )
|Accounts receivable from related party                                      |  |                             | 175     |   |      |   | 96     |  
|Inventory                                                                   |  |                             | (65     | ) |      |   | (30    | )
|Prepaid expenses, other current assets and other long-term assets           |  |                             | (46     | ) |      |   | (64    | )
|Accounts payable                                                            |  |                             | 75      |   |      |   | 95     |  
|Accrued liabilities                                                         |  |                             | (16     | ) |      |   | 218    |  
|Deferred rent                                                               |  |                             | 21      |   |      |   | (44    | )
|Deferred revenue                                                            |  |                             | (50     | ) |      |   | 116    |  
|                                                                            |  |                             |         |   |      |   |        |  
|Net cash used in operating activities                                       |  |                             | (1,855  | ) |      |   | (845   | )
|                                                                            |  |                             |         |   |      |   |        |  
|                                                                            |  |                            
|Investing activities:                                                       |  |                             |         |   |      |   |        |  
|Purchases of property and equipment                                         |  |                             | (5      | ) |      |   | (4     | )
|Maturities of available-for-sale investments                                |  |                             | 2,500   |   |      |   | 1,750  |  
|Purchases of available-for-sale investments                                 |  |                             | (16,972 | ) |      |   |       |  
|                                                                            |  |                             |         |   |      |   |        |  
|Net cash provided by (used in) investing activities                         |  |                             | (14,477 | ) |      |   | 1,746  |  
|                                                                            |  |                             |         |   |      |   |        |  
|                                                                            |  |                            
|Financing activities:                                                       |  |                             |         |   |      |   |        |  
|Principal repayment of the loan                                             |  |                             |        |   |      |   | (1,050 | )
|Expenses relating to merger                                                 |  |                             |        |   |      |   | (20    | )
|                                                                            |  |                             |         |   |      |   |        |  
|Net cash used in investing activities                                       |  |                             |        |   |      |   | (1,070 | )
|                                                                            |  |                             |         |   |      |   |        |  
|Net decrease in cash and cash equivalents                                   |  |                             | (16,332 | ) |      |   | (169   | )
|Cash and cash equivalents, beginning of period                              |  |                             | 20,394  |   |      |   | 2,539  |  
|                                                                            |  |                             |         |   |      |   |        |  
|Cash and cash equivalents, end of period                                    |  | $                           | 4,062   |   |      | $ | 2,370  |  
|                                                                            |  |                             |         |   |      |   |        |  
|                                                                            |  |                            
|Supplemental disclosure:                                                    |  |                             |         |   |      |   |        |  
|Cash paid for interest                                                      |  | $                           |        |   |      | $ | 77     |  

See accompanying notes
to condensed consolidated financial statements.



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diaDexus, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Business Overview

Formation of the Company

The Company (as defined below) is a life sciences company focused on the development and commercialization of patent-protected in vitro diagnostic products addressing unmet needs in cardiovascular
disease. The Company is the successor to a company initially formed as a joint venture between SmithKline Beecham Corporation (now GlaxoSmithKline LLC (GlaxoSmithKline)) and Incyte Pharmaceuticals, Inc. Upon formation, SmithKline Beecham
Corporation granted the Company an exclusive license to certain diagnostic intellectual property, including
Lp-PLA2, an inflammatory marker of cardiovascular risk.

The diaDexus PLAC® Test for Lp-PLA2provides new information, over and above traditional risk factors, to help identify individuals at increased risk of suffering a heart attack or stroke. Some of these events may be reduced with earlier
detection and more aggressive risk-reducing strategies, including treatment to lower LDL-cholesterol goals with statins. The Company has developed two formats of the PLAC Test, an enzyme-linked-immunosorbent serologic assay (ELISA)
product and a turbidimetric immunoassay (TIA) product.

On May 10, 2010, we removed our PLAC TIA test from the market in
order to address heterophilic interference observed in the PLAC TIA product. On June 30, 2010, we submitted a premarket notification to the United States Food and Drug Administration (the FDA) seeking clearance under
Section 510(k) of the Federal Food, Drug and Cosmetic Act (the FDCA) to market an enhanced PLAC TIA product that addresses the heterophilic interference observed in the suspended PLAC TIA product. On January 6, 2011, the FDA
informed the Company that it was cleared for marketing the automated version of its proprietary PLAC Test; however, the Company has not yet reintroduced the product to the market.

Reverse Merger

On July 28, 2010, VaxGen, Inc., a Delaware corporation, closed
a merger transaction (the Reverse Merger) with diaDexus, Inc.,a privately held Delaware corporation (Old diaDexus), pursuant to an Agreement and Plan of Merger and Reorganization, dated as of May 28, 2010, as
amended June 24, 2010 (the Merger Agreement), by and among VaxGen, Inc., Old diaDexus, Violet Acquisition Corporation, a wholly owned subsidiary of VaxGen, Inc. (Merger Sub I), Violet Acquisition, LLC, a wholly owned
subsidiary of VaxGen, Inc. (Merger Sub II), and John E. Hamer, as the representative of Old diaDexus stockholders. Pursuant to the Merger Agreement,Old diaDexus became a wholly owned subsidiary of VaxGen Inc. through a
merger of Merger Sub I with and into Old diaDexus, with Old diaDexus being the surviving company in the merger (Merger I), and, immediately following the effectiveness of Merger I, the merger of Old diaDexus with and into Merger Sub II,
with Merger Sub II being the surviving entity in the merger.

As of July 28, 2010, after giving effect to the Reverse Merger and the
issuance of VaxGen, Inc. common stock to certain employees of Old diaDexus, the Company had 53,067,057 shares of common stock issued and outstanding, with the former holders of Old diaDexus Series F Preferred Stock and employees of Old diaDexus
collectively owning approximately 38%, and the Pre-Merger VaxGen stockholders of Pre-Merger VaxGen (as defined below) owning approximately 62%, of the outstanding Company common stock.

The Reverse Merger has been accounted for as a reverse acquisition of net assets. As such, the financial statements of Old diaDexus are treated as the historical financial statements of the Company, with
the results of VaxGen, Inc. being included from July 28, 2010. Immediately following the closing of the Reverse Merger, Old diaDexus designees to the Companys Board of Directors represented a majority of the Companys directors, Old
diaDexus senior management represented the entire senior management of the Company and the operations formerly conducted by Old diaDexus were the sole revenue producing operations as well as the only continuing development effort of the
Company. For periods prior to the closing of the Reverse Merger, therefore, the information in these notes to consolidated financial statements relates to the historical business and operations of Old diaDexus. Certain portions of this Quarterly
Report on Form 10-Q may contain information that relates to Pre-Merger VaxGens previous operations, which are no longer material to the Companys business. Any comparison of Pre-Merger VaxGens revenues and operations with those of
the Company may not be helpful to an understanding of the Companys results for the quarter ended March 31, 2011 or future periods.



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diaDexus, Inc.

Notes to Condensed Consolidated Financial Statements - continued

(Unaudited)



Subsidiary Merger and Name Change

On November 1, 2010, VaxGen, Inc. merged Merger Sub II with and into VaxGen, Inc., with VaxGen, Inc. being the surviving entity in the merger, and VaxGen, Inc. changed its name to diaDexus, Inc.
pursuant to a merger effected under Section 253 of the Delaware General Corporation Law.

References in these notes to condensed
consolidated financial statements to the Company, we, us and our refer to diaDexus, Inc. (f/k/a VaxGen, Inc.), a Delaware corporation, and its consolidated subsidiaries for periods after the closing of
the Reverse Merger, and to Old diaDexus and its consolidated subsidiaries for periods prior to the closing of the Reverse Merger, unless the context requires otherwise. References to Pre-Merger VaxGen mean VaxGen, Inc., a Delaware
corporation, prior to the closing of the Reverse Merger.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles
(GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include
all disclosures required by accounting principles generally accepted in the U.S. In the opinion of management, unaudited condensed consolidated financial statements have been prepared on a consistent basis with December 31, 2010 audited
financial statements and includes all adjustments, consisting of normal recurring adjustments, which are necessary to fairly state the Companys consolidated financial positions as of March 31, 2011. Operating results for the three months
ended March 31, 2011 are not necessarily indicative of the results that may be expected for any other future period. In particular, diaDexus became subject to significant expenses relating to property leases and obligations as a public company.
These additional expenses are reflected in our results of operations only from July 28, 2010, the closing date of the Reverse Merger.

All intercompany accounts and transactions have been eliminated in consolidation.

2. Summary of Significant Accounting Policies

Basis of Consolidation

For the periods prior to July 28, 2010, the consolidated financial statements included the accounts of Old diaDexus, Inc. The Reverse Merger has been
accounted for as a reverse acquisition. The financial statements of Old diaDexus are treated as the historical financial statements of the combined company, with the results of VaxGen, Inc. being included from the effective completion date of the
Reverse Merger on July 28, 2010. The operations are treated as one operating segment and all inter-company balances and transactions were eliminated.

Use of Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amount of revenues and expenses during the reporting period. Actual results may differ significantly from those estimates.

The Company considers the following accounting policies related to revenue recognition, research and development expenses, accruals, stock-based compensation and income tax expenses to be the most
critical accounting policies, because they require the Company to make estimates, assumptions and judgments about matters that are inherently uncertain.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased
with original maturities of 90 days or less to be cash equivalents. Cash equivalents consist primarily of money market accounts and treasury securities.

Related Party

The Company discloses any transactions with GlaxoSmithKline under
related party.



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diaDexus, Inc.

Notes to Condensed Consolidated Financial Statements - continued

(Unaudited)



Restricted Cash

Restricted cash represents term deposits, which expire on January 1, 2012 and December 31, 2016, held at two financial institutions as collateral for the leases of the Companys facilities
in South San Francisco.

Available-for-Sale Investments

The Company classifies its investments as available-for-sale. Available-for-sale investments are recorded at fair value based on quoted market prices, with the unrealized gains or losses included in
accumulated other comprehensive income (loss) within stockholders equity, except that any unrealized losses which are deemed to be other than temporary are reflected in the statement of operations. Management assesses each of these investments
on an individual basis to determine if the decline in fair value was other than temporary. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization or accretion is
included in interest and other income. Realized gains or losses on sales of available-for-sale securities are reported in other income or expenses as incurred. The cost of securities sold is based on the specific identification method. Interest and
dividends on available-for-sale securities are recorded in interest and other income.

Inventory

Inventories are stated as the lower of cost or market. Cost is determined using the first in, first out (FIFO) method. Market value is
determined as the lower of replacement cost or net realizable value.

Property and Equipment

Property and equipment are recorded at cost and depreciated over their estimated useful lives using the straight-line method. Laboratory equipment,
computers, software, and office furniture are depreciated over three years. Leasehold improvements are recorded at cost and amortized over the term of the lease or their useful life, whichever is shorter. Maintenance and repairs are expensed as
incurred.

Segments

The
Company has one reportable segment and uses one measurement of profitability to manage its business. All long-lived assets are maintained in the United States of America.

Revenue Recognition

Revenues are generated from licensing fees, royalties earned, product
sales and contract arrangements, and recorded net of customer and distributor discounts. Revenue is recognized when the four basic criteria of revenue recognition are met: (i) a contractual agreement exists; (ii) delivery of product has
occurred and risk of loss and title has transferred, transfer of technology (intellectual property) has been completed or services have been rendered; (iii) the fee is fixed or determinable; and (iv) collectability is reasonably assured.

License fee revenue including nonrefundable upfront fees, is deferred and recognized over the term of the underlying agreements. Royalty
revenue is recognized when reportable product sales are confirmed. Revenue from technology licenses or other payments under collaborative agreements where the Company has a continuing obligation to perform is recognized as revenue over the expected
period of the continuing performance obligation. The term of these underlying agreements ranges from two to ten years.

Research and
Development

Research and development expenses include internal and external costs. Internal costs include product development, regulatory
support for technology, lab materials and supply costs and other technical support costs, including salaries and consultant fees. External expenses consist of sponsored research studies and investigator sponsored trials. Research and development
costs are expensed as incurred.

Impairment of Long-Lived Assets

In accordance with Subtopic ASC 360-10, impairment of long-lived assets is measured or assessed when events or changes in circumstances indicate that the carrying amount of such assets may not be
recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. In the event that such cash flows are not expected to be sufficient to recover
the carrying amount of the assets, the assets are written down to their estimated fair values. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell. Certain assets classified as held for
sale and which were recorded as part of the Reverse Merger completed on July 28, 2010 have an estimated fair value of $308,000 as of March 31, 2011.



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diaDexus, Inc.

Notes to Condensed Consolidated Financial Statements - continued

(Unaudited)



Stock-Based Compensation

Effective January 1, 2006, the Company adopted ASC 805 using the modified prospective transition method, which requires the measurement and recognition of compensation expense for all stock-based
payments made to employees and directors including employee stock option awards based on estimated fair value.

The assumptions used in
computing the fair value of stock-based awards reflect the Companys best estimates, but involve uncertainties relating to market and other conditions, many of which are outside of the Companys control. In addition, the Companys
estimate of future stock-based compensation expense will be affected by a number of items including the Companys stock price, the number of stock options the Companys board of directors may grant in future periods, as well as a number of
complex and subjective valuation adjustments and the related tax effect.

The net loss for the three months ended March 31, 2011 includes
employee stock-based compensation expense of $94,000. The net loss for the three months ended March 31, 2010 includes employee stock-based compensation expense of $30,000. As of March 31, 2011, the total unrecorded stock-based compensation
expense for unvested stock options, net of expected forfeitures, was $761,000, which is expected to be amortized over a weighted-average period of 2.43 years.

Fair Value Measurements

In accordance with ASC Subtopic 820-10 the carrying amounts of
certain financial instruments of the Company, including cash equivalents, marketable securities and liabilities, continue to be valued at fair value. ASC Subtopic 820-10 defines fair value and provides guidance for using fair value to measure assets
and liabilities and is applicable whenever assets or liabilities are required or permitted to be measured at fair value.

The fair value
estimates presented reflect the information available to the Company as of March 31, 2011. See Note 3, Fair Value Measurements.

Deferred Rent

Deferred rent consists of the difference between cash payments and the
recognition of rent expense on a straight-line basis for the buildings the Company leases. The leases provide for fixed increases in minimum annual rental payments and the total amount of rental payments due over the lease terms are being charged to
rent expense ratably over the life of the leases.

Comprehensive Income (Loss)

Comprehensive income (loss) represents all changes in stockholders equity except those resulting from investments or contributions by stockholders. The Companys unrealized gains on
available-for-sale securities represent the component of comprehensive income (loss) excluded from the Companys net loss.

Income
Taxes

The Company accounts for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities
are determined based on the difference between financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected to be realized.

On January 1, 2009, the Company adopted
ASC 740-10-25. For the three months ended March 31, 2011 and 2010, the Company did not have any additional unrecognized tax benefits and there was no effect on its financial condition or results of operations as a result of adopting ASC
740-10-25. The Companys practice is to recognize interest and/or penalties related to income tax matters in interest expense as incurred.

Recent Accounting Pronouncements

From
time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB) or other standard setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, we believe
that the impact of recently issued standards that are not yet effective will not have a material impact on our financial position or results of operations upon adoption.



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diaDexus, Inc.

Notes to Condensed Consolidated Financial Statements - continued

(Unaudited)



3. Cash, Cash Equivalents and Investments

As part of its cash management program, the Company maintains a portfolio of marketable investment securities that expire at various dates through
March 6, 2012. The securities are investment grade and generally mature within one year and include tax exempt securities and certificates of deposit. The fair value of substantially all securities is determined by quoted market prices. The
Company maintains its cash in bank accounts, which at times may exceed federally insured limits. The Company has not experienced any losses on such accounts. The Company considers all highly liquid investments purchased with an original maturity of
three months or less at the time of purchase to be cash equivalents.

The following is a summary of cash, cash equivalents, and
available-for-sale securities at March 31, 2011 and December 31, 2010 (in thousands):



|                                               |  |                   |        |  |                 |   |   |                  |  |   |                     |   |  |   |        | 
|---------------------------------------------- |  | ----------------- | ------ |  | --------------- | - | - | ---------------- |  | - | ------------------- | - |  | - | ------ | 
|                                               |  | March 31, 2011    |       
|                                               |  | Cost Basis        |        |  | UnrealizedGains |   |   | UnrealizedLosses |  |   | EstimatedFair Value |  
|Cash and cash equivalents:                     |  |                   |        |  |                 |   |   |                  |  |   |                     |   |  |   |        | 
|Cash                                           |  | $                 | 353    |  |                 | $ |  |                  |  | $ |                    |   |  | $ | 353    | 
|Money market funds                             |  |                   | 2,449  |  |                 |   |  |                  |  |   |                    |   |  |   | 2,449  | 
|Municipal bonds                                |  |                   | 260    |  |                 |   |  |                  |  |   |                    |   |  |   | 260    | 
|Commercial paper                               |  |                   | 1,000  |  |                 |   |  |                  |  |   |                    |   |  |   | 1,000  | 
|                                               |  |                   |        |  |                 |   |   |                  |  |   |                     |   |  |   |        | 
|Total cash and cash equivalents                |  | $                 | 4,062  |  |                 | $ |  |                  |  | $ |                    |   |  | $ | 4,062  | 
|                                               |  |                   |        |  |                 |   |   |                  |  |   |                     |   |  |   |        | 
|                                               |  |                   |        | 
|Available-for-sale marketable securities:      |  |                   |        |  |                 |   |   |                  |  |   |                     |   |  |   |        | 
|Commercial paper                               |  |                   | 3,996  |  |                 |   | 3 |                  |  |   |                    |   |  |   | 3,999  | 
|Corporate notes                                |  |                   | 7,780  |  |                 |   |  |                  |  |   | (4                  | ) |  |   | 7,776  | 
|US government agency obligations               |  |                   | 2,635  |  |                 |   |  |                  |  |   |                    |   |  |   | 2,635  | 
|                                               |  |                   |        |  |                 |   |   |                  |  |   |                     |   |  |   |        | 
|Total available-for-sale marketable securities |  | $                 | 14,411 |  |                 | $ | 3 |                  |  | $ | (4                  | ) |  | $ | 14,410 | 
|                                               |  |                   |        |  |                 |   |   |                  |  |   |                     |   |  |   |        | 
|                                               | 
|                                               |  | December 31, 2010 |       
|                                               |  | Cost Basis        |        |  | UnrealizedGains |   |   | UnrealizedLosses |  |   | EstimatedFair Value |  
|Cash and cash equivalents:                     |  |                   |        |  |                 |   |   |                  |  |   |                     |   |  |   |        | 
|Cash                                           |  | $                 | 393    |  |                 | $ |  |                  |  | $ |                    |   |  | $ | 393    | 
|Money market funds                             |  |                   | 20,001 |  |                 |   |  |                  |  |   |                    |   |  |   | 20,001 | 
|                                               |  |                   |        |  |                 |   |   |                  |  |   |                     |   |  |   |        | 
|Total cash and cash equivalents                |  | $                 | 20,394 |  |                 | $ |  |                  |  | $ |                    |   |  | $ | 20,394 | 
|                                               |  |                   |        |  |                 |   |   |                  |  |   |                     |   |  |   |        | 

Fair Value Measurements

In accordance with ASC 820, the Company discloses and recognizes the fair value of its financial assets and liabilities using a hierarchy that prioritizes the inputs to valuation techniques used to
measure fair value. The guidance establishes three levels of the fair value hierarchy as follows:

Level 1: Observable inputs, such as quoted
prices in active markets for identical assets or liabilities;

Level 2: Observable inputs other than Level 1 prices, such as quoted prices for
similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities;

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.



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diaDexus, Inc.

Notes to Condensed Consolidated Financial Statements - continued

(Unaudited)



The following table represents the Companys fair value hierarchy for its financial assets (cash
equivalents and investments) measured at fair value on a recurring basis as of March 31, 2011 and December 31, 2010 (in thousands):



|                                 |  |                         |        |  |                                                           |   |       |                                         |  |   |                                      |  |  |   |   | 
|-------------------------------- |  | ----------------------- | ------ |  | --------------------------------------------------------- | - | ----- | --------------------------------------- |  | - | ------------------------------------ |  |  | - | - | 
|                                 |  |                         |        |  | Fair Value Measurements                                   |  
|                                 |  | Balance atMarch 31,2011 |        |  | Quoted PricesIn ActiveMarkets forIdentical AssetsLevel 
1 |   |       | SignificantotherObservableInputsLevel 2 |  |   | SignificantUnobservableInputsLevel 3 | 
|Assets:                          |  |                         |        |  |                                                           |   |       |                                         |  |   |                                      |  |  |   |   | 
|Cash                             |  | $                       | 353    |  |                                                           | $ | 353   |                                         |  | $ |                                     |  |  | $ |  | 
|Money market funds               |  |                         | 2,449  |  |                                                           |   | 2,449 |                                         |  |   |                                     |  |  |   |  | 
|Municipal bonds                  |  |                         | 260    |  |                                                           |   |      |                                         |  |   | 260                                  |  |  |   |  | 
|Commercial paper                 |  |                         | 4,999  |  |                                                           |   |      |                                         |  |   | 4,999                                |  |  |   |  | 
|Corporate notes                  |  |                         | 7,776  |  |                                                           |   |      |                                         |  |   | 7,776                                |  |  |   |  | 
|US government agency obligations |  |                         | 2,635  |  |                                                           |   |      |                                         |  |   | 2,635                                |  |  |   |  | 
|Restricted cash                  |  |                         | 1,800  |  |                                                           |   |      |                                         |  |   | 1,800                                |  |  |   |  | 
|                                 |  |                         |        |  |                                                           |   |       |                                         |  |   |                                      |  |  |   |   | 
|                                 |  | $                       | 20,272 |  |                                                           | $ | 2,802 |                                         |  | $ | 17,470                               |  |  | $ |  | 
|                                 |  |                         |        |  |                                                           |   |       |                                         |  |   |                                      |  |  |   |   | 



|                   |  |                            |        |  |                                                          |   |        |                                         |  |   |                                      |  |  |   |   | 
|------------------ |  | -------------------------- | ------ |  | -------------------------------------------------------- | - | ------ | --------------------------------------- |  | - | ------------------------------------ |  |  | - | - | 
|                   |  |                            |        |  | Fair Value Measurements                                  |  
|                   |  | Balance atDecember 31,2010 |        |  | Quoted PricesIn ActiveMarkets forIdentical AssetsLevel 1 |   |        | SignificantotherObservableInputsLevel 2 |  |   | SignificantUnobservableInputsLevel 3 | 
|Assets:            |  |                            |        |  |                                                          |   |        |                                         |  |   |                                      |  |  |   |   | 
|Cash               |  | $                          | 393    |  |                                                          | $ | 393    |                                         |  | $ |                                     |  |  | $ |  | 
|Money market funds |  |                            | 20,001 |  |                                                          |   | 20,001 |                                         |  |   |                                     |  |  | $ |  | 
|Restricted cash    |  |                            | 1,800  |  |                                                          |   |       |                                         |  |   | 1,800                                |  |  |   |  | 
|                   |  |                            |        |  |                                                          |   |        |                                         |  |   |                                      |  |  |   |   | 
|                   |  | $                          | 22,194 |  |                                                          | $ | 20,394 |                                         |  | $ | 1,800                                |  |  | $ |  | 
|                   |  |                            |        |  |                                                          |   |        |                                         |  |   |                                      |  |  |   |   | 

4. Inventory

Inventory consists of the following (in thousands):



|                |  |               |     |  |                  |   |     | 
|--------------- |  | ------------- | --- |  | ---------------- | - | --- | 
|                |  | March 31,2011 |     |  | December 31,2010 |  
|Finished goods  |  | $             | 111 |  |                  | $ | 68  | 
|Work-in-process |  |               | 59  |  |                  |   | 37  | 
|                |  |               |     |  |                  |   |     | 
|                |  | $             | 170 |  |                  | $ | 105 | 
|                |  |               |     |  |                  |   |     | 

5. Assets Held For Sale

As part of the Reverse Merger, which was completed on July 28, 2010, the Company acquired a group of assets used by Pre-Merger VaxGen in its manufacturing process. Prior to the Reverse Merger,
VaxGen, Inc. had committed to a plan to sell the equipment related to its California manufacturing facility and had determined that these assets met the criteria for, and had been classified as, held for sale in accordance with ASC Topic
360. The market approach was used in determining the fair market value of these assets.



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diaDexus, Inc.

Notes to Condensed Consolidated Financial Statements - continued

(Unaudited)



Total assets held for sale as of March 31, 2011 and December 31, 2010 are as follows (in
thousands):



|                     |  |                  |     |  |                                                          |   |   |                                           |  |   |                                         |  |  |                                                                    |     |  |  |   |    |  
|-------------------- |  | ---------------- | --- |  | -------------------------------------------------------- | - | - | ----------------------------------------- |  | - | --------------------------------------- |  |  | ------------------------------------------------------------------ | --- |  |  | - | -- | -
|                     |  |                  |     |  | Fair Value Measurements Using                            |  
|Description          |  | March 31,2011    |     |  | QuotedPrices inActiveMarkets forIdenticalAssets(Level 1) |   |   | SignificantOtherObservableInputs(Level 2) |  |   | SignificantUnobservableInputs(Level 3)  |  |  | Three MonthsEndedMarch 31,2011Gains(Losses)                        |    
|Assets held for sale |  | $                | 308 |  |                                                          | $ |  |                                           |  | $ |                                        |  |  | $                                                                  | 308 |  |  | $ |   |  
|                     |  |                 
|                     |  |                  |     |  | Fair Value Measurements Using                            |  
|Description          |  | December 31,2010 |     |  | QuotedPrices inActiveMarkets forIdenticalAssets(Level 1) |   |   | SignificantOtherObservableInputs(Level 2) |  |   | SignificantUnobservableInputs (Level 3) |  |  | Period fromJuly 28, 2010throughDecember 31,2010 TotalGains(Losses) |    
|Assets held for sale |  | $                | 308 |  |                                                          | $ |  |                                           |  | $ |                                        |  |  | $                                                                  | 308 |  |  | $ | (2 | )

The measurement of the assets held for
sale fair value incorporated significant unobservable inputs as a result of a lack of any available observable market information to determine the fair value. The calculation of the fair value of assets held for sale used a market valuation
technique that relied on Level 3 inputs, including quoted prices for similar assets. There was no impairment charge for the three months ended March 31, 2011. Management is in the process of making a determination regarding the final
disposition of these assets.

6. Property, Plant and Equipment

Property and equipment are recorded at cost. Expenditures for major additions and improvements are capitalized, and maintenance and repairs are charged to expense as incurred. When property and equipment
are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period. Depreciation is provided over the estimated
useful lives of the related assets using the straight-line method for financial statement purposes. The Company uses other depreciation methods for tax purposes where appropriate. The estimated useful lives for significant property and equipment
categories are as follows:



|                                |  |                        
|------------------------------- |  | -----------------------
|Office and Laboratory equipment |  | 3 years                
|Computer equipment and software |  | 3 years                
|Leasehold improvements          |  | Term of lease agreement

The
following is a summary of property and equipment at cost less accumulated depreciation as of March 31, 2011 and December 31, 2010 (in thousands):



|                                                |  |               |         |   |                  |   |         |  
|----------------------------------------------- |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                                                |  | March 31,2011 |         |   | December 31,2010 |  
|Laboratory equipment                            |  | $             | 4,565   |   |                  | $ | 4,560   |  
|Leasehold improvements                          |  |               | 7,686   |   |                  |   | 7,686   |  
|Computer and software                           |  |               | 1,843   |   |                  |   | 1,843   |  
|Furniture and fixtures                          |  |               | 804     |   |                  |   | 804     |  
|                                                |  |               |         |   |                  |   |         |  
|                                                |  |               | 14,898  |   |                  |   | 14,893  |  
|Less: Accumulated depreciation and amortization |  |               | (14,443 | ) |                  |   | (14,313 | )
|                                                |  |               |         |   |                  |   |         |  
|                                                |  | $             | 455     |   |                  | $ | 580     |  
|                                                |  |               |         |   |                  |   |         |  



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diaDexus, Inc.

Notes to Condensed Consolidated Financial Statements - continued

(Unaudited)



Depreciation and amortization expense was $0.1 million and $0.2 million for the three months ended
March 31, 2011 and 2010, respectively.

7. Total Accrued and Other Current Liabilities

Total accrued and other current liabilities include the following as of March 31, 2011 and December 31, 2010 (in thousands):



|                                            |  |               |       |  |                  |   |       | 
|------------------------------------------- |  | ------------- | ----- |  | ---------------- | - | ----- | 
|                                            |  | March 31,2011 |       |  | December 31,2010 |  
|Accrued payroll and related expenses        |  | $             | 811   |  |                  | $ | 1,139 | 
|Accrued accounting fees                     |  |               | 206   |  |                  |   |      | 
|Accrued royalty expense                     |  |               | 158   |  |                  |   | 153   | 
|Accrued consulting expenses                 |  |               | 144   |  |                  |   | 109   | 
|Deferred sublease payment                   |  |               | 122   |  |                  |   | 122   | 
|Accrued legal and patent expense            |  |               | 107   |  |                  |   | 59    | 
|Collaborative research obligations          |  |               | 90    |  |                  |   | 42    | 
|Inventory                                   |  |               | 40    |  |                  |   |      | 
|Accrued sales tax                           |  |               | 30    |  |                  |   | 26    | 
|Other current liabilities                   |  |               | 206   |  |                  |   | 280   | 
|                                            |  |               |       |  |                  |   |       | 
|Total accrued and other current liabilities |  | $             | 1,914 |  |                  | $ | 1,930 | 
|                                            |  |               |       |  |                  |   |       | 

8. Concentration of Credit Risk

Revenues from the following four distributor and large laboratory customers represented a significant portion of total revenue for the three months ended March 31, 2011 and 2010 and accounts
receivable as of March 31, 2011 and December 31, 2010:



|           |  |               |    |   |                     |  |    |               |  |  |                  |   |  |  |    |  
|---------- |  | ------------- | -- | - | ------------------- |  | -- | ------------- |  |  | ---------------- | - |  |  | -- | -
|           |  | Revenue       |    |   | Accounts Receivable | 
|           |  | March 31,2011 |    |   | March 31,2010       |  |    | March 31,2011 |  |  | December 31,2010 |  
|Customer A |  |               | 51 | % |                     |  | 13 | %             |  |  | 17               | % |  |  | 26 | %
|Customer B |  |               | 16 | % |                     |  | 23 | %             |  |  | 35               | % |  |  | 27 | %
|Customer C |  |               | 11 | % |                     |  | 7  | %             |  |  | 11               | % |  |  | 14 | %
|Customer D |  |               | 6  | % |                     |  | 1  | %             |  |  | 18               | % |  |  | 11 | %

9. Basic and Diluted Loss per Share

Basic net loss per common share is based on the weighted average number of common shares outstanding during the period. Diluted net loss
per common share is based on the weighted average number of common shares and other dilutive securities outstanding during the period, provided that including these dilutive securities does not increase the net loss per share.

The effect of the options and warrants was anti-dilutive for the three months ended March 31, 2011 and 2010. The following table shows the total
outstanding securities considered anti-dilutive and therefore, excluded from the computation of diluted net loss per share (in thousands):



|                                  |  |                 |       |  |      |  |       | 
|--------------------------------- |  | --------------- | ----- |  | ---- |  | ----- | 
|                                  |  | As of March 31, |      
|                                  |  | 2011            |       |  | 2010 | 
|Options to purchase common stock  |  |                 | 7,055 |  |      |  | 1,147 | 
|Warrants to purchase common stock |  |                 | 16    |  |      |  | 2,070 | 
|                                  |  |                 |       |  |      |  |       | 
|Total                             |  |                 | 7,071 |  |      |  | 3,217 | 
|                                  |  |                 |       |  |      |  |       | 

Comprehensive loss for the Company was $2.5 million for the three months ended March 31, 2011 and $1.4 million for the
same period in 2010.



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diaDexus, Inc.

Notes to Condensed Consolidated Financial Statements - continued

(Unaudited)



10. Stock Based Compensation

Stock Option Plans

Pre-Reverse Merger

The Companys Board of Directors adopted the 2000 Equity Incentive Plan (the 2000 Plan) and reserved a total of 25,709,911 shares of the
Companys Common Stock for issuance thereunder, of which 2,200,000 shares were converted from the 1997 Plan. These shares of the Companys Common Stock were reserved for issuance to employees and consultants of the Company. The Board of
Directors has the authority to determine to whom options will be granted, the number of shares, the term and exercise price (which cannot be less than the estimated fair value at date of grant for incentive stock options or 85% of the estimated fair
value for nonstatutory stock options).

In January 2010, the Companys Board of Directors adopted the 2010 Equity Incentive Plan (the
2010 Plan) and reserved a total of 23,163,326 shares of the Companys Common Stock for issuance under the 2010 Plan, under which 15,435,189 of these shares were converted from the 2000 Plan. These shares of the Companys Common
Stock were reserved for issuance to employees and consultants of the Company.

Options generally vested 25% after one year, with 1/48 of the
shares subject to an option vesting on each monthly anniversary of the vesting commencement date thereafter. The maximum term of an option grant could not exceed 10 years. If an employee owned stock representing more than 10% of the outstanding
shares, the price of each share was required to be at least 110% of estimated fair value.

As of the closing of the Reverse Merger, the 2000
Plan and the 2010 Plan were both discontinued, and all outstanding option grants under the 2000 Plan and 2010 Plan were cancelled.

Post-Reverse Merger

Following
the closing of the Reverse Merger, the Company had the following stock option plans:

1996 Stock Option Plan

The 1996 Stock Option Plan (the Plan) initially had 4,750,000 shares of common stock authorized for issuance and a provision that
automatically increased this number by 3.5% of the issued and outstanding common stock on the last trading day of the December immediately preceding each fiscal year through January 2007. Options granted under the Plan may be designated as qualified
or nonqualified at the discretion of the Compensation Committee of the Board of Directors. Generally, shares issuable upon exercise of options vest ratably over four years, beginning one year from the date of grant; however, options can vest upon
grant. All options expire no later than 10 years from the date of grant. Qualified stock options are exercisable at not less than the fair market value of the stock at the date of grant and nonqualified stock options are exercisable at prices
determined at the discretion of the Board of Directors, but not less than 85% of the fair market value of the stock at the date of grant.

Following the Reverse Merger, the existing employees were granted new options under the Plan based on their pre-Reverse Merger option grant proportions
and vested options under the cancelled Old diaDexus 2000 Plan and 2010 Plan.

1998 Director Stock Option Plan

The 1998 Director Stock Option Plan (the Director Plan) for non-employee directors has 300,000 shares of common stock authorized for issuance
and all grants under this plan were suspended in 2005.



15



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##### Table of Contents

diaDexus, Inc.

Notes to Condensed Consolidated Financial Statements - continued

(Unaudited)



The following is a summary of the Companys stock option activity and related information for the
period ended March 31, 2011:

Valuation Assumptions

The compensation expense related to stock options recognized was determined using the Black-Scholes option valuation model. Option valuation models require the input of subjective assumptions and these
assumptions can vary over time. The weighted average assumptions used were as follows:



|                                   |  |                              |       |   |      |   |       |  
|---------------------------------- |  | ---------------------------- | ----- | - | ---- | - | ----- | -
|                                   |  | Three months endedMarch 
31, |      
|                                   |  | 2011                         |       |   | 2010 |  
|Dividend yield                     |  |                              | 0.0   | % |      |   | 0.0   | %
|Risk-free interest rate            |  |                              | 1.56  | % |      |   | 2.10  | %
|Expected volatility                |  |                              | 90.44 | % |      |   | 51.44 | %
|Forfeiture rate                    |  |                              | 11.57 | % |      |   | 12.65 | %
|Expected term (years)              |  |                              | 4.27  |   |      |   | 4.20  |  
|Fair value per share at grant date |  | $                            | 0.26  |   |      | $ | 0.01  |  

The expected stock price volatility
assumption was determined by examining the historical volatilities for industry peers, as the Company did not have sufficient trading history for the Companys common stock. The Company will continue to analyze the historical stock price
volatility and expected term assumption as more historical data for the Companys common stock becomes available. The risk-free interest rate assumption is based on the U.S. Treasury instruments whose term was consistent with the expected term
of the Companys stock options. The expected dividend assumption is based on the Companys history and expectation of dividend payouts. Different estimates of volatility and expected term could materially change the value of an option and
the resulting expense. The expected term of stock option represents the weighted-average period the stock options are expected to remain outstanding and is based on the options vesting terms, contractual terms and historical information to develop
reasonable expectations about future exercise patterns and post-vesting employment termination behavior.

The following table
summarizes stock compensation expense related to employee stock options and employee stock based compensation for the three months ended March 31, 2011 and 2010 which was incurred as follows: (in thousands)



|                                 |  |                              |    |  |      |   |    | 
|-------------------------------- |  | ---------------------------- | -- |  | ---- | - | -- | 
|                                 |  | Three Months EndedMarch 
31, |   
|                                 |  | 2011                         |    |  | 2010 |  
|Stock compensation expense:      |  |                              |    |  |      |   |    | 
|Product costs                    |  | $                            | 3  |  |      | $ | 1  | 
|Research and development         |  |                              | 22 |  |      |   | 7  | 
|Sales and marketing              |  |                              | 13 |  |      |   | 9  | 
|General and administrative       |  |                              | 56 |  |      |   | 13 | 
|                                 |  |                              |    |  |      |   |    | 
|Total stock compensation expense |  | $                            | 94 |  |      | $ | 30 | 
|                                 |  |                              |    |  |      |   |    | 

Employee Stock-Based Compensation

The table below presents information related to stock option activity under the Plan, net of options previously exercised, as follows:



|                                              |  |                             |           |   |                               |   |      |                                                    |  |  |                         |  |  |   |         | 
|--------------------------------------------- |  | --------------------------- | --------- | - | ----------------------------- | - | ---- | -------------------------------------------------- |  |  | ----------------------- |  |  | - | ------- | 
|                                              |  | Number ofOptionsOutstanding |           |   | Weighted-AverageExercisePrice |   |      | Weighted-AverageRemainingContractualTerm(In years) |  |  | AggregateIntrinsicValue | 
|Outstanding at December 31, 2010              |  |                             | 6,948,517 |   |                               | $ | 0.90 |                                                    |  |  |                         |  |  |   |         | 
|Options granted                               |  |                             | 402,000   |   |                               |   | 0.39 |                                                    |  |  |                         |  |  |   |         | 
|Options exercised                             |  |                             |          |   |                               |   |     |                                                    |  |  |                         |  |  |   |         | 
|Options cancelled/forfeited/expired           |  |                             | (295,273  | ) |                               |   | 8.12 |                                                    |  |  |                         |  |  |   |         | 
|                                              |  |                             |           |   |                               |   |      |                                                    |  |  |                         |  |  |   |         | 
|Outstanding at March 31, 2011                 |  |                             | 7,055,244 |   |                               | $ | 0.57 |                                                    |  |  | 9.12                    |  |  | $ | 816,923 | 
|                                              |  |                             |           |   |                               |   |      |                                                    |  |  |                         |  |  |   |         | 
|                                              |  |                             |           |  
|Exercisable at March 31, 2011                 |  |                             | 2,180,988 |   |                               | $ | 1.23 |                                                    |  |  | 8.52                    |  |  | $ | 253,579 | 
|                                              |  |                             |           |   |                               |   |      |                                                    |  |  |                         |  |  |   |         | 
|Vested and expected to vest at March 31, 2011 |  |                             | 6,379,775 |   |                               | $ | 0.60 |                                                    |  |  | 9.09                    |  |  | $ | 742,205 | 
|                                              |  |                             |           |   |                               |   |      |                                                    |  |  |                         |  |  |   |         | 

The aggregate intrinsic value of stock options exercisable at March 31, 2011 was $254,000 and the aggregate intrinsic
value of stock options outstanding was $817,000.



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##### Table of Contents

diaDexus, Inc.

Notes to Condensed Consolidated Financial Statements - continued

(Unaudited)



The following table summarizes information relating to stock options outstanding as of March 31,
2011:



|                        |  |                     |           |  |                                                   |  |      |                              |  |   |                   |  |  |                              |           |  |  |   |       | 
|----------------------- |  | ------------------- | --------- |  | ------------------------------------------------- |  | ---- | ---------------------------- |  | - | ----------------- |  |  | ---------------------------- | --------- |  |  | - | ----- | 
|                        |  | Options Outstanding |           |  | Options Exercisable                               | 
|Range of Exercise Price |  | NumberOutstanding   |           |  | WeightedAverageRemainingContractualLife(In Years) |  |      | WeightedAverageExercisePrice |  |   | NumberExercisable |  |  | WeightedAverageExercisePrice |          
|$0.26 - $0.26           |  |                     | 6,141,404 |  |                                                   |  | 9.28 |                              |  | $ | 0.26              |  |  |                              | 1,932,148 |  |  | $ | 0.26  | 
|$0.30 - $0.39           |  |                     | 705,000   |  |                                                   |  | 9.72 |                              |  |   | 0.36              |  |  |                              | 40,000    |  |  |   | 0.33  | 
|$4.57 - $4.57           |  |                     | 50,000    |  |                                                   |  | 2.30 |                              |  |   | 4.57              |  |  |                              | 50,000    |  |  |   | 4.57  | 
|$7.74 - $7.74           |  |                     | 40,000    |  |                                                   |  | 1.16 |                              |  |   | 7.74              |  |  |                              | 40,000    |  |  |   | 7.74  | 
|$8.74 - $8.74           |  |                     | 20,000    |  |                                                   |  | 2.64 |                              |  |   | 8.74              |  |  |                              | 20,000    |  |  |   | 8.74  | 
|$12.27 - $12.27         |  |                     | 30,000    |  |                                                   |  | 3.56 |                              |  |   | 12.27             |  |  |                              | 30,000    |  |  |   | 12.27 | 
|$14.30 - $14.30         |  |                     | 20,000    |  |                                                   |  | 1.85 |                              |  |   | 14.30             |  |  |                              | 20,000    |  |  |   | 14.30 | 
|$15.71 - $15.71         |  |                     | 40,000    |  |                                                   |  | 3.15 |                              |  |   | 15.71             |  |  |                              | 40,000    |  |  |   | 15.71 | 
|$19.44 - $19.44         |  |                     | 5,000     |  |                                                   |  | 0.02 |                              |  |   | 19.44             |  |  |                              | 5,000     |  |  |   | 19.44 | 
|$20.85 - $20.85         |  |                     | 3,840     |  |                                                   |  | 0.16 |                              |  |   | 20.85             |  |  |                              | 3,840     |  |  |   | 20.85 | 
|                        |  |                     |           |  |                                                   |  |      |                              |  |   |                   |  |  |                              |           |  |  |   |       | 
|$0.26 - $20.85          |  |                     | 7,055,244 |  |                                                   |  | 9.12 |                              |  | $ | 0.57              |  |  |                              | 2,180,988 |  |  | $ | 1.23  | 
|                        |  |                     |           |  |                                                   |  |      |                              |  |   |                   |  |  |                              |           |  |  |   |       | 

The estimated fair value of grants of stock options to non-employees of the Company is charged to expense in the
financial statements. These options vest in the same manner as the employee options granted under the option plan as described above.

Stock
based compensation expense recognized during the three months ended March 31, 2011 and 2010 includes compensation expense for stock based awards granted to employees based on the grant date fair value estimated in accordance with the provisions
of ASC 718. As of March 31, 2011, the total remaining unrecognized cost was approximately $0.8 million to be recognized over the next 2.43 years.

Shares Reserved for Future Issuance

The Company had reserved shares of common stock for
future issuance at March 31, 2011 and 2010 as follows:



|                                   |  |                 |           |  |      |  |            | 
|---------------------------------- |  | --------------- | --------- |  | ---- |  | ---------- | 
|                                   |  | As of March 31, |          
|                                   |  | 2011            |           |  | 2010 | 
|Options to purchase common stock   |  |                 | 7,055,244 |  |      |  | 1,147,286  | 
|Warrants to purchase common stock  |  |                 | 16,000    |  |      |  | 2,070,345  | 
|Shares available for option grants |  |                 | 1,229,152 |  |      |  | 7,826,684  | 
|                                   |  |                 |           |  |      |  |            | 
|Total                              |  |                 | 8,300,396 |  |      |  | 11,044,315 | 
|                                   |  |                 |           |  |      |  |            | 

In October 2004, Pre-Merger VaxGen granted stock options for 30,000 shares outside the approved plans to a new director with
an exercise price of $12.27 per share. These options were granted without stockholder approval, but pursuant to NASDAQ Marketplace Rules then applicable to Pre-Merger VaxGen on terms that are substantially in accordance with Pre-Merger VaxGens
standard stock option terms. As of March 31, 2011, none of these stock options have been exercised or repurchased.

11. Stock Warrants

The Company issues warrants to investors as part of its overall financing strategy. There were no warrants issued for the three months
ended March 31, 2011 and there were warrants outstanding to purchase 16,000 shares of the Companys common stock, with a weighted average exercise price of $20.25 per share and an aggregate exercise price of $0.3 million.



17



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##### Table of Contents

diaDexus, Inc.

Notes to Condensed Consolidated Financial Statements - continued

(Unaudited)



The following table summarizes information about all callable warrants outstanding as of March 31,
2011:



|                        |  |                      |        |  |                                                    |  |      |                              |  |   |                   |  |  |                              |        |  |  |   |       | 
|----------------------- |  | -------------------- | ------ |  | -------------------------------------------------- |  | ---- | ---------------------------- |  | - | ----------------- |  |  | ---------------------------- | ------ |  |  | - | ----- | 
|                        |  | Warrants Outstanding |        |  | Warrants Exercisable                               | 
|Range of Exercise Price |  | NumberOutstanding    |        |  | WeightedAverageRemainingContractualLife (In Years) |  |      | WeightedAverageExercisePrice |  |   | NumberExercisable |  |  | WeightedAverageExercisePrice |       
|$20.25 - $20.25         |  |                      | 16,000 |  |                                                    |  | 0.37 |                              |  | $ | 20.25             |  |  |                              | 16,000 |  |  | $ | 20.25 | 
|                        |  |                      |        |  |                                                    |  |      |                              |  |   |                   |  |  |                              |        |  |  |   |       | 
|                        |  |                      | 16,000 |  |                                                    |  | 0.37 |                              |  | $ | 20.25             |  |  |                              | 16,000 |  |  | $ | 20.25 | 
|                        |  |                      |        |  |                                                    |  |      |                              |  |   |                   |  |  |                              |        |  |  |   |       | 

12. Leases, Commitments and Contingencies

The Company leases certain office facilities under long-term, non-cancelable operating lease agreements. The operating leases expire at various dates through 2016. In connection with one of the leases,
the Company subleases a portion of that facility through May 2011.

As part of the Reverse Merger completed on July 28, 2010, the Company
recorded the lease obligation associated with the Pre-Merger VaxGen facility located at 349 Oyster Point Blvd., South San Francisco, California, which contained a lease payment that exceeded current market rates. Accordingly, the Company recognized
a $4.1 million unfavorable lease obligation, included in the accompanying balance sheet. We amortize the unfavorable lease obligation using the effective interest rate method.

Rent expense for our office facilities was $761,000 and $395,000 for the three months ended March 31, 2011 and 2010, respectively. The terms of the facility lease provide for rental payments on a
graduated scale. The Company recognizes rent expense on a straight-line basis over the lease period. Deferred rent of $176,000 and $155,000 at March 31, 2011 and December 31, 2010, respectively, is included in the accompanying balance
sheet.

Rental income from the sublease for the three months ended March 31, 2011 and 2010 was $365,000 and $357,000, respectively. This
has been included as a reduction to operating expenses in the statement of operations.

Future minimum lease payments under non-cancelable
operating leases are as follows (in thousands):



|                             |  |                 |        | 
|---------------------------- |  | --------------- | ------ | 
|                             |  | OperatingLeases |       
|2011 (1)                     |  |                 | 2,291  | 
|2012                         |  |                 | 2,433  | 
|2013                         |  |                 | 2,505  | 
|2014                         |  |                 | 2,581  | 
|2015                         |  |                 | 2,658  | 
|Thereafter                   |  |                 | 2,738  | 
|                             |  |                 |        | 
|Total minimum lease payments |  | $               | 15,206 | 
|                             |  |                 |        | 



|(1) | For nine months ending December 31, 2011
|--- | ----------------------------------------

On November 2, 2010, the Company received a letter from the landlord of the facility located at 349 Oyster Point Blvd., South San Francisco,
California, which is leased by the Company pursuant to a lease agreement entered into by Pre-Merger VaxGen. The letter asserts claims in writing against the Company that, among other things, the Company failed to provide it with required notice of
the Reverse Merger and requests that the Company establish an escrow to fund remaining sums due under the lease. The Company believes that these claims are without merit and will vigorously resist any request for an escrow or other special
consideration not required under the terms of the lease. However, we cannot assure you that the landlord will not commence legal proceedings against us relating to this lease.

The Company is from time to time subject to various claims and legal actions during the ordinary course of business. The Company believes that there are currently no claims or legal actions that would
reasonably be expected to have a material adverse effect on its results of operations or financial condition.



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##### Table of Contents

diaDexus, Inc.

Notes to Condensed Consolidated Financial Statements - continued

(Unaudited)



13. Income Taxes

Provision for Income Tax

The Companys effective tax rate was 0% for income
tax for the three months ended March 31, 2011 and the Company expects that its effective tax rate for the full year 2011 will be 0%. Based on the weight of available evidence, including cumulative losses since inception and expected future
losses, the Company has determined that it is more likely than not that the deferred tax asset amount will not be realized and therefore a valuation allowance has been provided on net deferred tax assets.

Under the provisions of Section 382 and 383 of the Internal Revenue Code, a change of control, as defined, may impose an annual limitation on the
amount of the Companys net operating loss and tax credit carryforwards, and other tax attributes, that can be used to reduce future tax liabilities. As a result of the Reverse Merger, certain of the Companys Old diaDexus tax attributes
prior to the Reverse Merger are subject to an annual limitation of $240,000 for federal and state purposes.

The Company files U.S. federal
and California state tax returns. The Company is currently not subject to any income tax examinations. Due to the Companys losses, generally all years remain open.

Uncertain Tax Positions

Effective January 1, 2009, the Company adopted ASC
740-10, which requires that the Company recognize the financial statement effects of a tax position when it becomes more likely than not, based upon the technical merits, that the position will be sustained upon examination. The gross amount of
unrecognized tax benefits as of March 31, 2011 was $1.7 million, all of which will not affect the effective tax rate if recognized due to valuation allowance. The Company does not expect any material changes in the next 12 months in
unrecognized tax benefits.

The Company recognizes interest and/or penalties related to uncertain tax positions. To the extent accrued
interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected in the period that such determination is made. The amount of interest and penalties accrued for ASC 740-10 as interest expense, as of
March 31, 2011, is $398,461, which is consistent with the Companys policy.

14. Subsequent Events

On April 19, 2011, the Company entered into a Volume Discount Addendum No. 2 (Addendum No. 2), effective as of January 1,
2011, with Health Diagnostics Laboratory (HDL). The Company and HDL are parties to an existing Purchase Agreement and existing Volume Discount Addendum, both effective as of January 1, 2011 (such Purchase Agreement, together with
the Volume Discount Addendum, and as amended by Addendum No. 2, the Amended Purchase Agreement). Addendum No. 2 provides that, effective as of April 1, 2011, HDL will no longer purchase certain of the Companys
diagnostic test products through a distributor and instead will purchase such products directly from the Company pursuant to the terms of the Amended Purchase Agreement.



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##### Table of Contents

|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

Special Note Regarding Forward-Looking Statements

This discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and related notes thereto appearing in
Part I, Item 1 of this Quarterly Report on Form 10-Q and the risk factors described in Part II, Item 1A of this Quarterly Report.

This Quarterly Report includes forward-looking statements that are subject to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Certain forward-looking statements can be identified by words such as may, will, expects, plans, anticipates, intends, believes,
could or would or the negative thereof or other comparable terminology. All statements other than statements of historical fact are forward-looking statements for purposes of these provisions, including any
statements of the plans and objectives of management, any statements regarding future operations, any statements regarding future economic conditions or performance and any statement of assumptions underlying any of the foregoing.

Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy, and other future conditions.
Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward
looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. We caution you therefore against relying on any of these forward-looking statements. Important factors that could cause
actual results to differ materially from those in the forward-looking statements include, but are not limited to, the following:



| |  |  | our ability to maintain regulatory clearance for and successfully commercialize our PLAC Test and new diagnostic products, including our enhanced
PLAC TIA Test;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our reliance on sole source third party manufacturers to manufacture and supply our main reagent and our PLAC Test;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | our relationship with key customers;
| | - |  | ------------------------------------



| |  |  | the effects of government regulation and our ability to comply with such regulations;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | our ability to demonstrate that treatment of individuals based on their Lp-PLA2 levels improves clinical outcomes in prospective clinical
studies;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the rate of adoption of the PLAC Test by doctors and laboratories;
| | - |  | ------------------------------------------------------------------



| |  |  | third party payors acceptance of and reimbursement for the PLAC Test;
| | - |  | ----------------------------------------------------------------------



| |  |  | our ability to retain key employees and to attract, retain and motivate other qualified personnel;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | our limited revenue and cash resources;
| | - |  | ---------------------------------------



| |  |  | the adequacy of our intellectual property rights;
| | - |  | -------------------------------------------------



| |  |  | our significant corporate expenses, including real estate lease liabilities and expenses associated with being a public company; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the other risks described below in Part II, Item 1A (Risk Factors).
| | - |  | ---------------------------------------------------------------------

Any forward-looking statement included in this Quarterly Report speaks only as of the date hereof. Factors or events that could cause our actual
results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to update any such forward-looking statement, whether as a result of new information, future developments or otherwise,
except as may be required by law.



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##### Table of Contents

Background

As described above, on July 28, 2010, we closed the Reverse Merger. As of July 28, 2010, after giving effect to the Reverse Merger and the issuance of VaxGen, Inc. common stock to certain
employees of Old diaDexus, we had 53,067,057 shares of common stock issued and outstanding, with the former holders of Old diaDexus Series F Preferred Stock and the former employees of Old diaDexus collectively owning approximately 38%, and the
Pre-Merger VaxGen stockholders owning approximately 62%, of the outstanding common stock of the Company.

The Reverse Merger has been
accounted for as a reverse acquisition. As such, the financial statements of Old diaDexus are treated as the historical financial statements of the Company, with the results of VaxGen, Inc. being included from July 28, 2010. Immediately
following the closing of the Reverse Merger, Old diaDexus designees to the Companys Board of Directors represented a majority of the Companys directors, Old diaDexus senior management represented the entire senior management of the
Company and the operations formerly conducted by Old diaDexus were the sole revenue producing operations as well as the only continuing development effort of the Company. For periods prior to the closing of the Reverse Merger, therefore, our
discussion below relates to the historical business and operations of Old diaDexus. Certain portions of this Quarterly Report on Form 10-Q may contain information that relates to Pre-Merger VaxGens previous operations, which are no longer
material to our business. Any comparison of Pre-Merger VaxGens revenues and operations with those of the Company may not be helpful to an understanding of the Companys results for the quarter ended March 31, 2011 or future periods.

On November 1, 2010, VaxGen, Inc. merged Merger Sub II with and into VaxGen, Inc., with VaxGen, Inc. being the surviving entity in the
merger, and VaxGen, Inc. changed its name to diaDexus, Inc. pursuant to a merger effected under Section 253 of the Delaware General Corporation Law.

Overview

We are a life sciences company focused on the
development and commercialization of patent-protected in vitro diagnostic products addressing unmet needs in cardiovascular disease. We are the successor to a company initially formed as a joint venture between SmithKline Beecham Corporation (now
GlaxoSmithKline) and Incyte Pharmaceuticals, Inc. Upon formation, SmithKline Beecham Corporation granted the company an exclusive license to certain diagnostic intellectual property, including Lp-PLA2, an inflammatory marker of cardiovascular risk.

The diaDexus PLAC Test for Lp-PLA2provides new information, over and above traditional risk factors, to help identify individuals at increased risk of
suffering a heart attack or stroke. Some of these events may be reduced with earlier detection and more aggressive risk-reducing strategies, including treatment to lower LDL-cholesterol goals with statins. We have developed two formats of the PLAC
Test, an enzyme-linked-immunosorbent serologic assay (ELISA) product and a turbidimetric immunoassay (TIA) product.

On May 10, 2010, we
removed our PLAC TIA test from the market in order to address a heterophilic interference product performance issue. On June 30, 2010 we submitted a premarket notification to the FDA seeking clearance under Section 510(k) of the FDCA to
market an enhanced PLAC TIA product that addresses the heterophilic interference observed in the suspended PLAC TIA product. On January 6, 2011, the FDA informed us that we were cleared for marketing the enhanced PLAC TIA product. We are
currently in the process of investigating problems we observed in some PLAC TIA manufacturing lots, and as a result, we will not launch the product to the market in the second quarter of 2011 as previously expected.

We have incurred substantial losses since our inception, and we expect to continue to incur substantial net losses for at least the next few years. To
date, we have funded our operations primarily through private placements of preferred stock and debt financing, as well as through revenue generated from the sale of our products. As a result of the Reverse Merger, Old diaDexus obtained $23.4
million in cash and cash equivalents that were held by Pre-Merger VaxGen, but Old diaDexus also became part of a combined entity that is subject to significant liabilities under certain real estate leases and expenses relating to obligations as a
public company. These additional expenses are reflected in our results of operations only from July 28, 2010, the closing date of the Reverse Merger.

Currently, we do not have a sufficient current level of revenues to meet the minimum operational expenses necessary to develop and commercialize our products and the minimum fixed expenses needed to meet
our commitments under our real estate leases and public company reporting obligations. In the short term, we expect to rely on our cash and short-term investment assets to meet our capital requirements. In the longer term, we will need to maintain
and increase our product revenue and raise additional equity or debt financing in order to fund our operations. Any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants.
However, we cannot assure you that we will be able to raise any such required financing.



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##### Table of Contents

Critical Accounting Policies and Estimates

The accompanying discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been
prepared in accordance with accounting principles generally accepted in the United States (GAAP). The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of
assets, liabilities and expenses, and related disclosures. On an ongoing basis, we evaluate these estimates. Estimates are based on historical experience, information received from third parties and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values 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 consider the following accounting policies related to revenue recognition,
research and development expenses, accruals, stock-based compensation and income tax expenses to be the most critical accounting policies, because they require us to make estimates, assumptions and judgments about matters that are inherently
uncertain.

Revenues

Revenues are generated from licensing fees, royalties earned, product sales and contract arrangements, and recorded net of customer and distributor
discounts. Revenue is recognized when the four basic criteria of revenue recognition are met: (i) a contractual agreement exists; (ii) delivery of product has occurred and risk of loss and title has transferred, transfer of technology
(intellectual property) has been completed or services have been rendered; (iii) the fee is fixed or determinable; and (iv) collectability is reasonably assured.

License fee revenue including nonrefundable upfront fees, is deferred and recognized over the term of the underlying agreements. Royalty revenue is recognized when reportable product sales are confirmed.
Revenue from technology licenses or other payments under collaborative agreements where the Company has a continuing obligation to perform is recognized as revenue over the expected period of the continuing performance obligation. The term of these
underlying agreements ranges from two to ten years.

Our revenues are derived to a large extent from sales to a limited number of distributors
and large laboratory customers which account for a significant portion of our revenue. The concentration of our key customers may vary from period to period for a variety of reasons, including competition, developments related to our products (such
as the suspension of our PLAC TIA Test), and changes in individual customers purchases of our products for reasons including profitability and inventory management. The concentration of revenue from our top four customers was 84% and 63% for
the three months ended March 31, 2011 and 2010, respectively.

Revenues by geography are based on the billing address of the customer.
The following table sets forth revenues by geographic area (in thousands):



|                  |  |                    |       |  |      |   |       | 
|----------------- |  | ------------------ | ----- |  | ---- | - | ----- | 
|                  |  | Three months ended |      
|                  |  | March 31,          |      
|                  |  | 2011               |       |  | 2010 |  
|United States     |  | $                  | 3,283 |  |      | $ | 2,576 | 
|Europe            |  |                    | 36    |  |      |   | 83    | 
|Rest of the world |  |                    | 2     |  |      |   | 7     | 
|                  |  |                    |       |  |      |   |       | 
|                  |  | $                  | 3,321 |  |      | $ | 2,666 | 
|                  |  |                    |       |  |      |   |       | 

Over 97% of our revenues in each of the three months ended March 31, 2011 and March 31, 2010, respectively were
from the US geographic area.

Research and Development

Research and development expenses include internal and external costs. Internal costs include product development, regulatory support for technology, lab material and supply costs and other technical
support costs, including salaries and consultant fees. External expenses consist of sponsored research studies and investigator sponsored trials. Research and development costs are expensed as incurred.

Accruals

In connection with the
process of preparing financial statements, we are required to estimate accrued expenses. This process involves communicating with our applicable personnel to identify services that have been performed on our behalf and estimating the level of
service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost. The majority of our service providers invoice us monthly in arrears for services performed. We make estimates
of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us. We periodically confirm the accuracy of our estimates with selected service providers and make adjustments, if necessary.



22



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##### Table of Contents

Stock-Based Compensation

We account for stock-based compensation using the fair value recognition provisions of Accounting Standard Codification (ASC) 718, Share-Based Payment,which was adopted using the
modified-prospective transition method effective January 1, 2006. The fair value of stock options and warrants are calculated using the Black-Scholes pricing method on the date of grant. Determining the appropriate fair value model and
calculating the fair value of stock-based payment awards require the input of various highly-subjective assumptions, including the expected life of the stock-based payment awards, our stock price volatility and the expected forfeiture rate of our
options. The assumptions used in calculating the fair value of stock-based payment awards represent managements best estimates, but these estimates involve inherent uncertainties and the application of management judgment. Because employee
stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in our managements opinion, the existing model does
not necessarily provide a reliable single measure of fair value of our employee stock options. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future. In
addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. If our actual forfeiture rate is materially different from our estimate, the stock-based compensation expense could be
significantly different from what we have recorded in the current period. Stock-based compensation to outside consultants is recorded at fair market value in general and administrative expense. See Note 10 to the consolidated financial statements
for more information regarding stock-based compensation.

Income Tax

Effective January 1, 2009, we adopted the provisions of Financial Accounting Standards Board ASC 740-10, Accounting for Uncertainty in Income Taxes. ASC 740-10 clarifies the accounting for
uncertainty in income taxes recognized in an enterprises financial statements. The interpretation applies to all tax positions accounted for and requires a recognition threshold and measurement attribute for the financial statement recognition
and measurement of a tax position taken, or expected to be taken, in an income tax return. Subsequent recognition, de-recognition and measurement is based on managements best judgment given the facts, circumstances and information available at
the reporting date. See Note 13 to the consolidated financial statements for more information regarding our income tax policies.

Pursuant to
the Reverse Merger, which was completed on July 28, 2010, Pre-Merger VaxGen filed tax returns with positions that may be challenged by the tax authorities. These positions relate to, among others, deductibility of certain expenses, expenses
included in our research and development tax credit computations, as well as other matters. Although the outcome of tax audit is uncertain, in managements opinion, adequate provisions for income taxes have been made for potential liabilities
resulting from such matters. We regularly assess the tax positions for such matters and include reserves for those differences in position. The reserves are utilized or reversed once the statute of limitations has expired and/or at the conclusion of
the tax examination. We believe that the ultimate outcome of these matters will not have a material impact on our financial position, financial operations or liquidity.

We file income tax returns in the U.S. federal jurisdiction and the California state jurisdiction. To date, we have not been audited by the Internal Revenue Service or any state income tax jurisdiction.
Our policy is to recognize interest and penalties related to the underpayment of income taxes as a component of income tax expense. As of March 31, 2011, there have been no interest or penalties charged to us in relation to the underpayment of
income taxes.

We have generated net losses since inception and accordingly did not record a provision for income taxes. The deferred tax
assets were primarily comprised of federal and state tax net operating loss (NOL), carryforwards. Due to uncertainties surrounding our ability to continue to generate future taxable income to realize these tax assets, a full valuation
allowance has been established to offset our deferred tax assets. Additionally, the future utilization of our NOL carryforwards to offset future taxable income may be subject to an annual limitation as a result of ownership changes that may have
occurred previously or that could occur in the future. If necessary, the deferred tax assets will be reduced by any carryforwards that expire prior to utilization as a result of such limitations, with a corresponding reduction of the valuation
allowance.

Under the provisions of Sections 382 and 383 of the Internal Revenue Code, a change of control, as defined, may impose an
annual limitation on the amount of the Companys net operating loss and tax credit carryforwards, and other tax attributes, that can be used to reduce future tax liabilities. As a result of the Reverse Merger, certain of the Companys Old
diaDexus tax attributes prior to the Reverse Merger are subject to an annual limitation of $240,000 for federal and state purposes.



23



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##### Table of Contents

Results of Operations

Results of Operations for The Three Months Ended March 31, 2011 and 2010.

Revenues



|                               |  |                              |       |  |                       |   |       |              |  |  |      |   
|------------------------------ |  | ---------------------------- | ----- |  | --------------------- | - | ----- | ------------ |  |  | ---- | --
|                               |  | Three months endedMarch 
31, |       |  | % Increase (Decrease) |  
|                               |  | 2011                         |       |  | 2010                  |   |       | 2010 to 2011 | 
|                               |  | (in thousands)               |       |  |                       |  
|Revenues:                      |  |                              |       |  |                       |   |       |              |  |  |      |   
|License revenue                |  | $                            | 76    |  |                       | $ | 76    |              |  |  |     | % 
|Royalty revenue                |  |                              | 1,005 |  |                       |   | 879   |              |  |  | 14   | % 
|Product sales                  |  |                              | 2,240 |  |                       |   | 1,512 |              |  |  | 48   | % 
|Product sales to related party |  |                              |      |  |                       |   | 199   |              |  |  | (100 | )%
|                               |  |                              |       |  |                       |   |       |              |  |  |      |   
|Total net revenues             |  | $                            | 3,321 |  |                       | $ | 2,666 |              |  |  | 25   | % 
|                               |  |                              |       |  |                       |   |       |              |  |  |      |   

Revenues are generated from licensing fees, royalties earned, product sales, and contract arrangements. We
classify our sales to GlaxoSmithKline as sales to related party. Management does not consider the accounting classification of revenue between royalties and product sales to be particularly relevant in evaluating its operating performance. Total net
revenues increased $655,000, or 25%, to $3.3 million for the three months ended March 31, 2011 compared to $2.7 million for the three months ended March 31, 2010.

The increase in net revenues reflects an increased demand for our PLAC ELISA product offset by the loss of some smaller customers due to the suspension of our TIA product in May 2010. The decrease in
product sales to related party is attributable to a planned reduction in purchases based on the related partys internal projects.

Our
top four distributor and large laboratory customers for the three months ended March 31, 2011 accounted for 84% of our revenue compared to 63% for the three months ended March 31, 2010. Because of this customer concentration and the timing
of orders from these customers, our quarterly revenue may fluctuate materially.

In May 2010, we removed our PLAC TIA test from the market in
order to address a heterophilic interference product performance issue. On June 30, 2010, we submitted a premarket notification to the FDA seeking clearance under Section 510(k) of the FDCA to market an enhanced PLAC TIA product. On
January 6, 2011, the FDA informed us that we were cleared for marketing the enhanced PLAC TIA product. We are currently in the process of investigating problems we observed in some PLAC TIA manufacturing lots, and as a result, we will not
launch the product to the market in the second quarter of 2011 as previously expected.

Product Costs



|              |  |                              |       |  |                       |   |     |              |  |  |    |  
|------------- |  | ---------------------------- | ----- |  | --------------------- | - | --- | ------------ |  |  | -- | -
|              |  | Three months endedMarch 
31, |       |  | % Increase (Decrease) |  
|              |  | 2011                         |       |  | 2010                  |   |     | 2010 to 2011 | 
|              |  | (in thousands)               |       |  |                       |  
|Product costs |  | $                            | 1,132 |  |                       | $ | 987 |              |  |  | 15 | %

Product costs include our expenditures for cost
of goods, manufacturing support, product supplies, quality control, personnel expenses and overhead allocations. Product costs increased $145,000, or 15%, to $1.1 million for the three months ended March 31, 2011 compared to $987,000 for the
three months ended March 31, 2010.

The increase primarily reflects expansion of quality and manufacturing group personnel expenses of
approximately $88,000 and an increase in product related materials and supplies costs of approximately $44,000. Gross margin increased slightly to 66% for the three months ended March 31, 2011 compared to 63% for the three months ended
March 31, 2010.

Sales and Marketing Expenses



|                    |  |                             |       |  |                       |   |       |              |  |  |     |   
|------------------- |  | --------------------------- | ----- |  | --------------------- | - | ----- | ------------ |  |  | --- | --
|                    |  | Three months endedMarch 31, |       |  | % Increase (Decrease) |  
|                    |  | 2011                        |       |  | 2010                  |   |       | 2010 to 2011 | 
|                    |  | (in thousands)              |       |  |                       |  
|Sales and marketing |  | $                           | 1,107 |  |                       | $ | 1,278 |              |  |  | (13 | )%



24



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##### Table of Contents

Sales and marketing expenses include our expenditures on customer support, medical and other consultant
fees, marketing programs and materials, and personnel expenses. Sales and marketing expenses decreased $171,000, or 13%, to $1.1 million for the three months ended March 31, 2011 compared to $1.28 million for the three months ended
March 31, 2010.

The decrease primarily reflects reductions in marketing program expenses of approximately $67,000, in marketing
materials costs of approximately $58,000, and in related travel expenses of approximately $34,000, primarily as a result of the suspension of our PLAC TIA product in May 2010.

Research and Development Expenses



|                         |  |                              |       |  |                       |   |     |              |  |  |    |  
|------------------------ |  | ---------------------------- | ----- |  | --------------------- | - | --- | ------------ |  |  | -- | -
|                         |  | Three months endedMarch 
31, |       |  | % Increase (Decrease) |  
|                         |  | 2011                         |       |  | 2010                  |   |     | 2010 to 2011 | 
|                         |  | (in thousands)               |       |  |                       |  
|Research and development |  | $                            | 1,492 |  |                       | $ | 932 |              |  |  | 60 | %

Research and development expenses include costs
related to product development, regulatory support of our technology and other technical support costs, including salaries and consultant fees. Research and development expenses increased $560,000, or 60%, to $1.5 million for the three months ended
March 31, 2011 compared to $932,000 for the three months ended March 31, 2010.

The increase primarily reflects the termination of a
third party service arrangement resulting in a reduction in expense reimbursement from a third party of approximately $213,000, an increase in personnel costs of approximately $197,000, and an increase in lab materials and supply costs of
approximately $97,000, both due to increased development support for the PLAC TIA product.

We expect to identify and hire additional
personnel to staff our planned development activities, and we expect research and development expenses to increase as we seek to maintain and expand our position in the market for diagnostics in cardiovascular disease.

General and Administrative Expenses



|                           |  |                              |       |  |                       |   |     |              |  |  |     |  
|-------------------------- |  | ---------------------------- | ----- |  | --------------------- | - | --- | ------------ |  |  | --- | -
|                           |  | Three months endedMarch 
31, |       |  | % Increase (Decrease) |  
|                           |  | 2011                         |       |  | 2010                  |   |     | 2010 to 2011 | 
|                           |  | (in thousands)               |       |  |                       |  
|General and administrative |  | $                            | 2,114 |  |                       | $ | 725 |              |  |  | 192 | %

General and administrative expenses include
personnel costs for finance, administration, information systems and professional fees as well as facilities expenses. General and administrative expenses increased $1.4 million, or 192%, to $2.1 million for the three months ended March 31,
2011 compared to $725,000 for the three months ended March 31, 2010.

The increase primarily reflects an increase in accounting, legal,
insurance and other professional service costs of approximately $535,000, additional facility costs, including a building lease entered into by Pre-Merger VaxGen, of approximately $520,000, and additional personnel costs related to the
Companys statutory filings requirements and public company obligations of approximately $193,000.

Given our post-Reverse Merger public
reporting obligations and higher costs relating to a building lease entered into by Pre-Merger VaxGen, we expect general and administrative expenses to be significantly higher in 2011 relative to pre-Reverse Merger 2010.

Interest Income, Interest Expense and Other Income (expense), net



|                                                                 |  |                              |    |  |                       |   |      |              |  |  |      |   
|---------------------------------------------------------------- |  | ---------------------------- | -- |  | --------------------- | - | ---- | ------------ |  |  | ---- | --
|                                                                 |  | Three months endedMarch 
31, |    |  | % Increase (Decrease) |  
|                                                                 |  | 2011                         |    |  | 2010                  |   |      | 2010 to 2011 | 
|                                                                 |  | (in thousands)               |    |  |                       |  
|Interest income, interest expense and other income(expense), net |  |                              |    |  |                       |   |      |              |  |  |      |   
|Interest income                                                  |  | $                            | 17 |  |                       | $ | 3    |              |  |  | 467  | % 
|Interest expense                                                 |  |                              |   |  |                       |   | (112 | )            |  |  | (100 | )%
|Other income (expense), net                                      |  |                              |   |  |                       |   | 2    |              |  |  | (100 | )%
|                                                                 |  |                              |    |  |                       |   |      |              |  |  |      |   
|Total net interest and other income (expense)                    |  | $                            | 17 |  |                       | $ | (107 | )            |  |  | (116 | )%
|                                                                 |  |                              |    |  |                       |   |      |              |  |  |      |   



25



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##### Table of Contents

Interest income is derived from cash balances and short term investments. Interest expense is based on
outstanding debt obligations. Total net interest and other income increased to $17,000 for the three months ended March 31, 2011, representing a change of $124,000 compared to a total net interest and other expense of $107,000 for the three
months ended March 31, 2010.

The increase in total net interest and other income was primarily due to a decrease in interest expense for
an outstanding debt facility repaid in May 2010 and a decrease of warrant liability valuation in other income (expense).

Income Taxes



|                     |  |                              |    |   |                       |   |    |              |  |  |     |   
|-------------------- |  | ---------------------------- | -- | - | --------------------- | - | -- | ------------ |  |  | --- | --
|                     |  | Three months endedMarch 
31, |    |   | % Increase (Decrease) |  
|                     |  | 2011                         |    |   | 2010                  |   |    | 2010 to 2011 | 
|                     |  | (in thousands)               |    |   |                       |  
|Income tax provision |  | $                            | (3 | ) |                       | $ | (5 | )            |  |  | (40 | )%

We generated net loss for the three months
ended March 31, 2011 and had no federal income tax provision. Our effective tax rate was 0% for income tax for the three months ended March 31, 2011 and we expect that our effective tax rate for the full year 2011 will be 0%. The $3,000
income tax provision in 2011 represents state taxes paid during the three months ended March 31, 2011.

In addition, we have substantial
net operating loss carry forwards available to offset future taxable income for federal and state income tax purposes. At March 31, 2011, we had unrecognized tax benefits totaling $1.7 million. Our ability to utilize our net operating losses
may be limited due to changes in our ownership as defined by Section 382 of the Code.

Under the provisions of Sections 382 and 383
of the Internal Revenue Code, a change of control, as defined, may impose an annual limitation on the amount of the Companys net operating loss and tax credit carryforwards, and other tax attributes, that can be used to reduce future tax
liabilities. As a result of the Reverse Merger, certain of the Companys Old diaDexus tax attributes prior to the Reverse Merger are subject to an annual limitation of $240,000 for federal and state purposes.

Liquidity and Capital Resources

Since our inception, we have incurred losses, and we have relied primarily on private placements of preferred stock and debt financing, as well as on
revenue generated from the sale of product to fund our operations.

As of March 31, 2011 we had cash, cash equivalents and short term
investments of $18.5 million, compared to $20.4 million at December 31, 2010. The decrease primarily reflects cash used in operations for the three months ended March 31, 2011.

Net cash used in operating activities in the three months ended March 31, 2011 was $1.9 million compared to $0.9 million in the three months ended March 31, 2010. The increase of $1.0 million
primarily related to the increased net loss, which was mostly driven by increased costs relating to obligations as a public company and costs associated with a building lease entered into by Pre-Merger VaxGen.

Net cash used in investing activities in the three months ended March 31, 2011 was $14.5 million, primarily due to purchases of available-for-sale
investments of $17.0 million partially offset by maturities of $2.5 million. Net cash provided by investing activities of $1.7 million in the three months ended March 31, 2010 was primarily due to maturities of available-for-sale investments.

There were no financing activities in the three months ended March 31, 2011. Net cash used in financing activities for the three months
ended March 31, 2010 was $1.1 million and primarily reflects principal repayment to a banking syndicate for a term loan that was repaid in May 2010.

As of March 31, 2011, we had an accumulated deficit of $190.0 million, working capital of $18.5 million and shareholders equity of $15.4 million. We believe that our existing
cash, cash equivalents, and investment securities will be sufficient to cover our cash needed for operating activities and commitments through at least June 30, 2012, based on our current operating plan.

Our future capital requirements will depend primarily upon our ability to maintain and grow our current product revenues, to develop and commercialize
new products, to manage our obligations under real estate leases and to improve our reimbursement prospects from third-party payors, including:



| |  |  | The rate of product adoption by doctors and laboratories; and
| | - |  | -------------------------------------------------------------



| |  |  | The third-party payor communitys acceptance of and reimbursement for the PLAC Test.
| | - |  | ------------------------------------------------------------------------------------

We expect to require additional financing and will seek to raise funds through equity or debt offerings, bank facilities, or other sources of capital.
Additional funding may not be available when needed or on terms acceptable to us. Any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. We cannot assure you that we will
be able to raise any such additional funding.



26



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##### Table of Contents

Commitments and Contingencies

Our contractual obligations and future minimum lease payments that are non-cancelable at March 31, 2011 are disclosed in the following table.



|                                   |  |                                      |        |  |      |   |       |      |  |   |       |  |  |      |       |  |      |   |       |       |  |   |       |  |  |   |       | 
|---------------------------------- |  | ------------------------------------ | ------ |  | ---- | - | ----- | ---- |  | - | ----- |  |  | ---- | ----- |  | ---- | - | ----- | ----- |  | - | ----- |  |  | - | ----- | 
|                                   |  | Payment due by period (in thousands) |       
|                                   |  | Total                                |        |  | 2011 |   |       | 2012 |  |   | 2013  |  |  | 2014 |       |  | 2015 |   |       | 2016+ | 
|Unconditional purchase obligations |  | $                                    | 598    |  |      | $ | 598   |      |  |   |      |  |  |      |      |  |      |   |      |       |  |   |      |  |  |   |      | 
|Operating lease obligations        |  |                                      | 15,206 |  |      |   | 2,291 | (1)  |  |   | 2,433 |  |  |      | 2,505 |  |      |   | 2,581 |       |  |   | 2,658 |  |  |   | 2,738 | 
|                                   |  |                                      |        |  |      |   |       |      |  |   |       |  |  |      |       |  |      |   |       |       |  |   |       |  |  |   |       | 
|Total contractual commitments      |  | $                                    | 15,804 |  |      | $ | 2,889 |      |  | $ | 2,433 |  |  | $    | 2,505 |  |      | $ | 2,581 |       |  | $ | 2,658 |  |  | $ | 2,738 | 
|                                   |  |                                      |        |  |      |   |       |      |  |   |       |  |  |      |       |  |      |   |       |       |  |   |       |  |  |   |       | 



|(1) | For the nine months ending December 31, 2011.
|--- | ---------------------------------------------

As part of the Reverse Merger completed on July 28, 2010, we recorded a lease obligation associated with the Pre-Merger VaxGen facility which contained a lease payment that exceeded current market
rates. Accordingly, the Company recognized a $4.1 million unfavorable lease obligation.

On November 2, 2010 we received a letter from
the landlord of the facility located at 349 Oyster Point Blvd., South San Francisco, California, which we lease pursuant to a lease agreement entered into by Pre-Merger VaxGen. The letter asserts claims in writing against the Company that, among
other things, the Company failed to provide it with required notice of the Reverse Merger and requests that the Company establish an escrow to fund remaining sums due under the lease. The Company believes that these claims are without merit and
will vigorously resist any request for an escrow or other special consideration not required under the terms of the lease. However, we cannot assure you that the landlord will not commence legal proceedings against us relating to this lease.

Off-Balance Sheet Arrangements

As of March 31, 2011, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are
issued by the Financial Accounting Standards Board (FASB) or other standard setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards that
are not yet effective will not have a material impact on our financial position or results of operations upon adoption.



|Item 3. | Quantitative and Qualitative Disclosure About Market Risk
|------- | ---------------------------------------------------------

In the normal course of business, our financial position is routinely subject to a variety of risks, including market risk associated with interest rate movement. We regularly assess these risks and have
established policies and business practices intended to protect against these and other exposures. As a result, we do not anticipate material potential losses in these areas.

As of March 31, 2011, we had cash, cash equivalents, and short-term investments of $18.5 million, consisting of cash, cash equivalents and highly liquid short-term investments. Our short-term
investments will likely decline by an immaterial amount if market interest rates increase and, therefore, we believe our exposure to interest rate changes is immaterial. Declines of interest rates over time will however, reduce our interest income
from short-term investments.



27



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##### Table of Contents

|Item 4. | Controls and Procedures
|------- | -----------------------

Evaluation
of Disclosure Controls and Procedures

We have performed an evaluation under the supervision and with the participation of our
management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934, as amended (the Exchange Act). Based on that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures were effective as of March 31, 2011 to provide reasonable assurance that
information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms.

Changes in Internal Controls

On
July 28, 2010, we closed the Reverse Merger, which has been accounted for as a reverse acquisition. The financial statements and information relating to Old diaDexus, a privately held company, now constitute the financial statements and
information of the Company. Because diaDexus was a privately held company prior to the Reverse Merger, it was not required to design or maintain its controls in accordance with Exchange Act Rule 13a-15 prior to the Reverse Merger. The
operations of Pre-Merger VaxGen, a publicly held company, were insignificant both before and after the Reverse Merger compared to those of the post-combination consolidated entity. As such, significant time and resources from our management and
other personnel have been required and will continue to be required for the design and implementation of public company internal control over financial reporting for the post-combination consolidated Company. Except for the continuing design and
implementation of new processes and procedures following the Reverse Merger, there was no change in our internal control over financial reporting that occurred during the quarter ended March 31, 2011 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of
Controls

Internal control over financial reporting may not prevent or detect all errors and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Also, projections of any evaluation of effectiveness of internal control to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not
absolute, assurance that the objectives of our disclosure control system are met.



28



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##### Table of Contents

PART II  OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

On November 2,
2010 we received a letter from the landlord of the facility located at 349 Oyster Point Blvd., South San Francisco, California, which we lease pursuant to a lease agreement entered into by Pre-Merger VaxGen. The letter asserts claims in writing
against the Company that, among other things, the Company failed to provide it with required notice of the Reverse Merger and requested that the Company establish an escrow to fund remaining sums due under the lease. The Company believes that these
claims are without merit and will vigorously resist any request for an escrow or other special consideration not required under the terms of the lease. However, we cannot assure you that the landlord will not commence legal proceedings against us
relating to this lease.

The Company is from time to time subject to various claims and legal actions during the ordinary course of business.
The Company believes that there are currently no claims or legal actions that would reasonably be expected to have a material adverse effect on its results of operations or financial condition.



|Item 1A. | Risk Factors
|-------- | ------------

Investing in our common
stock involves a very high degree of risk. You should carefully consider the risks described below and all of the other information in our filings under the Exchange Act before making any investment decisions regarding our common stock. The risks
and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we do not know or that we currently deem immaterial may also negatively affect our business, financial condition, operating results, and
prospects. In that case, the market price of our common stock could decline, and you could lose all or part of your investment.

Risks
Relating to Our Business Operations

Our enhanced PLAC TIA Test was recently approved, and its reintroduction may take more time and
resources than we expect.

On May 10, 2010, we began notifying our customers that we had temporarily suspended the
commercialization of the PLAC TIA product, and asked customers to discontinue use of this product, due to heterophilic interference observed in a small number of samples tested. On June 30, 2010 we submitted a premarket notification to the FDA
seeking clearance under Section 510(k) of the FDCA to market an enhanced PLAC TIA product that addressed the heterophilic interference observed in the suspended PLAC TIA product. On January 6, 2011, the FDA informed us that we were cleared
for marketing the enhanced PLAC TIA product. We are currently in the process of investigating problems we observed in some PLAC TIA manufacturing lots, and as a result, we will not launch the product to the market in the second quarter of 2011 as
previously expected. Our failure to reintroduce the PLAC TIA product on a timely basis (or at all) could have an adverse effect on our financial condition and our ability to maintain or expand our business.

We are an early stage company and have engaged in only limited sales and marketing activities for our first product, the PLAC Test, which aids in
assessing risk for both heart attack and ischemic stroke associated with atherosclerosis.

Our products may never gain significant
acceptance in the marketplace and therefore never generate substantial revenue or profits for the Company. As is the case with all novel biomarkers, we must establish a market for our PLAC Test and build that market through physician education and
awareness programs. Publication in peer review journals of results from outcome studies using our products will be an important consideration in the adoption by physicians and in the coverage by insurers of our products. For example, we are
currently in the process of having banked samples from two prospective statin outcome studies tested and analyzed, with the aim of generating publications in peer review journals that provide further support for the adoption of the PLAC Test by
physicians and the coverage of the product by third party payors. If the results of these studies are not positive, or if physicians or third party payors disagree with our interpretation of the data, this effort may not be successful. Our ability
to commercialize successfully the PLAC Test and other diagnostic products will depend on factors, including:



| |  |  | whether healthcare providers believe our PLAC Test and any other diagnostic tests that we successfully develop provide sufficient incremental clinical
utility;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | whether we are able to demonstrate that treatment of individuals based on their Lp-PLA2levels improves clinical outcomes in prospective clinical studies; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | whether health insurers, government health programs and other third-party payors will cover and pay for our diagnostic tests and the amounts they will
reimburse. We cannot assure that third-party payors will reimburse any of our products or that the level of reimbursement will be sufficient to realize a profit. The health care reimbursement system is in a constant state of change, including
changes due to the enactment in 2010 of federal healthcare reform, and any change may adversely impact our business.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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These factors may present obstacles to commercial acceptance of our products, and we may need to devote
substantial time and money to surmount these obstacles, and the result might not be successful.

Our business is characterized by a high
degree of customer concentration. Our four largest distributor and large laboratory customers accounted for 81% of our accounts receivable and 84% of our revenue as of and for the three months ended March 31, 2011, respectively. The loss of one
or more of these customers or a decline in revenue from one or more of these customers could have a material adverse effect on our business, financial condition, and results of operations.

Sales to a limited number of distributor and large laboratory customers account for a significant portion of our revenue and accounts receivable. Our
dependence on and the identity of our key customers may vary from period to period as a result of competition among our customers, developments related to our products (such as the suspension of our PLAC TIA Test), and changes in individual
customers purchases of our products for profitability, inventory management or other reasons. The concentration of revenue from our top four customers for the three months ended March 31, 2011 was 84% and was 63% for the three months
ended March 31, 2010. We may experience greater or lesser customer concentration in the future, depending on future commercial agreements and whether and when we are able to commercialize the PLAC TIA product. However, it is likely that our
revenue and profitability will continue to be dependent on a very limited number of large laboratory companies and distributors, and we may experience an even higher degree of customer concentration in the future. The loss of, material reduction in
sales volume to, or significant adverse change in our relationship with any of our key customers could have a material adverse effect on our revenue in any given period and may result in significant annual and quarterly revenue variations. In
addition, we may be unable to collect related accounts receivables when due, which could have a material adverse effect on our business. The concentration of accounts receivable from our top four customers as of March 31, 2011 was 81% and was
64% as of March 31, 2010.

We rely on sole source third parties to manufacture and supply certain raw materials, our main reagent
and our PLAC Tests. If these manufacturers are unable to supply these raw materials, reagents and products in a timely manner, or at all, we may be unable to meet customer demand, which would have a material adverse effect on our business.

We currently depend on sole source, third party manufacturers, Denka Seiken, BioCheck, Inc., and Diazyme Laboratories, to manufacture
and supply certain raw materials, our main reagent, and the different formats of our PLAC Test. We cannot assure you that these manufacturers will be able to provide these raw materials, reagents and products in quantities that are sufficient to
meet demand or at all, in a timely manner, which could result in decreased revenues and loss of market share. There may be delays in the manufacturing process over which we have no control, including shortages of raw materials, labor disputes,
backlog and failure to meet FDA standards. We are aware that certain of our sole source manufacturers rely on sole source suppliers with respect to materials used in our products. We rely on our third-party manufacturers to maintain their
manufacturing facilities in compliance with FDA and other federal, state and/or local regulations including health, safety and environmental standards. If they fail to maintain compliance with FDA or other critical regulations, they could be ordered
to curtail operations, which would have a material adverse impact on our business. Increases in the prices we pay our manufacturers, or lapses in quality, such as failure to meet our specifications or Quality System Regulation (QSR) and
other regulatory requirements, could materially adversely affect our business. Any manufacturing defect or error discovered after our products have been produced and distributed could result in significant consequences, including costly recall
procedures and damage to our reputation. Our ability to replace an existing manufacturer may be difficult, because the number of potential manufacturers is limited. If we do undertake to negotiate terms of supply with another manufacturer or other
manufacturers, our relationships with our existing manufacturers could be harmed. Any interruption in the supply of raw materials, reagents or product, or the inability to obtain these raw materials, reagents or product from alternate sources in a
timely manner, could impair our ability to supply the PLAC Test and to meet the demands of our customers, which would have a material adverse effect on our business.

We are subject to extensive regulation by the FDA and other regulatory agencies and failure to comply with such regulation could have a material adverse effect on our business, financial condition,
and results of operations.

Our business and our medical device products, including our PLAC Tests, are subject to extensive
regulation by the FDA and other federal, state, and foreign regulatory agencies. These laws and regulations govern many aspects of our products and operations, and the products and operations of our suppliers and distributors, including premarket
clearance and approval, design, development and manufacturing, labeling, packaging, safety and adverse event reporting, recalls, storage, advertising, promotion, sales and record keeping. Failure to comply with these laws and regulations could
result in, among other things, warning letters, civil penalties, delays in clearance or approval of our products, recalls, and other operating restrictions, all of which could cause us to incur significant expenses.



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Before we can market or sell a new product or a significant modification to an existing product in the
United States, we must obtain either clearance under Section 510(k) of the FDCA, or approval of a pre-market approval application, or PMA, from the FDA, unless an exemption applies. In the 510(k) clearance process, the applicant must
demonstrate to the FDAs satisfaction that a proposed device is substantially equivalent to a device legally on the market, known as a predicate device, with respect to intended use, technology and safety and
effectiveness, in order to obtain clearance from the FDA to market the proposed device. Clinical data is sometimes required to support substantial equivalence. The PMA pathway requires an applicant to demonstrate the safety and effectiveness of the
device based, in part, on extensive data, including, but not limited to, technical, preclinical, clinical trial, manufacturing, and labeling data. The FDA can delay, limit, or deny clearance or approval of a device for many reasons, including:



| |  |  | we may not be able to demonstrate to the FDAs satisfaction that our products are safe and effective for their intended users;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | the data from our pre-clinical studies and clinical trials may be insufficient to support clearance or approval, where required;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | the manufacturing process or facilities we use may not meet applicable requirements; and
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | changes in FDA clearance or approval policies or the adoption of new regulations may require additional data.
| | - |  | -------------------------------------------------------------------------------------------------------------

Further, any modification we make to a 510(k)-cleared device that could significantly affect its safety or effectiveness, or that would constitute a
major change in its intended use, design, or manufacture, would require us to seek a new 510(k) clearance or, possibly, approval of a PMA. The FDA requires every manufacturer to make this determination in the first instance, but the FDA may review
any manufacturers decision. The FDA may not agree with our decisions regarding whether new clearances or approvals are necessary. If the FDA disagrees with our determination and requires us to submit new 510(k) notifications or PMAs for
modifications to our previously cleared products for which we have concluded that new clearances or approvals are unnecessary, we may be required to cease marketing or to recall the modified product until we obtain clearance or approval, and we may
be subject to significant regulatory fines or penalties.

Even when a product reaches the market, the subsequent discovery of previously
unknown problems, such as material deficiencies or defects in design, labeling, or manufacture, or a potential unacceptable risk to health, with a product may result in restrictions on the product, including recall or withdrawal of the product from
the market, and/or a requirement to submit a new 510(k) submission or PMA for the product in order to support continued marketing. For example, we suspended commercialization of the PLAC TIA product due to heterophilic interference observed in a
small number of samples tested and sought a new 510(k) for the product. We may be forced to take similar actions in the future in response to previously unknown problems with our marketed products.

We are also subject to routine inspection by the FDA and certain state agencies for compliance with QSR, which establishes the good manufacturing
practices for medical devices, and Medical Device Reporting regulations, which require us to report to the FDA any incident in which one of our products may have caused or contributed to a death or serious injury or malfunctioned in a way that could
cause death or serious injury. Although we believe that we have adequate processes in place to ensure compliance with these requirements, the FDA or other regulatory bodies could force us to stop manufacturing, selling or exporting our products if
it concludes that we are out of compliance with applicable regulations or if it concludes that our products pose an unacceptable risk to health or are otherwise deficient in design, labeling or manufacture. Further, the ability of our suppliers to
supply critical components or materials and of our distributors to sell our products could be adversely affected if their operations are determined to be out of compliance. The FDA and other regulatory bodies could also require us to recall products
if we fail to comply with applicable regulations, which could force us to stop manufacturing such products. Such actions by the FDA and other regulatory bodies would adversely affect our revenues and results of operations.

Many national, regional, and local laws and regulations, including the recently-enacted healthcare reform legislation, have not been fully implemented by
the regulatory authorities or adjudicated by the courts, and their provisions are open to a variety of interpretations. In the ordinary course of business, we must frequently make judgments with respect to compliance with applicable laws and
regulations. If regulators subsequently disagree with the manner in which we have sought to comply with these regulations, we could be subjected to various sanctions, including substantial civil and criminal penalties, as well as product recall,
seizure or injunction with respect to the sale of our products. Such sanctions could severely impair our reputation within the industry and any limitation on our ability to manufacture and market our products could have a material adverse effect on
our business. In addition, in January 2011, the FDA announced twenty-five action items it intends to take in reforming the 510(k) premarket review program, The FDA issued its recommendations and proposed action items in response to concerns from
both within and outside of FDA about the 510(k) program. Although the FDA has not detailed the specific modifications or clarifications that the Agency intends to make to its guidances, policies, and regulations pertaining to the review and
regulation of devices such as ours which seek and receive marketing clearance through the 510(k) process, the FDAs announced action items signal that additional regulatory requirements are likely. In particular, the FDA intends to issue a
variety of draft guidances and regulations over the coming months which would, among other things, clarify when changes to a cleared medical device warrant a new 510(k) and which modifications would be eligible for a Special 510(k), establish a
Unique Device Identification System, and clarify FDAs use and application of several key terms in the 510(k) review process. These reforms, when implemented, could impose additional regulatory requirements upon us which could delay our ability
to obtain new clearances, increase the cost of compliance, or restrict our ability to maintain our current 510(k) clearances.



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We are reliant on the commercial success of our PLAC Test products.

We are largely dependent on our main product line, the PLAC Test. We expect that the PLAC Test products will account for a substantial portion of our
revenue for the foreseeable future. We do not know if our PLAC Test products will be successful over the long-term and it is possible that the demand for the product may decline over time. Any decline in demand or failure of the diaDexus PLAC Test
products to penetrate current or new markets significantly could have a material adverse effect on our business, financial condition, and results of operations.

If third-party payors do not reimburse our customers for the use of our clinical diagnostic products or if they reduce reimbursement levels, our ability to sell our products will be harmed.

We sell our products primarily through distributors and to large laboratory customers, substantially all of which receive
reimbursement for the health care services they provide to their patients from third-party payors, such as Medicare, Medicaid and other government programs, private insurance plans and managed care programs. Third-party payors are increasingly
attempting to contain health care costs by limiting both coverage and the level of reimbursement for medical products and services. Increasingly, Medicare, Medicaid and other third-party payors are challenging the prices charged for medical
services, including clinical diagnostic tests. Most of these third-party payors may deny reimbursement if they determine that a medical product was not used in accordance with cost-effective treatment methods, as determined by the third-party payor,
or was used for an unapproved indication.

If our customers are not reimbursed for our products, they may reduce or discontinue purchases of
our products, which would cause our revenues to decline. Lower-than-expected, or decreases in, reimbursement amounts for tests performed using our products may decrease amounts physicians and other practitioners are able to charge patients, which in
turn may adversely affect the willingness of physicians and other practitioners to purchase our products at prices we target, or at all. If we are unable to sell our products at target prices, our gross margins will suffer and our business could be
materially adversely affected.

Healthcare reform and restrictions on reimbursement may adversely affect our profitability.

In the United States, healthcare providers that purchase our products and other diagnostic products generally rely on third-party
payors to reimburse all or part of the cost of the procedure. We face efforts by non-governmental third-party payors, including health plans, to reduce utilization of diagnostic testing services and reimbursement for diagnostic services. For
instance, third-party payors often use the payment amounts under the Medicare fee schedules as a reference in negotiating their payment amounts. As a result, a reduction in Medicare reimbursement rates could result in a reduction in the
reimbursements we receive from such third-party payors. Changes in test coverage policies of and reimbursement from other third-party payors may also occur independently from changes in Medicare. Third-party payors may refuse to reimburse for
procedures and devices deemed to be experimental and investigational. Such reimbursement and coverage changes in the past have resulted in reduced prices, added costs and reduced accession volume and have added more complex and new regulatory and
administrative requirements.

In the United States, the American Medical Association assigns specific Current Procedural Terminology, or CPT,
codes, which are necessary for reimbursement of diagnostic tests. Once the CPT code is established, the Centers for Medicare and Medicaid Services establish reimbursement payment levels and coverage rules under Medicaid and Medicare, and private
payors establish rates and coverage rules independently. Although the tests performed by our assays have previously assigned CPT Codes, we cannot guarantee that our future assays will be covered by such CPT codes and will, therefore, be approved for
reimbursement by Medicare and Medicaid as well as most third-party payors. Levels of reimbursement may decrease in the future, and future legislation, regulation or reimbursement policies of third-party payors may adversely affect the demand for and
price levels of our products.

Our future success depends on our ability to retain our Chief Executive Officer and other key employees
and to attract, retain and motivate qualified personnel.

We depend on the efforts and abilities of Patrick Plewman, our Chief
Executive Officer, along with other senior management, our research and development staff and a number of other key management, sales, support, technical and administrative services personnel. Competition for experienced, high-quality personnel
exists, and we cannot assure that we can continue to recruit and retain such personnel. Our failure to hire and retain such personnel would impair our ability to develop new products and manage our business effectively.



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We will need to raise additional capital to support our operations and to continue as a going concern.

We will require additional funds to commercialize our products and develop new products. Our ability to fund our net losses and to
conduct the required development activities related to any new product candidates will be significantly limited if we are unable to obtain the necessary capital. We may seek to raise additional funds through equity or debt offerings, bank
facilities, or other sources of capital. We do not know, however, whether additional financing will be available when needed, or whether it will be available on favorable terms or at all. Failure to obtain adequate financing also will likely
adversely affect our ability to operate as a going concern. Any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants.

We are an early stage company with a history of losses, we expect to incur losses for at least the next few years, and we may never achieve
profitability.

We have incurred substantial net losses since our inception. Our accumulated deficit was approximately $190.0 million
at March 31, 2011. For the three months ended March 31, 2011 and 2010, we incurred a net loss of $2.5 million and $1.4 million, respectively. We expect to continue to incur substantial net losses for at least the next few years. If we are
unable to execute our commercialization strategy to achieve profitability, or if the time required to achieve profitability is longer than we anticipate, we may not be able to continue our business.

If the combination of patents, trade secrets, trademarks, and contractual provisions that we rely on to protect our intellectual property proves
inadequate, our ability to successfully commercialize our products will be harmed and we may never be able to operate our business profitably.

Our success depends, in large part, on our ability to protect proprietary discoveries, technology, and diagnostic tests that we develop under the patent and other intellectual property laws of the United
States and other countries, so that we can seek to prevent others from unlawfully using our inventions and proprietary information.

Additionally, we have filed or have license rights to a number of patent applications that are in an early stage of prosecution, and we cannot make any
assurances that any of the pending patent applications will result in patents being issued. In addition, due to technological changes that may affect our proposed products or judicial interpretation of the scope of our patents, our proposed products
might not, now or in the future, be adequately covered by our patents.

We have liabilities for real estate leases in excess of what is
necessary for our current business. We will incur these additional expenses until our lease of a smaller facility expires or until we are able to sublease our larger leased facility.

We have a significant real estate lease for a facility of approximately 65,000 square feet with current monthly minimum required expenses of approximately $200,000. The term of the lease continues until
December 31, 2016. Our lease of a smaller facility continues until January 1, 2012, with current monthly minimum required expenses of approximately $90,000. We receive some reimbursement under a sublease of a portion of this property,
which offsets a significant portion of our total monthly expenses under the lease and which expires after May 2011. Until such time that (i) our lease expires and we choose to move our operations to the larger facility or (ii) we are able
to sublease our larger leased facility, we will incur liabilities for real estate leases significantly in excess of what is necessary for our current business. We may never be able to sublease the larger facility. Also, the landlord of the larger
leased facility has previously filed lawsuits to enforce actions that the landlord believes are protective of its leasehold interests. The landlord of the larger leased facility has asserted claims in writing against us that, among other things, we
failed to provide it with required notice of the Reverse Merger, and has requested that we establish an escrow to fund remaining sums due under the lease. We believe that these claims are without merit and will vigorously resist any request for an
escrow or other special consideration not required under the terms of the lease. However, we cannot assure you that the landlord will not commence legal proceedings against us relating to this lease.

We license key intellectual property from GlaxoSmithKline and ICOS, and our contractual relationships have certain limitations.

We have an exclusive license from GlaxoSmithKline and a co-exclusive license from ICOS Corporation (ICOS) to practice and commercialize
technology covered by several issued and pending United States patents and their foreign counterparts. The majority of patents that relate to products currently sold by us will begin to expire in mid-2014.



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Several of our collaboration agreements with GlaxoSmithKline and ICOS provide licenses to use intellectual
property that is important to our business, and we may enter into additional agreements in the future with GlaxoSmithKline or with other third parties that change licenses of valuable technology. Current licenses impose, and future licenses may
impose, various commercialization, milestone and other obligations on us, including the obligation to terminate our use of patented subject matter under certain circumstances. If a licensor becomes entitled to, and exercises, termination rights
under a license, we could lose valuable rights and our ability to develop our current and future products. Our business may suffer if any current or future licenses terminate, if the licensors fail to abide by the terms of the license or fail to
prevent infringement by third parties, if the licensed patents or other rights are found to be invalid or if we are unable to enter into necessary licenses on acceptable terms.

Our stock price is likely to be volatile.

Currently, our common stock is quoted on
the OTC Bulletin Board. Stocks traded over the counter typically are subject to greater volatility than stocks traded on stock exchanges, such as the NASDAQ Stock Market, due to the fact that OTC trading volumes are generally
significantly lower than those on stock exchanges. This lower volume may allow a relatively few number of stock trades to greatly affect the stock price. The trading price of our common stock has been and is likely to continue to be extremely
volatile. Some of the many factors that may cause the market price of our common stock to fluctuate include, in no particular order:



| |  |  | Actions taken by regulatory authorities with respect to our products;
| | - |  | ---------------------------------------------------------------------



| |  |  | The progress and results of our product development efforts;
| | - |  | ------------------------------------------------------------



| |  |  | The outcome of legal actions to which we may become a party;
| | - |  | ------------------------------------------------------------



| |  |  | Our ability to commercialize the products, if any, that we are able to develop;
| | - |  | -------------------------------------------------------------------------------



| |  |  | Changes in our capital structure, such as future issuances of securities or the incurrence of additional debt; and
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | Restatements of our financial results and/or material weaknesses in our internal controls.
| | - |  | ------------------------------------------------------------------------------------------

The stock markets, and the markets for medical diagnostics and biotechnology stocks in particular, have experienced volatility that has often been
unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock. Investors may not be able to sell when they desire due to insufficient buyer demand and may
realize less than, or lose all of, their investment.

Our business, in particular the growth of our business, is dependent on our
ability to successfully develop and commercialize novel diagnostic products and services based on biomarkers. If we fail to develop and commercialize diagnostic products, we may be unable to execute our business plan.

Our long-term ability to generate product-related revenue will depend in part on our ability to develop additional formats or versions of the PLAC Test
and other new diagnostic products. If internal efforts do not generate sufficient product candidates, we will need to identify third parties that wish to collaborate with us to develop new products and applications. Our ability to pursue
successfully third-party relationships will depend in part on our ability to negotiate acceptable license and related agreements. Even if we are successful in establishing collaborative arrangements, they may never result in the successful
development or commercialization of any product candidate or the generation of any sales or royalty revenues. In addition, rapid technological developments and innovations characterize the markets for our products and services. Our success will
depend in large part on our ability to correctly identify emerging trends, enhance capabilities, and develop and manufacture new products quickly, in a cost-effective manner, and at competitive prices. The development of new and enhanced products is
a complex and costly process. We may need to make substantial capital expenditures and incur significant research and development costs to develop and introduce such new products and enhancements. Our choices for developing products may prove
incorrect if customers do not adopt the products we develop or if the products ultimately prove to be medically or commercially unviable. The discovery of performance problems may adversely affect development schedules. If we fail to timely develop
and introduce competitive new products or additional formats of our existing products, our business, may be materially adversely affected.

Any inability to protect our proprietary technologies and product candidates adequately could harm our competitive position.

We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies are covered
by valid and enforceable patents or are effectively maintained as trade secrets. We plan to continue to apply for patents covering our technologies and products as we deem appropriate. We cannot make assurances that our pending patent applications
will issue as patents and, if they do, whether the scope of such claims will be sufficiently broad to prevent third parties from utilizing our technologies, commercializing our discoveries or developing competing products. Any patents we currently
hold, or obtain in the future, may not be sufficiently broad to prevent others from utilizing our technologies, commercializing our discoveries, or developing competing technologies and products. Furthermore, third parties may independently develop
similar or alternative technologies or design around our patented technologies. Third parties may challenge or invalidate our patents, or our patents may fail to provide us with any competitive advantage.



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We have rights to patents and patent applications owned by GlaxoSmithKline, Human Genome Sciences, Inc.
(Human Genome Sciences) and ICOS that provide important protection on the composition of matter and utility of our products and product candidates. We do not, however, directly control the prosecution and maintenance of all of these
patents. GlaxoSmithKline, Human Genome Sciences, and ICOS may not fulfill their obligations as licensors and may allow these patents to go abandoned or may not pursue meaningful claims for our products. Also, while the United States Patent and
Trademark Office has issued diagnostic patents covering utility or methods, we do not know whether or how courts will enforce these patents. If a court finds these types of inventions to be unpatentable or interprets them narrowly, the benefits of
our patent strategy may not materialize. If any or all of these events occur, they could diminish the value of our intellectual property.

The requirements of being a public company have required and will continue to require significant resources, increase our costs and occupy our
management, and we may be unable to comply with these requirements in a timely or cost-effective manner.

On July 28, 2010, we
closed the Reverse Merger. The Reverse Merger was determined to constitute a reverse acquisition and Old diaDexus, a privately held company, was determined to be the acquirer for accounting purposes. Although Pre-Merger VaxGen was an operating
company, its operations were insignificant compared to those of the post-merger entity. Because the financial statements and information relating to Old diaDexus now constitute our financial statements and information, we are in a position similar
to a newly public company.

As a company with public reporting responsibilities, we have incurred and will continue to incur significant
legal, accounting, and other expenses that Old diaDexus did not incur as a private company. Complying with rules, regulations and requirements applicable to public companies will require substantial effort and will increase our costs and expenses.
Among other things, we are required to:



| |  |  | institute a more formalized function of internal control over financial reporting;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | prepare and file and distribute periodic and current reports under the Exchange Act for a larger operating business and comply with other Exchange Act
requirements applicable to public companies;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | formalize old and establish new internal policies, such as those relating to insider trading and disclosure controls and procedures;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | involve and retain to a greater degree outside counsel and accountants in the above activities; and
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | establish and maintain an investor relations function, including the provision of certain information on our website.
| | - |  | ---------------------------------------------------------------------------------------------------------------------

Compliance with these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and
costly. For example, we expect these new rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to incur substantial costs to maintain the same or similar
coverage.

The securities laws require, among other things, that we implement and maintain effective internal control for financial reporting
and disclosure. In particular, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on the effectiveness of our internal control over financial reporting. Our
testing may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses. We expect to incur significant expense and devote substantial management effort toward ensuring compliance with these
requirements. Moreover, if we are not able to comply with these requirements in a timely manner, or if we identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our
common stock could decline and we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which would entail expenditure of additional financial and management resources.

Natural disasters, including earthquakes, may damage our facilities.

Our corporate and manufacturing facilities are located in California. Our facilities in California are in close proximity to known earthquake fault zones. As a result, our corporate, research and
manufacturing facilities are susceptible to damage from earthquakes and other natural disasters, such as fires, floods and similar events. Although we maintain general business insurance against fires and some general business interruptions, there
can be no assurance that the scope or amount of coverage will be adequate in any particular case. Insurance specifically for earthquake risks is not available on commercially reasonable terms.



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We are not currently listed on a national exchange and there can be no assurance we will ever be
listed.

As a result of our failure to make timely filings of financial statements, we were delisted from the NASDAQ Stock Market in
2004. Currently, our common stock is quoted on the OTC Bulletin Board under the symbol DDXS.OB. We have not yet applied for our common stock to be listed on a national exchange, and we do not currently meet all of the requirements for listing or
relisting on the NASDAQ Stock Market. We do not know when, if ever, our common stock will be listed on a national stock exchange. In addition, we cannot be certain that the NASDAQ Stock Market will approve our stock for relisting or that any other
exchange will approve our stock for listing. In order to be eligible for relisting or listing, we must meet the initial listing criteria for the NASDAQ Stock Market or another national exchange, including a minimum per share price.

Our charter documents and Delaware law may discourage an acquisition of the Company.

Provisions of our certificate of incorporation, bylaws, and Delaware law could make it more difficult for a third-party to acquire us, even if doing so
would be beneficial to our stockholders. We may issue shares of preferred stock in the future without stockholder approval and upon such terms as our Board of Directors may determine. Our issuance of this preferred stock could have the effect of
making it more difficult for a third-party to acquire, or of discouraging a third-party from acquiring, a majority of our outstanding stock. Our bylaws also provide that special stockholders meetings may be called only by our Board of Directors,
Chairperson of the Board of Directors, or by our Chief Executive Officer or President, with the result that any third-party takeover not supported by the Board of Directors could be subject to significant delays and difficulties.

Failure in our information technology and storage systems could significantly disrupt the operation of our business.

Our ability to execute our business plan depends, in part, on the continued and uninterrupted performance of our information technology systems, or IT
systems. IT systems are vulnerable to damage from a variety of sources, including telecommunications or network failures, malicious human acts and natural disasters. Moreover, despite network security and back-up measures, some of our servers are
potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptive problems. Despite the precautionary measures we have taken to prevent unanticipated problems that could affect our IT systems, sustained or repeated
system failures that interrupt our ability to generate and maintain data could adversely affect our ability to operate our business.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds.
|------- | ------------------------------------------------------------

None



|Item 3. | Defaults Upon Senior Securities.
|------- | --------------------------------

None



|Item 4. | [Removed and Reserved.]
|------- | -----------------------

None



|Item 5. | Other Information.
|------- | ------------------

None



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|Item 6. | Exhibits
|------- | --------

The following exhibits are
filed as part of this report:



|        |  |                                                                                                                                                                                                                                                                                                                                                                                                 
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  | Description                                                                                                                                                                                                                                                                                                                                                                                     
|        | 
|2.1*    |  | Agreement and Plan of Merger and Reorganization, dated May 28, 2010, by and among VaxGen, Inc., Violet Acquisition Corporation, Violet Acquisition LLC, diaDexus, Inc. and John E.
Hamer, as the agent of diaDexus, Inc.s stockholders (incorporated by reference to Exhibit 2.1 to the registrants Current Report on Form 8-K (file no. 0-26483), filed on June 1, 2010)                     
|        | 
|2.2     |  | Amendment No. 1 to Agreement and Plan of Merger and Reorganization, dated June 24, 2010, by and among VaxGen, Inc., Violet Acquisition Corporation, Violet Acquisition LLC, diaDexus,
Inc., and John E. Hamer as the agent of diaDexus, Inc.s stockholders (incorporated by reference to Exhibit 2.1 to the registrants Current Report on Form 8-K (file no. 0-26483), filed on June 28, 2010)
|        | 
|3.1     |  | Restated Certificate of Incorporation of the registrant (incorporated by reference to Exhibit 3.1 to the registrants Quarterly Report on Form 10-Q (file no. 0-26483) for the
fiscal quarter ended September 30, 2010, filed on November 15, 2010)                                                                                                                                             
|        | 
|3.2     |  | Certificate of Change of Registered Agent and Registered Office (incorporated by reference to Exhibit 3.1 to the registrants Current Report on Form 8-K (file no. 0-26483),
filed on January 25, 2011)                                                                                                                                                                                         
|        | 
|3.3     |  | Amended and Restated Bylaws of the registrant (incorporated by reference to Exhibit 3.2 to the registrants Current Report on Form 8-K (file no. 0-26483), filed on November 5,
2010)                                                                                                                                                                                                           
|        | 
|10.1**  |  | Distribution Agreement, effective as of January 1, 2011 (the Inova Agreement), by and between diaDexus, Inc. and Inova Diagnostics, Inc.                                                                                                                                                                                                                                                      
|        | 
|10.2**  |  | 2011 Special Programs Addendum to the Inova Agreement, effective as of January 1, 2011                                                                                                                                                                                                                                                                                                          
|        | 
|10.3**  |  | First Amendment to the Inova Agreement, effective as of January 1, 2011                                                                                                                                                                                                                                                                                                                         
|        | 
|10.4**  |  | Addendum No. 3 to the Master Supply Agreement, effective as of April 1, 2011, by and between diaDexus, Inc. and Berkeley HeartLab, Inc.                                                                                                                                                                                                                                                         
|        | 
|10.5**  |  | Purchase Agreement, effective as of January 1, 2011, by and between diaDexus, Inc. and Health Diagnostics Laboratory                                                                                                                                                                                                                                                                            
|        | 
|10.6**  |  | Volume Discount Addendum to the Purchase Agreement, effective as of January 1, 2011, by and between diaDexus, Inc. and Health Diagnostics Laboratory                                                                                                                                                                                                                                            
|        | 
|10.7    |  | Volume Discount Addendum No. 2 to the Purchase Agreement, effective as of April 1, 2011, by and between diaDexus, Inc. and Health Diagnostics Laboratory                                                                                                                                                                                                                                        
|        | 
|31.1    |  | Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a)                                                                                                                                                                                                                                                                                                                
|        | 
|31.2    |  | Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a)                                                                                                                                                                                                                                                                                                                
|        | 
|32.1    |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                               
|        | 
|32.2    |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002                                                                                                                                                                                                                                               



|* | Certain schedules referenced in the Agreement and Plan of Merger and Reorganization have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy
of any omitted schedule will be furnished supplementally to the Securities and Exchange Commission upon request.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|** | Certain portions have been omitted pursuant to a confidential treatment request. Omitted information has been filed separately with the SEC.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------



37



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##### Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.



|                   |  |  |  |                |  |                                                                
|------------------ |  |  |  | -------------- |  | ---------------------------------------------------------------
|                   |  |  |  | diaDexus, Inc.
|                   |  |  | 
|Date: May 13, 2011 |  |  |  | By:            |  | / S /    Patrick
Plewman                                       
|                   |  |  |  |                |  | Patrick Plewman                                                
|                   |  |  |  |                |  | President & Chief Executive Officer                            
|                   |  |  | 
|Date: May 13, 2011 |  |  |  | By:            |  | / S /    David J.
Foster                                       
|                   |  |  |  |                |  | David J. Foster                                                
|                   |  |  |  |                |  | Executive Vice President, Chief Financial Officer and Secretary



38



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##### Table of Contents

EXHIBIT INDEX



|           |  |                                                                                                                                                                                                                                                                                                                                                                                                 
|---------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |  | Description                                                                                                                                                                                                                                                                                                                                                                                     
|           | 
|2.1*       |  | Agreement and Plan of Merger and Reorganization, dated May 28, 2010, by and among VaxGen, Inc., Violet Acquisition Corporation, Violet Acquisition LLC, diaDexus, Inc. and John E.
Hamer, as the agent of diaDexus, Inc.s stockholders (incorporated by reference to Exhibit 2.1 to the registrants Current Report on Form 8-K (file no. 0-26483), filed on June 1, 2010)                     
|           | 
|2.2        |  | Amendment No. 1 to Agreement and Plan of Merger and Reorganization, dated June 24, 2010, by and among VaxGen, Inc., Violet Acquisition Corporation, Violet Acquisition LLC, diaDexus,
Inc., and John E. Hamer as the agent of diaDexus, Inc.s stockholders (incorporated by reference to Exhibit 2.1 to the registrants Current Report on Form 8-K (file no. 0-26483), filed on June 28, 2010)
|           | 
|3.1        |  | Restated Certificate of Incorporation of the registrant (incorporated by reference to Exhibit 3.1 to the registrants Quarterly Report on Form 10-Q (file no. 0-26483) for
the fiscal quarter ended September 30, 2010, filed on November 15, 2010)                                                                                                                                             
|           | 
|3.2        |  | Certificate of Change of Registered Agent and Registered Office (incorporated by reference to Exhibit 3.1 to the registrants Current Report on Form 8-K (file no. 0-26483),
filed on January 25, 2011)                                                                                                                                                                                         
|           | 
|3.3        |  | Amended and Restated Bylaws of the registrant (incorporated by reference to Exhibit 3.2 to the registrants Current Report on Form 8-K (file no. 0-26483), filed on November 5,
2010)                                                                                                                                                                                                           
|           | 
|10.1**     |  | Distribution Agreement, effective as of January 1, 2011 (the Inova Agreement), by and between diaDexus, Inc. and Inova Diagnostics, Inc.                                                                                                                                                                                                                                                      
|           | 
|10.2**     |  | 2011 Special Programs Addendum to the Inova Agreement, effective as of January 1, 2011                                                                                                                                                                                                                                                                                                          
|           | 
|10.3**     |  | First Amendment to the Inova Agreement, effective as of January 1, 2011                                                                                                                                                                                                                                                                                                                         
|           | 
|10.4**     |  | Addendum No. 3 to the Master Supply Agreement, effective as of April 1, 2011, by and between diaDexus, Inc. and Berkeley HeartLab, Inc.                                                                                                                                                                                                                                                         
|           | 
|10.5**     |  | Purchase Agreement, effective as of January 1, 2011, by and between diaDexus, Inc. and Health Diagnostics Laboratory                                                                                                                                                                                                                                                                            
|           | 
|10.6**     |  | Volume Discount Addendum to the Purchase Agreement, effective as of January 1, 2011, by and between diaDexus, Inc. and Health Diagnostics Laboratory                                                                                                                                                                                                                                            
|           | 
|10.7       |  | Volume Discount Addendum No. 2 to the Purchase Agreement, effective as of April 1, 2011, by and between diaDexus, Inc. and Health Diagnostics Laboratory                                                                                                                                                                                                                                        
|           | 
|31.1       |  | Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a)                                                                                                                                                                                                                                                                                                                
|           | 
|31.2       |  | Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a)                                                                                                                                                                                                                                                                                                                
|           | 
|32.1       |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                               
|           | 
|32.2       |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002                                                                                                                                                                                                                                               



|* | Certain schedules referenced in the Agreement and Plan of Merger and Reorganization have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy
of any omitted schedule will be furnished supplementally to the Securities and Exchange Commission upon request.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|** | Certain portions have been omitted pursuant to a confidential treatment request. Omitted information has been filed separately with the SEC.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------



39