Summary of RESPONSE GENETICS INC

Item 2: Managements Discussions and Analysis

The following discussion of our financial condition and results of operation should be read in conjunction with our audited financial statements and related notes to the financial statements included elsewhere in this Quarterly Report on Form 10-Q as of June 30, 2008 and our audited financial statements for the years ended December 31, 2007 and 2006 included in our Annual Report on Form 10-KSB previously filed with the SEC. This discussion contains forward-looking statements that relate to future events or our future financial performance. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward looking statements.

Overview

Response Genetics, Inc. (the "Company") was incorporated in the state of Delaware on September 23, 1999 as Bio Type, Inc. for the purpose of providing unique molecular profiling services of tumor tissue that has been formalin-fixed and embedded in paraffin wax. In August 2000, we changed our name to Response Genetics, Inc. In November 2006, we established Response Genetics Ltd., a wholly owned subsidiary in Edinburgh, Scotland.

Clinical studies have shown that not all cancer chemotherapy works effectively in every patient, and that a number of patients receive therapy that has no benefit to them and may potentially even be harmful. Our goal is to provide cancer patients and their physicians with a means to make informed, individualized treatment decisions based on genetic analysis of tumor tissues. Our pharmacogenomic analysis of clinical trial specimens for the pharmaceutical industry may provide data that will lead to a better understanding of the molecular basis for response to specific drugs and, therefore lead to individualized treatment. We are focusing our efforts in the following areas:

• Launching our ResponseDX™ tests;

• Developing diagnostic tests for assessing the risk of cancer recurrence, prediction of chemotherapy response and tumor classification in cancer patients;

• Expanding our pharmacogenomic testing services business and creating a standardized and integrated testing platform into the major markets of the healthcare industry, including outside of the United States.

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

Response DX™

The outcome of cancer chemotherapy is highly variable due to genetic differences among patients. Some patients respond well with tumor shrinkage and increase in life span. Other patients do not obtain benefit from the same therapy but may still experience toxic side effects as well as delay in effective treatment and psychological trauma.

At present most chemotherapy regimens are administered without any pre-selection of patients on the basis of their particular genetics. However recent development of very sensitive molecular technologies has enabled researchers to identify and measure genetic and biochemical factors in patients' tissues that can predict the probability of success or failure of many currently used anti-cancer agents. In order to increase the chances of a better chemotherapy outcome for cancer patients, we are developing genetic tests that will measure predictive factors for tumor response in tumor tissue samples. We have begun offering tests for non-small cell lung cancer (NSCLC) (ResponseDX: LungÔ) and colorectal cancer (CRC) (ResponseDX: ColonÔ) patients' tumor tissue through our laboratory located in Los Angeles, California, which is registered under the Clinical Laboratory Improvement Amendments of 1988 (CLIA) and we anticipate offering additional tests for esophageal and pancreatic cancer in the future.

Diagnostic Tests for Other Cancers

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

Expansion of our pharmacogenomic testing services business

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

There are no assurances that the Company will be able to continue making its current ResponseDX tests available, or make additional ResponseDX tests available; will be able to develop and commercialize tests of other types of cancer; or will be able to expand our pharmacogenomic testing service business.

We anticipate that, over the next 12 months, a substantial portion of our capital resources and efforts will be focused on research and development to bring to market a series of diagnostic tests for cancer patients, to establish a pharmacogenomics database that is of commercial value, to establish laboratories overseas in collaboration with certain of our current pharmaceutical clients and for other general corporate purposes.

Research and development expenses represented 19% and 17% of our total operating expenses for the six months ended June 30, 2007 and June 30, 2008, respectively, and 23% and 17% for the three months ending June 30 2007 and 2008, respectively. Major components of the $1,308,544 in research and development expenses for the six-month period ended June 30, 2008 included supplies and reagents for our research activities, personnel costs, occupancy costs, equipment warranties and service, patent fees, insurance, business consulting and sample procurement costs.

On April 4, 2008, the board of directors increased the size of the board to seven members and elected John Ferrara to the board as a director of the Company. The board also determined that Mr. Ferrara is an "independent director" pursuant to the requirements for memberships established by NASD Market place Rule 4350(c)(4). We filed a Form 8-K on April 7, 2008 reporting this event.

On April 30, 2008, the board of directors increased the size of the board to eight members and elected David Gandara, MD to the board as a director of the Company. The board also determined that Dr. Gandara is an "independent director" pursuant to the requirements for memberships established by NASD Market place Rule 4350(c)(4). We filed a Form 8-K on May 6, 2008 reporting this event.

On May 16, 2008, the board of directors increased the size of the board to eight members and elected Kirk Calhoun to the board as a director of the Company. The board also determined that Mr. Calhoun is an "independent director" pursuant to the requirements for memberships established by NASD Market place Rule 4350(c)(4). We filed a Form 8-K on May 21, 2008 reporting this event.

Critical Accounting Policies and Significant Judgments and Estimates

This discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. 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 the disclosure of contingent assets and liabilities at the date of the financial statements, as well as revenues and expenses during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could therefore differ materially from those estimates under different assumptions or conditions. We believe the following critical accounting policies reflect our more significant estimates and assumptions used in the preparation of our financial statements.

Revenue Recognition

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

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

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

We are subject to potentially significant variations in the timing of revenue recognized from period to period due to a variety of factors including: (1) the timing of when specimens are submitted to us for testing; and (2) the specific terms, such as minimum assay requirements in any given period, advance payment requirements, and term of agreement, as set forth in each contract we have with significant clients.

License Fees

We have licensed technology for the extraction of RNA and DNA from FFPE tumor specimens from USC in exchange for royalty fees on revenue generated by use of this technology. These royalties are calculated as a fixed percentage of revenue that we generate from use of the technology licensed from USC. Total license fees due under the royalty agreement to USC were $46,946 and $40,580 for the six-month period ended June 30, 2007 and June 3, 2008, respectively, and $32,650 and $16,967 for the three-month period ended June 30 2007 and 2008, respectively. We also maintain a non-exclusive license to use Roche's polymerase chain reaction (PCR), homogenous PCR, and reverse transcription PCR processes. We pay Roche a fixed percentage royalty fee for revenue that we generate through use of this technology. Royalties due under this agreement totaled $64,404 and $158,836 for the six-month period ended June 30, 2007 and June 30, 2008, respectively, and $44,877 and $71,446 for the three months ended June 30, 2007 and June 30, 2008, respectively. These royalties are recorded as a component of cost of revenues in the statements of operations.

We are subject to potentially significant variations in royalties recorded in any period. While the amount paid is based on a fixed percentage from revenues of specific tests pursuant to terms set forth in the agreements with USC and Roche, the amount due is calculated based on the revenue we recognize using the respective licensed technology. As discussed above, this revenue can vary from period to period as it is dependent on the timing of the specimens submitted by our clients for testing.

Accounts Receivable

We invoice clients as specimens are processed and any other contractual obligations are met. Our contracts with clients typically require payment within 45 days of the date of invoice. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our clients to make required payments. We specifically analyze accounts receivable and historical bad debts, client credit, current economic trends and changes in client payment trends when evaluating the adequacy of the allowance for doubtful accounts. Account balances are charged-off against the allowance when it is probable the receivable will not be recovered. To date, our clients have primarily been large pharmaceutical companies. As a result, bad debts to date have been minimal.

Income Taxes

We estimate our tax liability through calculations we perform for the determination of our current tax liability, together with assessing temporary differences resulting from the different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are recorded in our balance sheets. Our management then assesses the likelihood that deferred tax assets will be recovered in future periods through future operating results. To the extent that we cannot conclude that it is more likely than not that the benefit of such assets will be realized, we establish a valuation allowance to adjust the net carrying value of such assets. The carrying value of our net deferred tax assets assumes that we will be able to generate sufficient future taxable income, based on management's estimates and assumptions. These estimates and assumptions take into consideration future taxable income and ongoing feasible tax strategies in determining recoverability of such assets. Our valuation allowance is subject to significant change based on management's estimates of future profitability and the ultimate realization of the deferred tax assets.

Results of Operations

Quarters Ended June 30, 2008 and June 30, 2007

Revenues. Revenues were $1,823,443 for the quarter ended June 30, 2008, as compared to $1,495,618 for the quarter ended June 30, 2007, an increase of $327,825, or 21.9%. This growth in revenue was due primarily to increased revenues generated under our existing contracts with our pharmaceutical company partners. For the quarter ended June 30, 2008, two of our clients, GSK and Taiho, accounted for approximately 94% of our revenue, as compared to approximately 63% of our revenue for the quarter ended June 30, 2007.

Cost of Revenues. Cost of revenues for the quarter ended June 30, 2008 were $905,134 as compared to $1,183,312 for the quarter ended June 30, 2007, a decrease of $278,178 or 23%. This decrease primarily resulted from an decrease in share-based compensation related to stock options issued to employees and consultants of $195,213 and a $71,219 decrease in costs for processing fluorescence in situ hybridization (FISH) studies.

Research and Development Expenses. Research and development expenses were $705,159 for the quarter ended June 3, 2008, as compared to $916,794 for the same period in 2007, a decrease of $211,635 or 23%. This decrease resulted primarily from a decrease in share-based compensation related to stock options issued to employees and consultants of $192,294 and a decrease in equipment related costs of $76,909. These reductions were partially offset by a $51,633 increase in laboratory supply and reagent costs. We expect research and development expenses to increase as we work to develop additional aspects of our technology and to study diagnostic indicators for various forms of cancer.

General and Administrative Expenses. General and administrative expenses totaled $2,455,883 for the quarter ended June 30, 2008, as compared to $1,924,816 for the comparable period in 2007, an increase of $531,067 or 28%. This increase resulted primarily from an increase in legal fees of $592,204, an increase of $176,773 in personnel related expenses, an increase in contract and recruitment services of $103,164 and an increase of $73,162 in costs related to the marketing of our newly developed products and higher costs associated with being a public company. These costs were partially offset by a decrease in share based compensation related to stock options issued to our employees and consultants of $203,946 and a reduction of costs related to our initial public offering, which was completed in June 2007, of $128,020. We expect general and administrative expenses to increase as a result of the need to hire additional administrative personnel and due to higher legal, accounting, compliance and related expenses associated with being a public company.

Interest Income. Interest income was $90,124 for the quarter ended June 30, 2008, compared with $66,655 for the same period in 2007. This $23,469 increase was due to higher average cash balances due to completion of our initial public offering completed in June 2007, and higher rates of return during the period ending June 30, 2008.

Interest Expense. Interest expense was $93 for the quarter ended June 30, 2008 and $14,506 for the same period in the preceding year. Prior to our public offering, this expense consisted largely of a fixed amount on notes payable from our stockholders. The notes payable and accrued interest related to these notes payable was converted into shares of our common stock upon the closing of our initial public offering. Refer to Liquidity and Capital Resources below for further discussion regarding this matter.

Income Taxes. As of June 30, 2008 and 2007, a full valuation allowance has been recorded for the deferred tax assets since we do not believe the recoverability of the deferred income tax assets in the near future is more likely then not. Accordingly, an income tax provision/benefit has not been recognized during the quarters ended June 30, 2008 and 2007.

Six Months Ended June 30, 2008 and June 30, 2007

Revenues. Revenues were $3,726,379 for the six-months ended June 30, 2008, as compared to $3,115,378 for the comparable period in 2007, an increase of $611,001, or 19.6%. This growth was generated by revenue from our existing pharmaceutical company contracts. For the six-months ended June 30, 2008, two of our clients, GSK and Taiho, accounted for approximately 94% of our revenue, as compared to approximately 74% of our revenue for the six-months ended June 30, 2007.

Cost of Revenues. Cost of revenues for the six-month period ended June 30, 2008 were $1,824,099 as compared to $2,006,152 for the six-month period ended June 30, 2007, a decrease of $182,053 or 9%. The decrease resulted from a decrease in expense associated with the issuance of stock options to employees and consultants of $123,313 and a decrease in costs associsted with the processing of fluorescence in situ hybridization assays of $284,642 partially offset by increased lab supply and reagent costs of $151,942, increased license fees of $44,355 and increased costs associated with equipment depreciation, warranties and repairs of $38,002.

Research and Development Expenses. Research and development expenses were $1,308,544 for the six-month period ending June 30, 2008, as compared to $1,237,215 for the same period in 2007, an increase of $71,329 or 6%. This decrease resulted primarily from a decrease in share-based compensation related to stock options issued to employees and consultants of $155,963, a decrease in equipment related costs of $40,208, a reduction in laboratory supplies and reagents of $32,743, partially offset by business consulting costs of $130,704. We expect research and development expenses to increase as we work to develop additional aspects of our technology and to study diagnostic indicators for various forms of cancer.

General and Administrative Expenses. General and administrative expenses totaled $4,729,356 for the six-month period ended June 30, 2008, as compared to $3,187,882 for the comparable period in 2007, an increase of $1,541,474 or 48%. This increase resulted primarily from $588,943 in expenses incurred to operate our laboratory in Scotland which costs began in April, 2007 an increase in legal fees of $323,876, increased personnel costs of $299,585, increased business consulting expenses of $326,293 related to the marketing of our new products and costs associated with being a public company, and an increase in contract and recruitment services of $103,158. We expect general and administrative expenses to increase as a result of the need to hire additional administrative personnel and due to higher legal, accounting, compliance and related expenses associated with being a public company.

Interest Income. Interest income was $243,296 for the six-month period ended June 30, 2008, compared with $108,331 for the same period in 2007. This $134,965 increase was due to higher average cash balances due to the completion of our initial public offering in June 2007, and higher rates of return during the period ending June 30, 2008.

Interest Expense. Interest expense was $2,969 for the six-month period ended June 30, 2008 and $26,756 for the same period in the preceding year. Prior to our initial public offering this expense consisted largely of a fixed amount on notes payable from our stockholders. The accrued interest related to these notes payable was converted into shares of our common stock upon the closing of our initial public offering. Refer to Liquidity and Capital Resources below for further discussion regarding this matter.

Income Taxes. As of June 30, 2007 and June 30, 2008, a full valuation allowance has been recorded for the deferred tax assets since we do not believe the recoverability of the deferred income tax assets in the near future is more likely then not. Accordingly, an income tax provision/benefit has not been recognized during the six months ended June 30, 2007 and 2008.

Liquidity and Capital Resources

We incurred net losses of $3,242,365 and $3,896,719 during the quarter ended June 30, 2007 and the quarter ended June 30, 2008, respectively. Since our inception in September 1999, we have incurred cumulative losses and as of June 30, 2008, we had an accumulated deficit of $24,216,910. We expect that our research and development, and general and administrative expenses will continue to increase and, as a result, we will need to generate significant revenues to achieve profitability.

We expect to use our capital to fund research and development and to make capital expenditures to keep pace with the expansion of our research and development programs and to scale up our commercial operations. The amount and timing of actual expenditures may vary significantly depending upon a number of factors, such as the progress of our product development, regulatory requirements, commercialization efforts, and the amount of cash used by operations. We expect that we will continue to generate revenue through our pharmacogenomic testing services business provided to pharmaceutical companies, but these revenues are not guaranteed and are not expected to substantially offset the costs associated with our expansion efforts.

We lease office and laboratory space for our location in Los Angeles under noncancelable operating leases that expire through March 2010. Additionally, in 2007, the Company entered into an agreement to lease office and laboratory space for our operations in Scotland. This is an operating lease which expires in March, 2010. Total rent expense was $281,214 and $317,163 for the six months ended June 30, 2007 and 2008, respectively. Future minimum lease payments aggregate to approximately $1,205,486 over the next three years through the expiration of the leases in 2010. We also lease 180 sq ft of space at 103 South Carroll Street, Suite 2b, Fredrick, Maryland 21701, for administrative purposes. This lease expires on August 31, 2008.

Comparison of Six Months Ended June 30, 2008 and 2007

As of June 30, 2008, we had $15,128,848 in cash and cash equivalents, working capital of $12,994,311 and an accumulated deficit of $24,216,910.

Cash flows from operating activities

During the quarter ended June 30, 2008, the Company generated negative cash flows from operations of $1,268,218 compared to negative cash flows of $1,284,085 from operations in the quarter ended June 30, 2007. The main factors for the decrease of $15,867 are related to a combination of a decrease in receivables, a decrease in prepaid expenses, accounts payable, accrued expenses, accrued payroll, bonus and related liabilities, and deferred revenue.

The decrease in accounts receivable, of $3,573,392, related mainly to one receivable related to an amendment entered into in the fourth quarter of 2007 to the contract with GSK Bio, of $3,059,597, which was received in the first quarter. The Company has not entered into any new agreements in the six months ended June 30, 2008 that require substantial down payments prior to services rendered.

In addition, the Company has had a decrease in deferred revenue of $2,394,056 related to an decrease in advance billings to its customers, along with the recognition of $3,112,899 in deferred revenue for the six months ended June 30, 2008.

The decrease in prepaid expenses and accrued expenses is related to the completion of the IPO process of which the Company was incurring prepaid IPO costs for the first six months of the year ended December 31, 2007, and were offset against the proceeds of our IPO, in June 2007. The current effect of cash outlays for prepaid expenses is related to the Company's insurance policies.

The change in accrued expenses from the three months ended June 30, 2007 compared to June 30, 2008 is due to less expenses being incurred as a result of the completion of the IPO process in June 2007, which resulted in one time charges that were reimbursed with the proceeds of the IPO. The consistency related to accounts payable is due to the ability of the Company to pay its . . .