UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C.20549
  
  FORM 10-K
  (Mark One)
 x
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2010ORo
TRANSITION REPORT UNDER TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from                    to
  Commission File No. 333-62216
  
 
 HEALTH DISCOVERY CORPORATION
 (Name of Registrant as Specified in its charter)
  Georgia

74-3002154(State or other jurisdiction of incorporation or

organization)

(I.R.S. Employer Identification No.)2 East Bryan Street, Suite 610

Savannah, Georgia

31401(Address of principal executive offices)

(Zip Code)
  (912) 443-1987(Registrant’s telephone number, including area code)Securities Registered Pursuant to Section 12 (b) of the Exchange Act:NoneSecurities Registered Pursuant to Section 12 (g) of the Act:None
  Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
  Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes o No x
  Indicate by check mark whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
  Indicate by check mark whether the registrant has submitted electronically and posted on its Web site, 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 o No o
 
 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained in this form, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
  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 definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 Large Accelerated Filer
o
Accelerated Filer oNon-accelerated Filer
o
Smaller Reporting Company x
 
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12(b)-2 of the Exchange Act). Yes o No x
  The aggregate market value of the voting common stock held by non-affiliates as of June 30, 2010 was approximately $29,277,720.
  As of March 31, 2011, there were 229,475,747 shares of common stock outstanding, no shares of Series A Preferred Stock outstanding, and 18,777,675 shares of Series B Preferred Stock are outstanding.
  
 
  HEALTH DISCOVERY CORPORATION
  FORM 10-K
  For the Fiscal Year Ended December 31, 2010
  Table of Contents
 Page No.PART I




1ITEM 1.

Business


1ITEM 1A.

Risk Factors


18ITEM 1B.

Unresolved Staff Comments


27ITEM 2.

Properties


27ITEM 3.

Legal Proceedings


27ITEM 4.

(Removed and Reserved)


27PART II




27ITEM 5.

Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities


27ITEM 6.

Selected Financial Data


29ITEM 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations


29ITEM 7A.

Quantitative and Qualitative Disclosures About Market Risk


40ITEM 8.

Financial Statements and Supplementary Data


40ITEM 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure


40ITEM 9A.

Controls and Procedures


41ITEM 9B.

Other Information


42PART III




42ITEM 10.

Directors, Executive Officers and Corporate Governance


42ITEM 11.

Executive Compensation


46ITEM 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters


49ITEM 13.

Certain Relationships and Related Transactions, and Director Independence


50ITEM 14.

Principal Accounting Fees and Services


50PART IV




51ITEM 15.

Exhibits, Financial Statement Schedules


51SIGNATURES


54
  i
 PART I
  ITEM 1. BUSINESS
  Our History
  We were organized under the name Direct Wireless Communications, Inc. in April 2001 by Direct Wireless Corporation, which licensed to us its technology for a wireless telephone.  In October 2001, Direct Wireless Corporation, then our sole stockholder, pursuant to an effective registration statement under the Securities Act of 1933, distributed its entire holdings of our common stock as a stock dividend to its stockholders.  As a result of the dividend, Direct Wireless Corporation ceased to own any of our equity securities.  The negative events that occurred over the next several years in the communications industry made it difficult for us to fund the advancement of our communication platform.  As a result, we made the decision to strategically change the overall direction of our intended business activities.
  On August 26, 2003, we acquired all of the assets of The Barnhill Group, LLC, which was owned by Stephen D. Barnhill, M.D.  Dr. Barnhill is a physician trained in laboratory medicine and clinical pathology.  He developed artificial intelligence and pattern recognition computational techniques used today in medicine, genomics, proteomics, diagnostics, drug discovery and other fields of scientific endeavor.  Following the acquisition, Dr. Barnhill became our Chief Executive Officer and Chairman of our Board of Directors.  Also, immediately following our acquisition of the assets of The Barnhill Group, LLC and the change in strategic direction of the Company, our licensing rights to the telecommunications technology previously granted by Direct Wireless Corporation were terminated and all payment obligations to Direct Wireless Corporation were terminated.
  We amended our charter to change our name to Health Discovery Corporation (“HDC” or the “Company”) on November 6, 2003, at which time the new trading symbol (HDVY) became effective.
  On December 30, 2003, we acquired the assets of Fractal Genomics, LLC, a company with patented Fractal Genomics Modeling (“FGM”) software, through the issuance of 3,825,000 common shares of the Company and the issuance of a $500,000 note payable, all of which has been paid.
  On July 30, 2004, we began purchasing rights to a portfolio of 71 patents and pending patent applications, including patents on the use of Support Vector Machines, or SVMs, and other machine learning tools useful for diagnostic and drug discovery (the “SVM Portfolio”).  On May 6, 2005, we acquired the remaining interest in the SVM Portfolio from a group of unrelated third parties.
  Effective September 26, 2004, we were assigned a patent license agreement with Lucent Technologies GRL Corporation (“Lucent”). The patent license agreement is associated with the SVM Portfolio. We agreed to pay minimum royalty fees to Lucent, which increases based on the revenue of each licensed product that is sold, leased, or put into use by the Company. The license granted will continue for the entire unexpired term of Lucent’s patents.
  On July 12, 2007, we completed our reincorporation in Georgia by effecting a conversion in our legal domicile from Texas to Georgia.  Our business, assets, liabilities, net worth and headquarters were unchanged as a result of the conversion, and our directors and officers prior to the conversion continued to serve after the conversion.  In connection with the conversion, the Company’s shares were converted on a one-for-one basis.
  On October 9, 2007, we amended our Articles of Incorporation to set forth the rights and preferences of the Series A Preferred Stock.  All outstanding shares of Series A Preferred Stock were converted on a one-for-one basis into shares of our Common Stock, no par value (the “Common Stock”) on November 4, 2009.
 
 On March 4, 2008, we formed two wholly owned subsidiaries, SVM Technology Inc., a Georgia corporation, and SVM Technology Inc., a Delaware corporation.  We anticipate that we will use each of these subsidiaries to expand our business model by applying SVM technology outside of scientific discovery in the healthcare arena.
  On March 30, 2009, we amended our Articles of Incorporation to provide the rights and preferences of the Series B Preferred Stock, including the right to receive dividends, including special dividends, the right to vote on matters presented to holders of Common Stock, a preference right in the event of liquidation, and the right to convert the Series B Preferred Stock into Common Stock.  On November 13, 2009 we further amended and restated our Articles of Incorporation to provide for the rights and preferences of the Series B Preferred Stock as more fully described on the Amended and Restated Articles of Amendment to Articles of Incorporation incorporated by reference to this Form 10-K as Exhibit 3.1(c).
  1
  Our Company Overview
  HDC is a pattern recognition company that uses advanced mathematical techniques to analyze large amounts of data to uncover patterns that might otherwise be undetectable.  The Company operates primarily in the emerging field of molecular diagnostics where such tools are critical to scientific discovery.  The terms artificialintelligence and machine learning are sometimes used to describe pattern recognition tools.
  HDC’s mission is to use its patents, intellectual prowess, and clinical partnerships principally to identify patterns that can advance the science of medicine, as well as to advance the effective use of our technology in other diverse business disciplines, including the high-tech, financial, and homeland security markets.
  Our historical foundation lies in the molecular diagnostics field where we have made a number of important discoveries that may play a critical role in developing more personalized approaches to the diagnosis and treatment of certain diseases.  However, our SVM assets in particular have broad applicability in many other fields.  Intelligently applied, HDC’s pattern recognition technology can be a portal between enormous amounts of otherwise undecipherable data and truly meaningful discovery.
  Our Company’s principal asset is its intellectual property which includes advanced mathematical algorithms called Support Vector Machines (SVM) and Fractal Genomic Modeling (FGM), as well as biomarkers that we discovered by applying our SVM and FGM techniques to complex genetic and proteomic data.  Biomarkers are biological indicators or genetic expression signatures of certain disease states.  Our intellectual property is protected by more than 88patents that have been issued or are currently pending around the world.
  Our business model has evolved over time to respond to business trends that intersect with our technological expertise and our capacity to professionally manage these opportunities.  In the beginning, we sought only to use our SVMs internally in order to discover and license our biomarker signatures to various diagnostic and pharmaceutical companies.  Today, our commercialization efforts include: utilization of our discoveries and knowledge to help develop biomarkers for use as companion diagnostics, surrogate biomarkers, and diagnostic and prognostic predictive tests; licensure of the SVM and FGM technologies directly to diagnostic and pharmaceutical companies; and, the formation of new ventures with domain experts in other fields where our pattern recognition technology holds commercial promise.
   Our Principal Market
  The principal healthcare market for our pattern recognition technology and biomarker discoveries is medical diagnostics, particularly the rapidly growing field of molecular diagnostics.  The market consists of two basic types of diagnostic procedures: in vitro tests performed on a patient’s fluid or tissue samples and in vivo tests performed directly on the body, including blood pressure monitoring and imaging analysis such as x-rays.  In vitrodiagnostics (IVD) can be further divided into several major segments, including clinical chemistry, immunochemistry, hematology/cytometry, microbiology, and molecular diagnostics.
 
 According to a Visiongain Pharmaceutical Report, the IVD portion of the diagnostics market currently accounts for over $31 billion in sales worldwide.  Today, the molecular diagnostics segment represents a fraction of the IVD revenues with about $2.5 billion in sales, but it is widely considered to be the fastest growing segment, estimated at a 20-25% compounded annual growth rate, mainly in the U.S. and EU markets, versus 6-7% for IVD as a whole.  It is difficult to accurately assess the size of this segment since many countries do not have reference laboratories external to hospitals.  Areas of particular growth include infectious diseases, oncology, genetic diseases, and pharmacogenetic analyses.  Companies involved in this space include several major pharmaceutical and diversified corporations, including Roche Holdings Ltd., Abbott Laboratories, Inc., and Johnson & Johnson. Siemens AG and General Electric Company operate medical imaging segments that are expanding in diagnostics.  Other market players include large technology companies like Becton, Dickinson and Company, Beckman Coulter, Inc. and Bio-Rad Laboratories, Inc.
  IVDs have been established as effective tools for all aspects of disease management, especially in areas of unmet clinical need.  Such tests have been developed for screening and prognosis as well as for applications, such as determination of genetic predisposition to disease, detection of presymptomatic disease, and prediction of individual drug response.
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  Molecular Diagnostics
  Within the overall IVD market, the molecular diagnostics segment is expected to expand dramatically, largely attributable to advances in genomics and proteomics.Primary market drivers include the addition of new diagnostic tests in high volume testing areas coupled with the introduction of new instrumentation that provide greater ease, speed, and quality in test performance.  Given its annualized growth rate, the potential for molecular diagnostics is particularly impressive in the U.S., which represents the largest commercial market with the most favorable conditions for entry and marketing.
  Borrowing from the two disciplines of genomics and proteomics, molecular diagnostics categorizes cancer and other diseases using technology such as mass spectrometry and gene chips.  Genomics is the study of all the genes in a cell or organism, and proteomics is the study of all the proteins in a cell or organism.  Molecular diagnostics determines how these genes and proteins interact in patients by focusing on patterns in different types of healthy and diseased patient cells.  Molecular diagnostics uncover these genomic and proteomic changes and capture this information as expression patterns.  Also called molecular signatures, these expression patterns improve clinicians’ ability to diagnose cancer when it is less advanced, predict which patients will respond to certain treatments, predict cancer recurrence risk, and select appropriate treatment for individual patients.
  Molecular diagnostics can facilitate early, accurate screening and prediction of diseases in their asymptomatic stages, years before symptoms manifest or diseases actually begin.  This allows intervention to begin earlier, perhaps preventing the disease entirely.  Early intervention will allow the healthcare system to encompass both preventative and reactive medicine, improving overall healthcare efficiency and possibly reducing systemic healthcare expenditures.
  The molecular diagnostics industry is an increasingly powerful healthcare participant with tremendous potential.  It is characterized by a very diverse, constantly changing technology base that continuously produces new opportunities and applications.  Advances in polymerase chain reaction (“PCR”), multiplexing, sequencing and other technologies are propelling both new and old companies forward with novel capabilities.Similarly, a growing understanding of the molecular basis of cancer and other chronic diseases has awakened new realms of medicine to the possibilities of molecular diagnostic testing.
  Clinicians have discovered that molecular diagnostics have many uses beyond just the creation of new screening and diagnostic tools.  Expression patterns can also provide information for the design of new cancer treatments, monitor the treatment’s effectiveness as it is studied in a clinical trial, and even predict the patient’s response to a new treatment.  In addition to its importance in addressing the many kinds of cancer, molecular diagnostics will likely become an important technology for detecting resistance to antibiotics, a major hazard in the hospital setting.  In the future, molecular tests should be able to determine within two to three hours not only the nature of an infection, but also therapeutic selection and any potential resistance.
  The molecular diagnostics market as a whole is experiencing growth, rapidly changing technology and intense competition.  New tests and new instruments to perform automated analysis continue to expand the capabilities of companies in this industry.  The identification and validation of novel genes, gene products, and biomarkers results in a potential market for diagnostic tests to identify such genes, gene products and biomarkers.  The market includes sales of reagents, instruments, and kits to clinical laboratories and research reagents that can be used by labs to develop their own in-house diagnostic tests.  It also includes testing services by those clinical labs that have developed their own products, plus diagnostics companies that operate their own branded, certified testing services.
  Molecular diagnostic tests typically analyze DNA, RNA, or protein biomarkers (analytes) to identify a disease, determine its course, evaluate response to therapy, or predict individual predisposition to a disease.  The techniques applied involve analysis of DNA sequences, DNA methylation patterns, gene expression profiles, proteins, protein expression, or combinations of these biomarkers.  Such biomarkers provide direct information about genotypic and/or phenotypic changes associated with specific diseases or responses to treatment.  Biomarker analysis has also become an important tool in drug discovery, preclinical drug development, and patient monitoring during clinical trials.
  Most molecular diagnostics currently on the market are primarily single-analyte tests involving the detection of a single gene or protein.  However, many disease-related processes are multifactorial, involving the abnormal expression of multiple genes or proteins.  Second-generation molecular diagnostics are anticipated to utilize novel detection technologies and multiplexing platforms to allow the measurement of a large number of analytes simultaneously.  These innovations within the industry will increasingly utilize multiplexing platforms such as DNA microarrays that perform parallel biomarker analysis.
 
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  The market has been driven by transition to fully automated systems, real time amplification, and growing development of point-of-care platforms.  Industry experts estimate that future growth will stem from emerging applications like genotyping for identifying drug resistant strains; bioterrorism testing applications within infectious disease; disease diagnostics and prognostic assays for disease applications like sepsis and nosocomial infections, such as MRSA, cancer, cardiovascular disease, and Alzheimer’s disease; diagnosis of inherited disorders; and theranostics companion diagnostics.
  Genomic testing to determine diagnosis, therapeutic selection and response, and preventative measures is an important segment of the overall IVD market.  Although this segment is small today, it is an extremely fast-growing component.
 
 Using companion diagnostics in patient care can substantially improve patient outcomes and pave the way for more personalized, targeted medicine by reducing both misdiagnoses and adverse reactions, and by eliminating unnecessary and expensive downstream tests.  Today, patient dosage levels are based on age, sex, and weight, as determined by empirical studies. However, specific drug metabolism may be as individualized as one’s fingerprint.  In the future, molecular diagnostics may be able to direct physicians to the right drugs for every patient, no matter what the illness.
  This trend towards personalized medicine may ultimately lead to the reduction of overall healthcare expenditures.  What is known as a surrogatemolecular marker may now be substituted for the lengthy process of comparing the effects of a prospective new drug versus a placebo on the ultimate outcome of a disease.  As a result, a drug’s effectiveness against the disease process in question may be monitored more efficiently by evaluating the presence or absence of a specific biomarker, thereby avoiding failures late in the research and development process as well as the threat of recalls.  One example of the successful application of biomarker data to therapeutic evaluation is the use of blood cholesterol levels to evaluate the effectiveness of cholesterol lowering drugs.  This approach has the potential for creating a revolutionary new paradigm in the conduct of clinical trials worldwide.
  From a demographic standpoint, 12% of the U.S. population was 65 years old or older in 2000. By 2030, that portion of the population is anticipated to grow to 20%, burdening the healthcare system with increased numbers of cardiovascular, neurological, and other age-related diseases.   Age-related conditions are expected to contribute to the health care market that may provide an opportunity to market greater product development and molecular tests.
  Demand for diagnostics addressing the pharmacogenetic testing segment (i.e. companion diagnostics and surrogate biomarkers) are expected to drive market growth in the years ahead.  Pharmacogenetics broadly relates to the study of genetic variations and their application to drug discovery to provide personalized therapy.  Currently the second largest market sector behind diagnostics for infectious diseases, the pharmacogenetic sector of the molecular diagnostics market is projected to grow rapidly.
  The Role of HDC’s Technology in Molecular Diagnostics
  Our pattern recognition technology offers pharmaceutical companies a key tool as they approach drug discovery in this new era of personalized medicine.  Accordingly, our marketing efforts are focused on utilizing our technology in partnership with many of the world’s leading pharmaceutical and life-sciences companies.  Our primary commercialization strategy for our technology and discoveries is to enter into both licensing agreements and joint development opportunities that feature up-front license fees, fee-for-service development revenue, milestone payments, and royalty streams.  We believe the pharmaceutical market offers us a promising commercial opportunity for the application of our technology, as the pharmaceutical industry is characterized by costly R&D efforts to create new patent-protected products.
  The use of HDC’s SVM technology and our discovered biomarkers may help pharmaceutical companies develop and evaluate new drugs and medical therapies in less time and at lower cost.  According to the lobby group PhRMA, only 1 of every 10,000 potential medicines investigated by America’s drug companies survives the research and development process and is approved for patient use by the U.S. Food and Drug Administration (FDA).  On average, the drug developmental process can take up to 15 years in research and development, with costs approaching many hundreds of millions of dollars. This extended timeframe and enormous expense has led to an emphasis on the development of “blockbuster” drugs.
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  Within the drug discovery R&D process, biomarkers like ours can help pharmaceutical companies identify disease targets and pathways and validate mechanisms of drug action.  They may also serve as pharmacodynamic indicators of drug activity, drug response, and drug toxicity in clinical development.  Biomarkers may also be used to help avoid new drug failures in late stage trials.  Outside of the pharmaceutical market, the use of biomarkers can result in earlier detection of disease, and improved prognosis of therapeutic outcome.
  We consistently work to influence the evolving relationship between diagnostics and monitoring patients for therapeutic outcome.  In February 2007, the FDA provided 510(k) clearance for MammoPrint, Agendia B.V.’s multi-gene expression breast cancer prognosis test.  We believe this indicates the acceptance of the field of molecular diagnostics and highlighted the growing importance of personalized medicine.  In particular, the advent of molecular diagnostics has led to the possibility of a completely new paradigm in the care of patients suffering from cancer and other diseases.
  Current diagnostic tools, such as blood marker-based immunoassays, imaging techniques, and biopsy analyses, provide valuable information and have played an important role in the successful treatment of cancer patients, but are not without limitations. We believe there is a market for advanced diagnostic and prognostic tests that can provide meaningful information, screen for cancer, detect early recurrence, and monitor progression and therapeutic response in real time.  HDC’s pattern recognition technology can play a critical role in the development of these tests because an advanced pattern recognition technique such as SVM technology could be required for this type of discovery.
  Working with recognized diagnostic and pharmaceutical partners, our goal is to develop a product line of newly discovered biomarker signatures and pathways that can be found in human genes and genetic variations, as well as gene, protein and metabolite expression differences.  In addition, we market our expertise in the design of clinical trials for companion diagnostics to substantiate the clinical validity and commercial utility of those biomarkers.  We also market the potent combination of our intellectual property and intellectual prowess to our prospective collaborative partners.  As inventors of the SVM technology, our world renowned mathematicians offer these companies an impressive development team for their drug discovery, diagnostic test or other applications.
  Our Technologies and Discoveries
  HDC owns a patent portfolio of machine learning technology, including certain pioneer patents on SVM.  We also have consulting arrangements with many of the physicians, clinical specialists and mathematicians responsible for developing and filing the pioneer neural network and SVM patents for the analysis of clinical data.
  The Company’s SVM technology is commonly considered within the context of artificial intelligence.  This is a branch of computer science concerned with giving computers the ability to perform functions normally associated with human intelligence, such as reasoning and optimization through experience. Machine learning is a type of artificial intelligence that enables the development of algorithms and techniques that allow computers to learn.  Pattern recognition is machine learning with a wide spectrum of applications including medical diagnosis, bioinformatics, classifying DNA sequences, detecting credit card fraud, stock market analysis, object recognition in computer vision, and robot locomotion.
 
 SVM Overview
  SVMs are mathematical algorithms that allow computers to sift through large, complex datasets to identify patterns.  SVMs are widely acknowledged for their ability to discover hidden relationships in these complex datasets.  With the ability to handle what is known as infinite dimensional space, SVMs are broadly considered to be superior to neural networks and other mathematical techniques.  SVM is a core machine learning technology with strong theoretical foundations and excellent empirical successes.
  Since their introduction in 1992, SVMs marked the beginning of a new era in the learning from examples paradigm in artificial intelligence. Rooted in the Statistical Learning Theory developed by Professor Vladimir Vapnik, a member of HDC’s Scientific Advisory Board, SVMs quickly gained attention from the math and science communities due to a number of theoretical and computational merits.  This development advanced a new framework for modeling learning algorithms.  Within this framework, the fields of machine learning and statistics were merged introducing powerful algorithms designed to handle the difficulties of prior computational techniques.
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  The new generation of learning algorithms that were developed based on this theory has proved to be remarkably resistant to the problems imposed by noisy data and high dimensionality. They are computationally efficient, have an inherent modular design that simplifies their implementation and analysis and allows the insertion of domain knowledge, and, more importantly, they have theoretical guarantees about their generalization ability.  SVMs have been validated in hundreds of independent academic publications and presentations.  In recognition for his work, Professor Vapnik received the prestigious Alexander von Humboldt Prize from the German government honoring foreign scientists and scholars for lifetime achievement.
  SVMs have become widely established as one of the leading approaches to pattern recognition and machine learning worldwide and are replacing neural networks in a variety of fields, including engineering, information retrieval and bioinformatics.  This technology has been incorporated into product and research applications by many biomedical, pharmaceutical, software, computer and financial companies.  Educational and research institutions throughout the world have successfully applied SVMs to a wide array of applications, including gene and protein expression analysis, medical image analysis, flow cytometry, and mass spectrometry.
  Recursive Feature Elimination - Support Vector Machine Overview
  Recursive Feature Elimination (RFE-SVM) is an application of SVM that was created by members of HDC’s science team to find discriminate relationships within clinical datasets, as well as within gene expression and proteomic datasets created from micro-arrays of tumor versus normal tissues. In general, SVMs identify patterns – for instance, a biomarker/genetic expression signature of a disease.  The RFE-SVM utilizes this pattern recognition capability to identify and rank order the data points that contribute most to the desired results.  The Company believes that its six RFE-SVM patents are currently the only RFE patents properly issued in the world.
  In March 2010, the U.S. Patent and Trademark Office issued Patent No. 7,685,077, which claims RFE-SVM, to Intel Corporation.  The Company believes that this patent was improperly granted and has filed a continuation application to provoke an interference proceeding in the U.S.P.T.O. to obtain an affirmation of the Company’s prior and exclusive rights to the RFE-SVM technology. In parallel, the Company is requesting that the U.S.P.T.O re-examine the Intel patent to properly consider the Company’s prior art and, in view of that prior art, withdraw the Intel patent.
  Using RFE-SVM, we have been able to access information in micro-array datasets that the most advanced bioinformatics techniques missed.  In one micro-array experiment, RFE-SVMs were able to filter irrelevant tissue-specific genes from those related to the malignancy. RFE-SVM has also been used to determine gene expression patterns that correlate to the severity of a disease, not just its existence.  It has been shown to improve both diagnosis and prognosis by providing physicians with an enhanced decision tool.  HDC scientists believe that these analytic methods are effective for finding genes and proteins implicated in several cancers, as well as in assisting with the pharmacogenetic and toxicological profiling of patients.  The RFE-SVM method is also capable of finding those specific genes and proteins that are unhindered by ever-increasing patent protection.
  Fractal Genomic Modeling Overview
  On September 30, 2003, we acquired the assets of Fractal Genomics, LLC, a company with patented FGM software.  The fractal technology is used to find discriminate relationships within clinical datasets as well as within gene expression datasets created from micro-arrays of disease versus normal tissues.
  The Fractal Genomic Modeling (“FGM”) data analysis technique has been shown to improve the mapping of genetic pathways involved in the diagnosis and prevention of certain diseases. HDC scientists feel that these analytic methods are effective for finding genes implicated in several cancers, HIV infection, lymphedema, Down’s syndrome, and a host of other diseases, as well as the pharmacogenetic profiling of patients.
  FGM technology is designed to study complex networks. A complex network can be made up of genes inside a living organism, web pages on the Internet, stocks within a financial market, or any group of objects or processes that appear to be connected together in some intricate way. FGM uses a new approach toward modeling network behavior to rapidly generate diagrams and software simulations that facilitate prediction and analysis of whatever process is your particular object of study. Two important concepts behind FGM technology are the notions of scale-free networks and self-similarity.
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  Our Scientific Advisory Board
  Our Scientific Advisory Board is comprised of scientists with vast experience in the fields of mathematics and medicine.  The members of the Scientific Advisory Board are Kary Mullis, Ph.D., winner of the Nobel Prize for Chemistry for discovering PCR (1993), Vladmir Vapnik, Ph.D., creator of SVMs and winner of the Humboldt Research Award, Isabelle Guyon, Ph.D., co-inventor of the first patent for SVMs, Nitesh Chawla, Ph.D., Assistant Professor in the Department of Computer Science and Engineering and Co-Director of the Interdisciplinary Center for Network Science and Applications at the University of Notre Dame, Ramananda K. Madyastha, M.D., Ph.D, recipient of the Raja Ravi Sher Singh of Kalsia Memorial Cancer Research Prize for outstanding contributions in the field of cancer research,  and Bernhard Scholköpf, Ph.D., director at the Max Plank Institute for Biological Cybernetics in Tubingen, Germany and an elected member of the Max Plank Society.
  Our Scientific Achievements
  Our Chief Executive Officer and members of our Scientific Advisory Board are experienced in the design, analysis and application of machine learning technology, having invented many of the concepts and methodologies used to exploit domain knowledge.  In addition, through pattern recognition, our Chief Executive Officer and members of our Scientific Advisory Board have identified and patent-protected biomarkers as possible treatment advances for several diseases, including prostate cancer, breast cancer, pancreatic cancer, Benign Prostatic Hyperplasia (BPH), colon cancer, and melanoma.
  Prostate Cancer
  The National Cancer Institute (NCI) estimates that more than 186,000 new cases of prostate cancer will be diagnosed in the U.S. in 2008, with more than 28,660 deaths.  There are approximately 50 million PSA tests performed worldwide each year, half of which are performed in the U.S.  The PSA test sells in the U.S. national clinical laboratories for approximately $100 per test.  In a peer-reviewed paper recently published in the New England Journal of Medicine, the PSA test was shown to be an ineffective prostate cancer screening test, leaving open the opportunity for a better test to replace the PSA test as a screening tool for prostate cancer.  The Company’s prostate cancer test was the subject of a peer-reviewed paper published in the August 2009 edition of UroToday International, a respected international urology journal.
  HDC has identified, patent-protected and recently licensed a genetic biomarker signature that identifies clinically significant high grade prostate cancer cells based on analysis of tissue samples.  Upon the achievement of successful validation, the Company’s test may be used to analyze patients with elevated PSA or abnormal rectal exams, with negative biopsy results to determine if there is genomic evidence of grade three or higher cancer cells present in biopsy tissue, indicating the presence of a cancer potentially missed by the biopsy.
  On July 31, 2007, we announced our alliance and licensing agreement with Clarient, Inc. (recently acquired by GE Healthcare) for development of a new molecular diagnostic test for prostate cancer based on our discovered prostate cancer biomarker signature.  During 2008, the Company and Clarient successfully completed all phases of the clinical trial process with the hope of achieving the statistical significance necessary to validate the ability to commercialize a test.  Results from the Phase I, Phase II and Phase III double-blinded clinical validation studies were completed at Clarient and published in the peer reviewed journal UroToday International. These results demonstrated a high success rate for identifying the presence of Grade 3 or higher prostate cancer cells (clinically significant cancer), as well as normal BPH (benign prostatic hyperplasia) cells.  Clarient has not yet reported any commercial sales to us.  Clarient has not been actively marketing the 4-gene prostate cancer test because pathologists, not urologists, are their primary client. Due to cash constraints, Clarient did not have the funding to create a separate sales force focused on urologists. With the recent GE Healthcare acquisition, combining In Vivo imaging and In Vitro molecular diagnostics is now a primary focus for Clarient/GE Healthcare and prostate cancer is one of the primary diseases in which we believe they plan to combine the modalities for better patient management. Although Clarient/GE Healthcare is not currently marketing the prostate cancer test, the test is available through Clarient’s PATHSiTETM virtual reporting tool and accessible to Clarient/GE Healthcare’s entire pathology network.
  7
  On January 30, 2009, we entered into a license agreement with Abbott Molecular Inc. (“Abbott”), pursuant to which, among other things, the Company granted Abbott a worldwide, exclusive, royalty-bearing license for in-vitro diagnostic rights to develop and commercialize reagent test kits for the Company’s prostate cancer molecular diagnostic tests in both biopsy tissue and urine.  We also granted Abbott a worldwide royalty bearing, co-exclusive license (co-exclusive with Quest) for developing and commercializing a laboratory developed urine based molecular diagnostic test (“LDT”) for clinically significant prostate cancer, which could be commercialized in a clinical laboratory and sold directly to physicians for their patients. Because Abbott is primarily in the In-Vitro Diagnostic (IVD) development business, Abbott may choose to develop, validate and commercialize the IVD version of the 4-gene prostate cancer test and not pursue the Laboratory Developed Test (LDT) development. If that is the case, we would ask Abbott to return the LDT rights to HDC. If Abbott returns the LDT rights to HDC, we will immediately begin licensing discussions with clinical laboratories in the US, Europe and China to pursue development, validation and commercialization of the LDT version of the HDC 4-gene prostate cancer test which potentially increases our global reach for commercialization of the LDT version of the test. Abbott paid a one-time initial signing fee of $100,000 and then reimbursed us $100,000 in development costs as required by the license agreement.  In addition, with respect to products subject to the license (the “Products”), Abbott will pay milestone payments to us upon achievement of the following events:  $250,000 upon completion of Phases 1 and 2 as described in the FDA Submission Plan; $250,000 upon completion of Phases3 and 4 as described in the FDASubmission Plan; $500,000 upon submission of either a 510(k) or Pre-Market Approval (“PMA”) submission to the FDA; and $500,000 upon the receipt of a written notification by the FDA of the approval of the applicable 510(k) or PMA submission. We will also receive royalty payments of 10% of Abbott’s Net Sales for the Products with medical utility claims for use on prostate biopsy tissue samples, and 5% of Abbott’s Net Sales for the Products with medical utility claims for use on urine samples. In addition to the royalty payments, with respect to the urine based products, Abbott will also pay us certain amounts upon the achievement of certain milestones as follows:  after the sale of 50,000 tests in a calendar year, a milestone payment of $200,000; after a sale of 200,000 tests in a calendar year, a milestone payment of $750,000; and after a sale of 500,000 tests in a calendar year, a milestone payment of $1,500,000.  ”Net Sales” is equal to Abbott’s gross revenue less 5%, subject to adjustments as described in the license.
  We have now completed the Abbott clinical trial for Phase 1 and 2 of the urine prostate cancer test validation process. In addition, we have completed all clinical laboratory genomic testing on the clinical trial specimens at MD Anderson Cancer Center. We have fully analyzed the data and are pleased with the results. We have met with and submitted all of our results to Abbott for their independent analysis and are awaiting their comments. If Abbott is satisfied with these results, we expect to receive the $250,000 milestone payment for completion of Phase 1 and 2 and move on to Phase 3 and 4 as described in the FDA Submission Plan.  If  for some reason Abbott chooses not to move forward, we will immediately begin licensing discussions with other international IVD companies, as well as, clinical laboratories in the US, Europe and China.
  On January 30, 2009, we entered into a license agreement with Quest, pursuant to which the Company granted to Quest a non-exclusive, royalty bearing license for developing and commercializing a urine-based LDT for clinically significant prostate cancer which could be commercialized and sold by Quest’s clinical laboratories directly to physicians for their patients.  In consideration of granting the license to Quest, Quest paid a license fee to the Company and will pay ongoing royalty payments, certain milestone payments, and development fees.
  Quest Diagnostics has now completed the urine prostate cancer test clinical trial described in our Licensing and Development Agreement with them. In addition, Quest has completed all clinical laboratory genomic testing on the clinical trial specimens. The clinical trial has now been un-blinded and the patient information has been supplied to Quest.  Quest is now in the process of fully analyzing the data and validating the results.
  The Company is continuing to advance the development of the urine based prostate cancer test. The Company is pleased with the data and results completed to date.  In a recent clinical trial, we have now demonstrated that that the 4-gene urine test for clinically significant prostate cancer outperformed serum PSA, Digital Rectal Exam (DRE), as well as, published data for PCA3 and TMPRSS-ERG assays for the early detection of prostate cancer.
  Additionally, preliminary testing has demonstrated that mRNA transcripts from the four genes can be detected in the plasma (blood) of patients with benign prostate hyperplasia (BPH) as well as from patients with prostate cancer.  The levels in prostate cancer have been shown to be different from those in benign prostate hyperplasia (BPH). Further validation and a larger scale study are needed to confirm this preliminary observation and to establish correlation with clinical behaviors.
  We continue to progress towards the goal of commercialization of the 4-gene urine-based prostate cancer test at Quest and with Abbott  Upon completion of development and validation to the satisfaction of Quest, the 4-gene urine test for prostate cancer can be immediately commercializedas an LDT under the current CLIA regulations.Upon regulatory approval, Abbott could immediately begin commercialization and sale of the individual In-VitroDiagnostic (IVD) test kits to additional national, regional and local clinical laboratories, as well as hospital, academic and physician laboratories around the world.
  8
  Breast Cancer
  For women, breast cancer is the most common non-skin cancer and the second leading cause of cancer-related death in the United States.  An estimated 221,000 women are diagnosed with breast cancer in the United States each year, and one in eight U.S. women will have breast cancer in her lifetime.  However, death rates from breast cancer have been declining since 1990, and these decreases are believed to be the result, in part, of earlier detection and improved treatment.  Mammography remains the best method of early breast cancer detection.  According to studies cited by the National Cancer Institute, 10-20% of breast cancers detected by a physical exam were missed by a film mammogram.  For this reason, there have been extensive research efforts to improve mammography.
  The FDA reports that there are about 33.5 million mammography procedures performed each year in the United States.  Data from 2000-2002 show that about 70 percent of all mammograms that are performed annually are for screening purposes (to detect cancer as opposed to following cancer once it has been diagnosed). This translates to about 23.5 million screening procedures every year.  Currently, the breast cancer prognostic market is projected to be about $300 to $400 million.
  Detecting malignancy in mammograms can be very difficult. Individual mammograms are unique and there can be great variation within “normal” images.  Unlike CT scans and MRIs, mammograms are not cross-sectional images.  Basically, a mammogram produces a two-dimensional picture of a three-dimensional object.  The projection from 3D to 2D and the resulting overlaps on the images may interfere with the recognition of the distinguishing features, which are often very subtle.  The rules for differentiating the benign and malignant cases are vague and not easily formulated.
 
 One way to reduce reading errors is to have two radiologists read the same mammograms independently. However, in most health care systems, it is not feasible to implement such a two-radiologist reading process.  A computer-assisted detection (CAD) system serving as a second reader is therefore an attractive option, and CAD is currently reimbursed by both insurance companies and Medicare.
  Both digital and film mammography use X-rays to produce an image of the breast.  In film mammography, which has been used for over thirty-five years, the image is created directly on a film.  While standard film mammography is very good, it is less sensitive for women who have dense breasts.  A major limitation of film mammography is the film itself.  Once a film mammogram is obtained, it cannot be significantly altered; if the film is underexposed, for example, contrast is lost and cannot be regained.
  Digital mammography takes an electronic image of the breast and stores it directly in a computer. Digital mammography uses less radiation than film mammography and allows for improvement in image storage and transmission because images can be stored and sent electronically.  Radiologists can use software to help interpret digital mammograms.
  HDC licensed its two breast cancer diagnostic technologies (MammoSIGHT, for detecting malignancy in mammograms and MetastaSIGHT, for identifying circulating tumor cells in the blood) to Smart Personalized Medicine, LLC (“SPM”) pursuant to an amended license agreement in exchange for a 20% ownership position in SPM and a per test royalty up to 7.5% based on net proceeds received from the sale of the new breast cancer prognostic test other than by Quest Diagnostics Incorporated (“Quest”).  The detection component of these technologies finds the areas of particular interest in the image and separates these objects from the background.  The feature extraction component formulates numerical values relevant to the classification task from the segmented objects.  HDC’s patented technology can be used within all diagnostic imaging radiology techniques, including PET scans, CT scans, and MRIs.
  Effective March 11, 2010, the Company and SPM amended (the “Amendment”) the original License Agreement, dated August 22, 2008 (the “SPM License Agreement”), pursuant to which we had licensed our intellectual property to SPM for use in the development of breast cancer products. As amended, we will receive all payments under the Quest Development Agreement and License Agreement directly from Quest, and SPM will not be required to make any additional payments to the Company related to either such agreement.  With respect to SPM proceeds received unrelated to the arrangement with Quest, we will receive a per test royalty up to 7.5% based on net proceeds received from a Test (as defined in the SPM License Agreement) and such additional allocation and distribution of license fees and royalties received from future sublicenses with third parties as may be agreed.  In addition, our equity percentage interest in SPM was increased from 15% to 20%, and such equity percentage interest may be diluted only to the same extent and in the same manner as each other initial equity percentage interest holder; provided, however, that when raising additional equity, SPM must obtain our prior written approval of the terms and conditions of such equity offering.  SPM expects that once the laboratory test is developed with Quest, it can provide physicians and their patients a way to better determine the probability of relapse, allowing patients with good prognosis results an opportunity to avoid unnecessary expensive and traumatic chemotherapy treatments.
  9
  On March 11, 2010, the Company, Quest and SPM entered into a Development Agreement (the “Quest Development Agreement”) pursuant to which the Company and SPM will assist Quest in the development of new laboratory tests for aiding in the selection of breast cancer therapies. The Company, SPM and Quest also entered a related Licensing Agreement (the “Quest License”).
  Pursuant to the Quest License, SPM granted a co-exclusive (with SPM) sublicense to utilize the Licensed Patent Rights to the extent necessary to enable Quest to develop Products and perform the Validation Work under the Quest Development Agreement. Quest has the right to use SPM’s Breast Cancer Database developed in association with a world renowned academic cancer center (the “Database”).  In consideration for the license, Quest has separately made payments to SPM and us. Such payments to us include a $500,000 “License Fee (which has been paid in full), License Maintenance Fees” equal to $8,750 for the first year and $17,500 for each year thereafter (with such fees being credited against the “Royalty Payments” described below), upon the publication of a study performed for the Validation Work an “Initial Product License Fee” of $125,000 for each of the first two Products, and “Royalty Payments” equal to 2.45% of the Net Sales of each Licensed Product (i.e., each breast cancer test) sold by Quest. Quest will reimburse SPM and us for costs incurred related to any Validation Work done with respect to a Product.
  Pursuant to the Quest License, in the event of a termination for cause by Quest prior to the termination of any products, Quest has the right to receive a refund of pro rata portion of the License Fee based on the ratio of the number of months from the date of termination until the eighteenth month anniversary of the agreement to such eighteenth month period.
 
 Pursuant to the Quest Development Agreement, we are required to use the support vector machine technology and other intellectual property and expertise licensed to SPM to analyze data for the development and/or validation of applications of clinical laboratory services, In Vitro Diagnostic kits, clinical trial services and the other elements of “Field” (collectively, the “Products”).
  In consideration for our efforts under the Quest Development Agreement, Quest agreed to pay us $375,000 in development fees of which $291,662 has been received by HDC, with $83,338 remaining to be paid under the contract. These amounts are in addition to the $500,000 License Fee previously received as described above. Quest timely paid the first seven development fee monthly installments; however, the final two installment payments have not been made as required under the agreement.
  A collaborative effort between SPM and HDC is underway at the MD Anderson Cancer Center (“MDACC”) in Houston, Texas.  The Principal Investigator at MDACC is completing the review of the breast cancer tissue blocks maintained in the tissue repository, to identify those subjects who meet the inclusion criteria for the study.  Once the tissue blocks have been identified for the study, they will be assessed for hormone and HER-2 protein receptor status and subjected to multi parameter protein and gene expression assays, followed by SVM based pattern recognition analysis to identify those features that best predict cancer recurrence, time to recurrence and overall patient survival.
  Pancreatic Cancer
  In February 2010, the Company entered into an agreement with the Pancreas, Biliary and Liver Surgery Center of New York (the “Pancreas Center”) to develop new molecular diagnostic tests for the early detection of pancreatic cancer. The Pancreas, Biliary and Liver Surgery Center is under the leadership of Drs. Michael Wayne, Franklin Kassim and Avram Cooperman.  Under the terms of the agreement, the Pancreas, Biliary and Liver Surgery Center will provide all specimens from their collected specimen banks, specimens on all new patients and all associated clinical and outcomes data. The specimens will include tissue, blood and urine.
  The Company’s relationship with the Pancreas Center continued without interruption, irrespective of the fact that Saint Vincent Catholic Medical Centers located in New York City, has opted to close its operations.  The Pancreas Center has affiliated with Beth Israel Medical Center and is expected to affiliate with other hospitals in the New York City region in the near future.
  10
  To date, over 55 fresh frozen pancreatic tissues with accompanying blood specimens have now been collected and stored for the genomic analysis.  We plan to perform both gene expression profiling and profiling of micro-RNAs on specimens from pancreatic cancers, cysts and pancreatitis tissues.  SVM based pattern recognition analysis will then be used to identify the features that can discriminate these three tissues.  We will then interrogate the blood specimens to quantitate the gene transcripts (mRNA) and micro-RNAs and establish a gene based test to permit the early detection of pancreatic cancer. The Company will use its patent protected SVM-based discovery technology and science team in an attempt to develop these new molecular diagnostic tests for pancreatic cancer in a similar fashion to the urine-based prostate cancer test developed by the Company and licensed for development and commercialization to Quest Diagnostics and Abbott on a royalty-based, world-wide co-exclusive basis.  The Company will own all of the intellectual property and commercialization rights to these newly discovered molecular diagnostic tests for pancreatic cancer. Now that the Company has these development pancreatic tissues collected and stored, we can advance our discussions to partner with a large clinical laboratory and a large diagnostic instrument company for development, marketing and commercialization of these new pancreatic cancer tests.
  Benign Prostatic Hyperplasia (BPH)
  BPH is a non-cancerous enlargement of the prostate gland that occurs as men age.  The enlargement often leads to obstruction in the flow of urine through the urethra that passes through the prostate gland. BPH is a common condition, representing a global treatment market of almost $4 billion annually growing by 12% per year in fixed-rate US dollar terms.  According to the National Institutes of Health (NIH), BPH affects more than 50% of men over age 60 and as many as 90% of men over the age of 70.  While BPH does not cause prostate cancer, both may be found together.
  HDC has identified and patent-protected a subset of genes that separates benign prostatic hyperplasia (BPH) from prostate cancer with a high degree of accuracy.  This same set of genes also separated BPH from normal tissue patterns, indicating that BPH is a disease with molecular characteristics of its own.  This discovery could be used to develop a new non-invasive diagnostic test for BPH, which does not currently exist, as well as a completely new type of therapy for patients with this disease.  This patent-protected gene set was developed in association with an international pharmaceutical company to be used as a surrogate biomarker for their clinical trial evaluating a new BPH drug.
  We have identified and patent protected fifty gene biomarkers representing 5 gene pathways involved with the development of benign prostatic hypertrophic disease (BPH).   All of these protein products of the genes are known to be secreted into the circulation or are highly likely to be secreted proteins from prostatic cells.  This blood protein test may be useful as companion diagnostic for use in clinical trials of new drug treatments. We intend to seek a strategic pharmaceutical partner, which has BPH drugs in the market currently or under development to finish development, finalize validation and commercialize a new molecular diagnostic test for BPH.
  Colon Cancer
  In the United States, colorectal cancer is the third most common cancer in men and women. The National Cancer Institute (NCI) estimates that more than 108,000 new cases of colon and rectal cancer will be diagnosed in the U.S. in 2008, with nearly 50,000 deaths.
  HDC has identified and patent-protected colon cancer-specific biomarkers that can be used in the development of diagnostic assays for cancer detection, disease discrimination, and even a potential vaccine.  The aim of this early biomarker discovery project was to define the gene expression patterns associated with colon cancer.  Our RFE-SVM served as an effective tool for sifting through the voluminous data of thousands of measurements to highlight only those genes that optimally contributed to the study focus.
  Melanoma
  In February 2010, we announced that we are developing a melanoma/skin cancer mobile phone application which will enable customers to take a picture of a mole, lesion or birthmark, send it to HDC, and receive a risk assessment for melanoma and other skin cancer on their mobile phone.  This first-ever melanoma/skin cancer mobile phone application using our SVM technology will employ sophisticated image analysis techniques using patent protected algorithms for evaluating moles, lesions and birthmarks.  Since mid-February 2010, the Company has made progress on our melanoma risk management mobile phone application. . We have selected Apple’s iPhone as our initial mobile platform and have been focused on tuning image capture and analysis capabilities for skin lesions and moles for that platform.   In addition to the images we used to successfully train our melanoma app, we have now licensed a set of skin lesions including melanomas from Johns Hopkins University known as Dermatlas. We processed all the melanoma images from Dermatlas and a subset of the benign moles using the iPhone app. The results indicate a high sensitivity and specificity. In addition, we have been able to successfully eliminate images that are not skin lesions with a 99% accuracy rate. The Company has initiated discussions with potential U.S. and non-U.S. laboratory partners, dermatologists and marketing partners.  A beta version of the app has been completed and is currently being tested in the field. A more advanced version of the app with features and a user interface optimized for consumer use is in the final stages of development.  In addition to the potential revenue generated from the app itself, we may generate revenue from skin biopsies being referred by our app for Dermatopathology review with our clinical laboratory partners. It is important for us to have our global clinical laboratory partnerships in place before formally launching the melanoma app so that we can maximize the revenue stream from our referrals. We continue to have these partnership discussions with clinical laboratories both inside the US and internationally.
  11
  Flow Cytometry, Cytogenetics, and Pap smear Imaging
  Management believes that our research agreement with a leading biotech company to develop an SVM-based diagnostic test to help interpret flow cell cytometry data for myelodysplastic syndrome (pre-leukemia) has resulted in a successful proof of concept. The Company is pleased with the development progress to date, and the Company is now in discussions with clinical laboratories capable of completing development, final validation and commercialization of the new diagnostic test for the interpretation of flow cytometry data.
  The Company is currently developing a software tool for the computer assisted analysis of chromosome abnormalities, referred to as cytogenetic analysis, using pattern recognition combined with image analysis techniques.  Innovative techniques for image processing are being developed to address the challenges in the cytogenetics product, which is to properly accommodate the variability of the chromosome images while retaining sensitivity to recognize subtle abnormalities in the chromosomes. The preprocessing techniques are designed to improve the performance of the subsequent SVM learning system. The initial implementation of the software system incorporating the new techniques is scheduled for validation in the second quarter of 2011. Large scale testing of the system is expected to start immediately after the software release. Performance data from the test will be collected and analyzed to guide the further improvements of the system. The Company is in discussions with a large national clinical laboratory for development, validation and commercialization of this new image analysis tool for cytogenetic analysis.
  We have developed a set of sophisticated image processing operations to isolate the potentially abnormal cells in a high resolution digitized Pap smear image. Features relevant to the recognition problem can be extracted from the segmented cells. A set of fundamental geometrical, statistical, and topological features have been defined. These features can be used to facilitate SVM training, with other high level classification systems.  The data generated to date supports the development a laboratory developed test (LDT) for the interpretation of Pap smear images.  We are in discussions with a clinical laboratory to develop, validate and commercialize the LDT version of this computer assisted Pap smear interpretation tool.
  SVM Capital, LLC
  In January 2007, SVM Capital, LLC was formed as a joint venture between HDC and Atlantic Alpha Strategies, LLC (“Atlantic Alpha”) to explore and exploit the potential applicability of our SVM technology to quantitative investment management techniques.  Atlantic Alpha’s management has over thirty years of experience in commodity and futures trading.  Atlantic Alpha reports that the SVM technology is now working well with dynamic time series for S&P data accumulated over the past fifty-eight years as well as a limited pilot program of real-time trading activity, and that the latest SVM-derived models generated by SVM Capital have successfully outperformed the static buy-and-hold model both in increased returns as well as in reduced risk.  After more than 2 years of successful live trading, Atlantic Alpha has now deployed the SVM K-2 model to over 30 securities.  These include nation ETF’s, large cap equities and commodities.  Atlantic Alpha is now exclusively trading SVM’s K-2 model and will begin offering this technology to the public via a new fund which began trading in January 2011.  HDC owns a 45% equity position in SVM Capital.
  Employees
  On December 31, 2010, we had 6 full time employees.
  Website Address
  Our corporate website address is www.HealthDiscoveryCorp.com.  To view our public filings from the home page, select the “Display SEC Filings” tab followed by “SEC Filings.”  This is a direct link to our filings with the Securities and Exchange Commission (“SEC”), including but not limited to our Annual Report of Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and any amendments to these reports.  These reports are accessible soon after we file them with the SEC.
  12
  Governmental Regulation
  Our business plan involves Biomarker Discoveryin the field of molecular diagnostics.  This early discovery process does not involve any governmental regulations or approvals.  If we are successful in licensing our discoveries to other companies, FDA approvals may be required before the ultimate product may be sold to consumers.  Our current plan is to require the companies licensing our discoveries or technologies to be responsible for the costs involved in such approvals.  If we are not successful in licensing these discoveries on these terms or choose to take these discoveries to market ourselves, we may then be subject to applicable FDA regulations and would then bear the costs of such approvals.
  We know of no current governmental regulations that will materially affect the Company’s current operations or products. However, if the FDA changes its current position, and decides to regulate laboratory developed tests (LDT’s) currently regulated by CLIA certification, this could materially affect the development costs and commercialization timelines for our products.
   Intellectual Property
  In connection with the SVM Acquisition, we obtained rights to the intellectual property within the “SVM portfolio” that currently consists of forty-seven patents which were or have since issued as well as thirty-seven other patent applications that are pending in the U.S. and elsewhere in the world.  The issued patents and pending applications in the SVM portfolio to date, including new applications that we have filed since acquiring the original IP, HDC are:
 Patent/Application No.

Title

Expiration DateU.S. Patent No. 6,128,608

Enhancing Knowledge Discovery Using Multiple Support Vector Machines

05/01/2019U.S. Patent No. 6,157,921

Enhancing Knowledge Discovery Using Support Vector Machines in a Distributed Network Environment

05/01/2019U.S. Patent No. 6,427,141

Enhancing Knowledge Discovery Using Multiple Support Vector Machines.

05/01/2019U.S. Patent No. 6,658,395

Enhancing Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector Machines.

05/01/2019U.S. Patent No. 6,714,925

System for Identifying Patterns in Biological Data Using a Distributed Network.

05/01/2019U.S. Patent No. 6,760,715

Enhancing Biological Knowledge Discovery Using Multiple Support Vector Machines.

05/01/2019U.S. Patent No. 6,789,069

Method of Identifying Patterns in Biological Systems and Method of Uses.

05/01/2019U.S. Patent No. 6,882,990

Method of Identifying Biological Patterns Using Multiple Data Sets.

05/01/2019U.S. Patent No. 6,944,602

Spectral Kernels for Learning Machines

02/19/2023U.S. Patent No. 6,996,542

Computer-Aided Image Analysis

04/21/2021U.S. Patent No. 7,117,188

Methods of Identifying Patterns in Biological Systems and Uses Thereof

05/01/2019U.S. Patent No. 7,299,213

Method of Using Kernel Alignment to Extract Significant Features from a Large Dataset

03/01/2022U.S. Patent No. 7,318,051

Methods for Feature Selection in a Learning Machine

02/25/2021U.S. Patent No. 7,353,215

Kernels and Methods for Selecting Kernels for Use in a Learning Machine

05/07/2022
  13
  Patent/Application No.

Title

Expiration DateU.S. Patent No. 7,383,237

Computer-Aided Image Analysis

11/04/2019U.S. Patent No. 7,444,308

Data Mining Platform for Bioinformatics

08/07/2020U.S. Patent No. 7,475,048

Pre-Processed Feature Ranking for a Support Vector Machine

08/07/2020U.S. Patent No. 7,542,947

Data Mining Platform for Bioinformatics and Other Knowledge Discovery

08/07/2020U.S. Patent No. 7,542,959

Feature Selection Using Support Vector Machine Classifier

05/01/2019U.S. Patent No.  7,617,163

Kernels and Kernel Methods for Spectral Data

11/9/2021U.S. Patent No. 7,624,074

Methods for Feature Selection in a Learning Machine

08/07/2020U.S. Patent No. 7,676,442

Selection of Features Predictive of Biological Conditions Using Protein Mass Spectrographic Data

08/07/2020U.S. Patent No. 7,778,193

Kernels and Methods for Selecting Kernels for Use in a Learning Machine

05/07/2022U.S. Patent No. 7,797,257

System for Providing Data Analysis Services Using a Support Vector Machine for Processing Data Received from a Remote Source

05/01/2019U.S. Patent No. 7,805,388

Method for Feature Selection in a Support Vector Machine Using Feature Ranking

08/07/2020U.S. Patent No. 7,890,445

Model Selection for Cluster Data Analysis

06/08/2024Australian Patent No.  764897

Pre-processing and Post-processing for Enhancing Knowledge Discovery Using Support Vector Machines.

05/01/2019Indian Patent No. 212978

Pre-Processing and Post-Processing for Enhancing Knowledge Discovery Using Support Vector Machines

05/01/2019South African Patent No. 00/7122

Pre-processing and Post-processing for Enhancing Knowledge Discovery Using Support Vector Machines.

05/01/2019Australian Patent No.  780050

Enhancing Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector Machines.

05/24/2020Chinese Patent No. ZL00808062.3

Enhancing Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector Machines.

05/24/2020European Patent No. 1192595

Enhancing Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector Machines.

05/24/2020Spanish Patent No. ES2254182

Enhancing Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector Machines.

05/24/2020German Patent No. DE60024452.0-08

Enhancing Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector Machines.

05/24/2020Indian Patent No. 223409

Enhancing Knowledge Discovery for Multiple Data Sets Using Multiple Support Vector Machines

05/24/2020Israeli Patent No. 146705

Enhancing Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector Machines

05/24/2020Norwegian Patent No. 319,838

Enhancing Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector Machines.

05/24/2020
  14
  Patent/Application No.

Title

Expiration DateSouth Korean Patent No.  724104

Enhancing Knowledge Discovery from Data Sets Using Multiple Support Vector Machines

05/24/2020Australian Patent No.  779635

Method of Identifying Patterns in Biological Systems and Method of Uses.

10/27/2020Canadian Patent No. 2,388,595

Method of Identifying Patterns in Biological Systems and Method of Uses

08/07/2020Australian Patent No.  2002243783

Computer Aided Image Analysis

01/23/2022European Patent No.1356421

Computer Aided Image Analysis

01/23/2022Spanish Patent No.2337556

Computer Aided Image Analysis

01/23/2022Japanese Patent No. 3947109

Computer Aided Image Analysis

01/23/2022Australian Patent No. 2002253879

Methods of Identifying Patterns in Biological Systems and Uses Thereof

01/24/2022Japanese Patent No. 4138486

Methods of Identifying Patterns in Biological Systems and Uses Thereof

01/24/2022European Patent No. 1459235

Methods of Identifying Patterns in Biological Systems and Uses Thereof

01/24/2022Canadian Application No. 2,330,878

Pre-Processing and Post-Processing for Enhancing Knowledge Discovery Using Support Vector Machines

05/01/2019European Publication No. 1082646

Pre-Processing and Post-Processing for Enhancing Knowledge Discovery Using Support Vector Machines

05/01/2019European Application No. 10184558.4

Pre-Processing and Post-Processing for Enhancing Knowledge Discovery Using Support Vector Machines

05/01/2019Hong Kong Application No. 011065063

Pre-Processing and Post-Processing for Enhancing Knowledge Discovery Using Support Vector Machines

05/01/2019Canadian Application No.  2,371,240

Enhancing Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector Machines

05/24/2020Japanese Application No. 2000-620577

Enhancing Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector Machines

05/24/2020European Publication No. 1236173

Method of Identifying Patterns in Biological Systems and Method of Uses

08/07/2020European Application No. 10185728.2

Method of Identifying Patterns in Biological Systems and Method of Uses

08/07/2020Japanese Application No. 2001-534088

Method of Identifying Patterns in Biological Systems and Methods of Uses

08/07/2020U.S. Patent Publication No. 2005/0165556

Colon Cancer-Specific Markers

05/01/2019U.S. Patent Publication No. 2010/0256988

System for Providing Data Analysis Services Using a Support Vector Machine for Processing Data Received from a Remote Source

05/01/2019U.S. Application No. 12/944,197

Feature Selection Using Support Vector Machine Classifier

05/01/2019U.S. Application No. 12/957,411

Support Vector Machine-Recursive Feature Elimination (SVM-RFE)

05/01/2019
  15
 
 
 Patent/Application No.

Title

Expiration DateU.S. Application No.12/868,658

Kernels for Identifying Patterns in Datasets Containing Noise or Transformation Invariance

05/07/2022U.S. Patent Publication No. 2010/0205124

Support Vector Machine-Based Method for Analysis of Spectral Data

08/07/2020U.S. Application No. 12/890,705

Feature Selection and for Evaluating Features Identified as Significant for Classifying Data

08/07/2020European Publication No.  1828917

Biomarkers for Screening, Predicting, and Monitoring Prostate Disease

11/14/2025Canadian Application No. 2,435,254

Methods of Identifying Patterns in Biological Systems and Uses Thereof

01/24/2022Canadian Application No. 2,435,290

Computer Aided Image Analysis

01/23/2022U.S. Application No. 13/019,585

Identification of Co-Regulation Patterns by Unsupervised Cluster Analysis of Gene Expression Data

05/17/2022U.S. Patent Publication No. 2010/0256988

Data Mining Platform for Knowledge Discovery from Heterogeneous Data Types and/or Heterogeneous Data Sources

08/07/2020European Publication No. 1449108

Pre-Processed Feature Ranking for a Support Vector Machine

11/07/2022U.S. Patent Publication No. 2008/0050836

Biomarkers for Screening, Predicting, and Monitoring Benign Prostate Hyperplasia

01/24/2022U.S. Patent Publication No. 2009/0215024

Biomarkers Upregulated in Prostate Cancer

01/24/2022U.S. Patent Publication No. 2009/0286240

Biomarkers Overexpressed in Prostate Cancer

01/24/2022U.S. Patent Publication No. 2009/0305257

Biomarkers Downregulated in Prostate Cancer

01/24/2022U.S. Patent Publication No. 2009/0215058

Methods for Screening, Predicting and Monitoring Prostate Cancer

01/24/2022WIPO Application No. PCT/US09/66873

Methods for Screening, Predicting and Monitoring Prostate Cancer

12/04/2029U.S. Patent Publication No. 2009/0226915

Methods for Screening, Predicting and Monitoring Prostate Cancer

01/24/2022U.S. Patent Publication No. 2009/0204557

Method and System for Analysis of Flow Cytometry Data Using Support Vector Machines

02/08/2029Australian Application No. 2009212193

Method and System for Analysis of Flow Cytometry Data Using Support Vector Machines

02/08/2029Chinese Application No. 200980110847.2

Method and System for Analysis of Flow Cytometry Data Using Support Vector Machines

02/08/2029European Application No. 09709037.7

Method and System for Analysis of Flow Cytometry Data Using Support Vector Machines

02/08/2029 
 16
 
 Patent/Application No.

Title

Expiration DateIndian Application No. 5526/CHENP/2010

Method and System for Analysis of Flow Cytometry Data Using Support Vector Machines

02/08/2029Japanese Application No. 2010-546084

Method and System for Analysis of Flow Cytometry Data Using Support Vector Machines

02/08/2029U.S. Application No. 12/975,306

System and Method for Remote Melanoma Screening

05/01/2019WIPO Application No. PCT/US10/61667

System and Method for Remote Melanoma Screening

12/21/2030
 
 HDC also owns intellectual property rights in U.S. and foreign patents and pending patent applications covering the FGM technology.  The FGM portfolio includes three issued patents, which are:
  Patent/Application No.

Title

Expiration DateU.S. Patent No. 6,920,451

Method for the Manipulation, Storage, Modeling, Visualization and Quantification of Datasets.

01/19/2021U.S. Patent No. 7,366,719

Method for the Manipulation, Storage, Modeling, Visualization and Quantification of Datasets

01/19/2021European Patent No.1252588

Method for the Manipulation, Storage, Modeling, Visualization and Quantification of Datasets.

01/19/2021
 
 Our Competition
  HDC conducts its business principally in the diagnostics industry in the field of Biomarker Discovery and image analysis.  The diagnostics industry is highly fragmented, competitive and evolving. There is intense competition among countless healthcare, biotechnology and diagnostics companies attempting to discover potential new diagnostic products.  These companies may:
  ●
develop new diagnostic products before we or our collaborators;●
develop diagnostic products that are more effective or cost-effective than those developed by us or our collaborators; or●
obtain patent protection or other intellectual property rights that would limit the ability to develop and commercialize, or a customers’ ability to use, our or our collaborators’ diagnostic products.
  The Company competes with companies in the United States and abroad that are engaged in the development and commercialization of diagnostic tests that utilize biomarker discovery and CAD image analysis techniques. These companies may develop products that are competitive with and/or perform the same or similar to the products offered by us or our collaborators. Also, clinical laboratories may offer testing services that are competitive with the products sold by us or our collaborators. The testing services offered by clinical laboratories may be easier to develop and market than test kits developed by us or our collaborators because the testing services are not subject to the same clinical validation requirements that are applicable to FDA-cleared or approved diagnostic test kits.
  While a number of companies perform biomarker discovery, we believe that our SVM and FGM technologies give us a distinct advantage over competing technologies.  Neither classical statistical analysis nor neural networks (the competing technologies) can effectively handle the large amounts of inputs necessary to produce fully validated biomarkers like the Company’s technology.
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Customers and Licensees
  We have produced sales, licensing, and developmental revenue since 2005 through agreements with several customers and licensees.  In 2009, we entered into strategic alliance and licensing agreements with Abbott and Quest for commercialization of a new molecular diagnostic test for prostate cancer based on our discovered prostate cancer biomarker signature.  In July 2008, we entered into a development and license agreement for the collaborative development and commercialization of SVM-based computer assisted diagnostic tests with DCL Laboratories (“DCL”) for the independent detection of ovarian, cervical and endometrial cancers.  However, in the first quarter of 2010, due to a shift in strategic direction involving the third party, we mutually terminated the license in February 2010, and are exploring other options to develop and commercialize such tests.  In March 2010, we licensed the use of our SVM technology to SPM to develop a superior breast cancer prognostic test.  See Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional disclosure regarding these licensing activities.
  ITEM 1A.  RISK FACTORS
  This annual report on Form 10-K contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including, without limitation, all statements, other than statements of historical facts, that address activities, events or developments that we expect or anticipate will or may occur in the future, including but not limited to statements regarding the successful implementation of our services, business strategies and measures to implement such strategies, competitive strengths, expansion and growth of our business and operations, references to future success, the ability of the Company to utilize its SVM and FGM assets and other intellectual property to identify biomarkers which can be used in diagnostic tests, the ability to enter into agreements with strategic partners for the development and commercialization of diagnostic tests, the ability of the Company to develop a product line, the ability to achieve profitability, about anticipated size of the market for diagnostic tests, the capabilities of molecular diagnostic tests, regarding working with our collaborators resulting in revenue for the Company, the sufficiency of our liquidity and capital resources, and other such matters.  All such statements are forward-looking statements and are based on the beliefs of, assumptions made by and information currently available to our management. The words “expect,” “estimate,” “anticipate,” “believe,” “intend,” “plan” and similar expressions and variations thereof are intended to identify forward-looking statements. Such forward-looking statements may involve uncertainties and other factors that may cause the actual results and performance of our company to be materially different from future results or performance expressed or implied by such statements.
  The cautionary statements set forth in this “Risk Factors” section and elsewhere in this annual report identify important factors with respect to such forward-looking statements, including certain risks and uncertainties, which could cause actual results to differ materially from those expressed in or implied by such forward-looking statements. Among others, factors that could adversely affect actual results and performance include failure to successfully develop a profitable business, delays in identifying and enrolling customers, the inability to retain a significant number of customers, effectiveness and execution of licensing efforts, our ability to employ and retain key employees and experienced scientists, our access to tissue samples, loss of the ability to use certain patent rights, the inability to continue to protect our proprietary information, competitive conditions, our ability to remain competitive in a rapidly changing technological environment, acceptance of our products by the market, volatility in U.S. and global stock markets generally and in our stock price specifically, potential shareholder claims which could result in substantial dilution to our shareholders, economic conditions generally, the effect of current difficulties in the credit markets on our business, factors beyond our control, including, but not limited to, catastrophes (both natural and man-made), earthquakes, floods, fires, explosions, acts or terrorism or war, and the risks identified elsewhere in this report. All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by the foregoing cautionary statement.  All forward looking statements and cautionary statements included in this document are made as of the date hereof based on information available to us, and we assume no obligation to update any forward looking statement or cautionary statement.
 
 18
  Risks Related to Our Business
  We are a developing business and a high-risk company.
  We are a high-risk company in a volatile industry.  In September 2003, we completely changed the focus of our business from wireless telecommunications to biotechnology.  Investors should recognize that an investment in our company is risky and highly speculative.  We are a developing business, and our prospects must be considered in light of the risks, uncertainties, expenses and difficulties frequently encountered by companies in their early stages of development.  Failure to implement and execute our business and marketing strategy successfully, to provide superior customer service, to respond to competitive developments and to integrate, retain and motivate qualified personnel could have a material adverse effect on our business, results of operations and financial condition. We must successfully overcome these and other business risks.
  We may incur future losses, and we may never achieve or sustain profitability.
  While we expect to continue to maintain a positive cash balance during 2011, our expenses are expected to exceed our income until we successfully complete transactions resulting in significant revenue.  Accordingly, our capital will be decreased to pay these operating expenses.  If we ever become profitable, of which there is no assurance that we can, from time to time our operating expenses could exceed our income and thus our capital will be decreased to pay these operating expenses.  We cannot assure you that we will ever achieve profitability.  Even if we do achieve profitability, we may not be able to sustain or increase profitability.
  We may need additional financing.
  During 2009, we raised additional capital in the amount of $1,490,015 through the issuance of Series B Preferred Stock and received proceeds from the exercise of previously issued warrants to purchase our Common Stock of $2,450,430.  In addition, since January 1, 2010, we have received an additional $5,852,333 from the exercise of previously issued warrants to acquire our Common Stock.  If we are unable to generate sufficient revenue, additional proceeds may be required to finance our activities. We cannot assure prospective investors that we will not need to raise additional capital or that we would be able to raise sufficient additional capital on favorable terms, if at all.  There can be no assurance that additional financing will be available, if required, on terms acceptable to us.  If we fail to raise sufficient funds or do not increase our revenues from licensing our technology or performing services, we may have to cease operations or materially curtail our business operations. If we raise additional capital by issuing equity securities, our stockholders may experience dilution. If we raise additional funds through collaboration and licensing arrangements, we may be required to relinquish some rights to our technologies or product candidates, or grant licenses on terms that are not favorable to us.
  A significant portion of our net revenues will be paid as either a Special Dividend to the holders of the Series B Preferred Stock or to our senior management in bonuses.
  Subject to the limitations set forth in the Amended and Restated Articles of Amendment to Articles of Incorporation and applicable law, as long as the Series B Preferred Stock (the “Series B Preferred Stock”) remain outstanding, the Company must pay the holders of the Series B Preferred Stock a special dividend (the “Special Dividend”) equal to 15% of the Company’s “Net Revenues.”  Company Net Revenues will include, but not be limited to, revenue derived from development fees, license fees and royalties paid to the Company and revenue collected as a result of the sale of any asset of the Company or distributions from SVM Capital, LLC, but will not include the proceeds of any capital infusions from the exercise of outstanding options or warrants or as a result of any capital raise undertaken by the Company.  At any time following the issuance of the Series B Preferred Stock, the Company may satisfy the Special Dividend in its entirety if the aggregate payments made to the Series B Holders is equal to that value which provides an internal annual rate of return of twenty percent (20%) on the Series B Preferred Stock.  The maximum Special Dividend to be paid each year shall be the aggregate Series B Original Issue Price, and no amounts in excess of such amount shall accrue or carry-over to subsequent years. The shares of our Series B Preferred Stock also accrue dividends at the rate of 10% per year, which must be paid by the fifth anniversary of the issuance of such shares either by the Company’s issuance of the number of shares of Common Stock equal to such accrued dividends divided by the average closing price of the Company’s Common Stock during the prior ten business days or by the payment of cash, as the Company may determine in its sole discretion.
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  Further, pursuant to the terms of the employment agreement with Dr. Barnhill, a cash bonus (subject to an annual cap specified in the employment agreement) of 10% of the Company’s Net Revenue (as defined in the CEO’s employment agreement) is being accrued and paid as a cash bonus.  Although the employment agreement terminated on August 15, 2010, the Company and Dr. Barnhill have agreed to extend the terms and conditions of the terminated employment agreement on a month-to-month basis while the parties negotiate the terms of a new employment agreement.
  Additionally, the Company may pay additional bonuses out of such revenue to other senior management.  The payment of the Special Dividend and any bonuses to management will reduce the amount of cash able to be used to fund our operations, to pay dividends to holders of our Common Stock and to otherwise distribute to holders of our Common Stock upon a sale or liquidation.The payment of the Special Dividend and any bonuses to management will reduce the amount of cash able to be used to fund our operations, to pay dividends to holders of our common stock and to otherwise distribute to holders of our common stock upon a sale or liquidation.
 
 Our operating results are unpredictable and may fluctuate significantly from period to period, which may cause our stock price to decline and result in losses to investors.
  Our operating results may vary from period to period due to numerous factors, many of which are outside our control, including the number, timing and acceptance of our services. Factors that may cause our results to vary by period include:
  ■
payments of milestones, license fees or research payments under the terms of our increasing number of external alliances;■
changes in the demand for our products and services;■
the nature, pricing and timing of products and services provided to our collaborators;■
acquisition, licensing and other costs related to the expansion of our operations;■
reduced capital investment for extended periods;■
losses and expenses related to our investments in joint ventures and businesses;■
regulatory developments or changes in public perceptions relating to the use of genetic information and the diagnosis and treatment of disease based on genetic information; and■
changes in intellectual property laws that affect our rights in genetic information that we sell and license.
 
 Advisory and personnel costs, marketing programs and overhead account for a substantial portion of our operating expenses. Some of these expenses cannot be adjusted quickly in the short term.  If revenues of the business decline or do not grow as anticipated, we may not be able to reduce our operating expenses accordingly.  Failure to achieve anticipated levels of revenue could therefore significantly harm our operating results for a particular period.
  Because we do not intend to pay dividends on our Common Stock, holders of our Common Stock will benefit from an investment in our Company only if it appreciates in value.
  We have never declared or paid any cash dividends on our Common Stock. We currently intend to retain the Company’s future earnings, if any, to finance the expansion of the Company’s business and do not expect to pay any cash dividends in the foreseeable future.  As a result, the success of an investment in our Common Stock will depend entirely upon any future appreciation. There is no guarantee that our Common Stock will appreciate in value or even maintain the price at which its investors purchased their shares.
  Our stock price has been, and is likely to continue to be, highly volatile.
  Our stock price has, since September 1, 2003, traded as high as $0.60 and as low as $0.03.  Our stock price could fluctuate significantly due to a number of factors beyond our control, including:
  ■
variations in our actual or anticipated operating results;■
sales of substantial amounts of our stock;■
announcements about us or about our competitors, including technological innovation or new products or services;■
litigation and other developments related to our patents or other proprietary rights or those of our competitors;■
conditions in the life sciences, pharmaceuticals or genomics industries; and■
Governmental regulation and legislation.
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  In addition, the stock market in general, and the market for life sciences and technology companies in particular, have experienced extreme price and volume fluctuations historically. These fluctuations often have been unrelated or disproportionate to the operating performance of these companies. These broad market and industry factors may decrease the market price of our Common Stock, regardless of our actual operating performance.
  In the past, companies that have experienced volatility in the market prices of their stock have been the objects of securities class action litigation. If we became the object of securities class action litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could affect our profitability.
  Our approach of incorporating ideas and methods from mathematics, computer science and physics into the disciplines of biology, organic chemistry and medicine is relatively new and may not be accepted by our potential customers or collaborators.
  We intend to create a fully integrated biomarker discovery company to provide pharmaceutical and diagnostic companies worldwide with new, clinically relevant and economically significant biomarkers.  Our potential customers and collaborators may be reluctant to accept our new, unproven technologies, and our customers may prefer to use traditional services. In addition, our approach may prove to be ineffective or not as effective as other methods.  For example, our products and technologies may prove to be ineffective if, for instance, they fail to account for the complexity of the life processes that we are now attempting to model.  If our customers or collaborators do not accept our products or technologies and/or if our technologies prove to be ineffective, our business may fail or we may never become profitable.
  Even if our computational technologies are effective as research tools, our customers or we may be unable to develop or commercialize new drugs, therapies or other products based on them.
  Even if our computational technologies perform their intended functions as research tools, our customers may be unable to use the discoveries resulting from them to produce new drugs, therapies, diagnostic products or other life science products.  Despite recent scientific advances in the life sciences and our improved understanding of biology, the roles of genes and proteins and their involvement in diseases and in other life processes is not well understood.  Only a few therapeutic products based on the study of and discoveries relating to genes or proteins have been developed and commercialized.  If our customers are unable to use our discoveries to make new drugs or other life science products, our business may fail or we may never become profitable.
  Our SVM Portfolio utilizes technology that may be covered by an earlier-issued patent, and if we lose the rights to use that patent, our ability to exploit certain aspects of our SVM technology will be impaired.
  Our SVM Portfolio utilizes technology that may be covered by the original hyperplane patent (Pat. No. 5,649,068) invented by members of our Scientific Advisory Board and owned by Lucent Technologies GRL Corporation (“Lucent”).  We have obtained an assignment of a pre-existing patent license from Lucent. If Lucent were to terminate the license, it is possible that we would not be able to use portions of the SVM technology.
  The industries in which we are active are evolving rapidly, and we may be unable to keep pace with changes in technology.
  The pharmaceutical and biotechnology industries are characterized by rapid technological change.  This is especially true of the data-intensive areas of such technologies.  Our future success will largely depend on maintaining a competitive position in the field of drug, therapeutics and diagnostic products discovery.  If we fail to keep pace with changes in technology, our business will be materially harmed. Rapid technological development may result in our products or technologies becoming obsolete. This may occur even before we recover the expenses that we incurred in connection with developing those products and technologies.  Products or services offered by us could become obsolete due to the development of less expensive or more effective drug or diagnostics discovery technologies.  We may not be able to make the necessary enhancements to our technologies to compete successfully with newly emerging technologies.
  We face intense competition, and if we are unable to compete successfully we may never achieve profitability.
  The markets for our products and services are very competitive, and we expect our competition to increase in the future.  Although we have not identified specific companies that provide the full suite of services that we do, we compete with entities in the U.S. and worldwide that provide products and services for the analysis of genomic information and information relating to the study of proteins (proteomic information) or that commercializes novel genes and proteins.  These include genomics, pharmaceutical and biotechnology companies, academic and research institutions and government and other publicly funded agencies.  We may not be able to successfully compete with current and future competitors.  Many of our competitors have substantially greater capital resources, research and development staffs, facilities, manufacturing and marketing experience, distribution channels and human resources than we do.  This may allow these competitors to discover or to develop products in advance of us or of our customers.
  21
  Some of our competitors, especially academic and research institutions and government and other publicly funded agencies, may provide for free services or data similar to the services and data that we provide for a fee.  Moreover, our competitors may obtain patent and other intellectual property protection that would limit our rights or our customers’ and partners’ ability to use or commercialize our discoveries, products and services.  If we are unable to compete successfully against existing or potential competitors, we may never achieve profitability.
  Our management may be unable to address future growth.
  We anticipate that if we experience a period of growth in our customer base and market opportunities, a period of significant expansion of the Company will be required. This expansion will place a significant strain on our management, operational and financial resources. To manage future growth of our operations, if any, we will be required to improve existing and implement new operational systems, procedures and controls, and to expand, train and manage our employee base. There can be no assurance that our current and planned personnel, systems, procedures and controls will be adequate to support our future operations, that management will be able to hire, train, retain, motivate and manage the required personnel or that we will be able to identify, manage and exploit existing and potential strategic relationships and market opportunities. Our failure to manage growth effectively could have a material adverse effect on our business, results of operations and financial condition.
  If our business does not keep up with rapid technological change or continue to introduce new products, we may be unable to maintain market share or recover investments in our technologies.
  Technologies in the biomarker industry have undergone, and are expected to continue to undergo, rapid and significant change. We may not be able to keep pace with the rapid rate of change and introduce new products that will adequately meet the requirements of the marketplace or achieve market acceptance. If we fail to introduce new and innovative products, we could lose market share to our competitors, limit our growth and damage our reputation and business.
  The future success of our business will depend in large part on our ability to maintain a competitive position with respect to these technologies. We believe that successful new product introductions provide a significant competitive advantage because customers make an investment of time in selecting and learning to use a new product and are reluctant to switch to a competing product after making their initial selection. However, our business or others may make rapid technological developments, which could result in our technologies, products or services becoming obsolete before we are able to recover the expenses incurred to develop them.
  If our business cannot enter into strategic alliances or licensing agreements, we may be unable to develop and commercialize our technologies into new products and services or continue to commercialize existing products or services.
  We may be unable to maintain or expand existing strategic alliances or establish additional alliances or licensing arrangements necessary to continue to develop and commercialize products, and any of those arrangements may not be on terms favorable to the business. In addition, current or any future arrangements may be unsuccessful. If we are unable to obtain or maintain any third party license required to sell or develop our products or product enhancements, we may choose to obtain substitute technology either through licensing from another third party or by developing the necessary technology ourselves. Any substitute technology may be of lower quality or may involve increased cost, either of which could adversely affect our ability to provide our products competitively and harm our business.
  We also depend on collaborators for the development and manufacture of complex instrument systems and chemicals and other materials that are used in laboratory experiments.  We cannot control the amount and timing of resources our collaborators devote to our products. We may not be able to enter into or satisfactorily retain these research, development and manufacturing collaborations and licensing agreements, which could reduce our growth and harm our competitive position.
  22
  We may not be able to find business partners to develop and commercialize product candidates derived from our discovery activities.
  Our strategy for the development and commercialization of diagnostic biomarkers and therapeutic proteins depends on the formation of collaborations or licensing relationships with third parties that have complementary capabilities in relevant fields. Potential third parties include pharmaceutical and biotechnology companies, diagnostic companies, academic institutions and other entities.  We cannot assure you that we will be able to form these collaborations or license our discoveries or that these collaborations and licenses will be successful.
  Our dependence on licensing and other collaboration agreements makes us heavily dependent on our collaborators.
  We may not be able to enter into licensing or other collaboration agreements on terms favorable to us.  Even if we do enter into an acceptable agreement, collaborators typically may be afforded significant discretion in electing whether to pursue any of the planned activities.  In most cases, our collaborators will have responsibility for formulating and implementing key strategic or operational plans. Decisions by our collaborators on these key plans, which may include development, clinical, regulatory, marketing (including pricing), inventory management and other issues, may prevent successful commercialization of the product or otherwise affect our profitability.
  In addition, we may not be able to control the amount and timing of resources our collaborators devote to the product candidates, and collaborators may not perform their obligations as expected. Additionally, business combinations or changes in a collaborator’s business strategy may negatively affect its willingness or ability to complete its obligations under the arrangement with us.  Furthermore, our rights in any intellectual property or products that may result from our collaborations may depend on additional investment of money that we may not be able or willing to make.
  Potential or future collaborators may also pursue alternative technologies, including those of our competitors.  Disputes may arise with respect to the ownership of rights to any technology or product developed with any future collaborator. Lengthy negotiations with potential collaborators or disagreements between us and our collaborators may lead to delays or termination in the research, development or commercialization of product candidates or result in time-consuming and expensive litigation or arbitration. If our collaborators pursue alternative technologies or fail to develop or commercialize successfully any product candidate to which they have obtained rights from us, our business, financial condition and results of operations may be significantly harmed.
  If we are unable to hire or retain key personnel or sufficient qualified employees, we may be unable to successfully operate our business.
  Our business is highly dependent upon the continued services of our executive team and board of directors.  While certain members of our senior management are parties to employment or consulting agreements and non-competition and non-disclosure agreements, we cannot assure you that these key personnel and others will not leave us or compete with us, which could materially harm our financial results and our ability to compete.  The loss, incapacity or unavailability for any reason of any of these individuals could have a material adverse effect upon our business, as well as our relationships with our potential customers.  We do not carry key person life insurance on any member of our senior management.  Furthermore, competition for highly qualified personnel in our industry and geographic locations is intense.  Our business would be seriously harmed if we were unable to retain our key employees, or to attract, integrate or retain other highly qualified personnel in the future.
  We may not be able to employ and retain experienced scientists, mathematicians and management.
  Technologies in our industry have undergone, and are expected to continue to undergo, rapid and significant change. A highly skilled staff is integral to developing, marketing and supporting new products that will meet or exceed the expectations of the marketplace and achieve market acceptance. Without experienced staff, our business may be unable to maintain or grow market share, which could result in lower than expected revenues and earnings.
  If our access to tissue samples or to genomic data or other information is restricted, or if this data is faulty, our business may suffer.
  To continue to build our technologies and related products and services, we need access to third parties’ scientific and other data and information.  We also need access to normal and diseased human and other tissue samples and biological materials.  We may not be able to obtain or maintain such access on commercially acceptable terms.  Some of our suppliers could become our competitors and discontinue selling supplies to us.  Information and data from these suppliers could contain errors or defects that could corrupt our databases or the results of our analysis of the information and data.  In addition, government regulation in the United States and other countries could result in restricted access to, or use of, human and other tissue samples.  Although currently we do not face significant problems in obtaining access to tissues, if we lose access to sufficient numbers or sources of tissue samples, or if tighter restrictions are imposed on our use of the information generated from tissue samples, our business may suffer.
  23
  The sales cycle for some of our products and services is lengthy.  We expend substantial funds and management effort with no assurance of successfully selling our products or services.
  Our ability to obtain customers for our platforms, tools and services depends in large part upon the perception that our technologies can help accelerate their efforts in drug and diagnostics discovery.  Our ability to obtain customers for our therapeutic or diagnostic product candidates significantly depends on our ability to validate and prove that each such product candidate is suitable for our claimed therapeutic or diagnostic purposes.  Our ability to obtain customers will also depend on our ability to successfully negotiate terms and conditions for such arrangements. The sales cycle for our therapeutic and diagnostic product candidates is typically lengthy and may take more than 12 months.
  An inability to protect our proprietary data, technology or products may harm our competitive position.
  If we do not adequately protect the intellectual property underlying our products and services, competitors may be able to develop and market the same or similar products and services. This would erode our competitive advantage.  In addition, the laws of some countries do not protect or enable the enforcement of intellectual property to the same extent as the laws of the United States.
  We use contractual obligations to protect a significant portion of our confidential and proprietary information and know-how.  This includes a substantial portion of the knowledge base from which we develop a large portion of our proprietary products and services.  However, these measures may not provide adequate protection for our trade secrets or other proprietary information and know-how.  Customers, employees, scientific advisors, collaborators or consultants may still disclose our proprietary information in violation of their agreements with us, and we may not be able to meaningfully protect our trade secrets against this disclosure.
  In addition, we have applied for patents covering some aspects of some of our technologies and biomarker subsets of genes and proteins we have discovered using these technologies.  We plan to continue to apply for patents covering parts of our technologies and discoveries as we deem appropriate, but cannot assure you that we will be able to obtain any patents or that the patents will be upheld if challenged.  The patent positions of biotechnology related companies are generally uncertain and involve complex legal and factual questions.  Legislative changes and/or changes in the examination guidelines of governmental patents offices may negatively affect our ability to obtain patent protection for certain aspects of our intellectual property, especially with respect to genetic discoveries, and may negatively impact the enforceability of one or more of our patents. In contrast to recent court decisions invalidating claims directed to individual human genes and proteins, our focus has been directed to identifying relationships between small groups of genes and proteins that are useful for diagnosing, treating and prognosing diseases and other conditions.
  Our success depends in large part on our ability to patent our discoveries.
  Our success depends, in large part, on our ability to obtain patents on biomarkers and pathways that we have discovered and are attempting to commercialize.  We face intense competition from other biotechnology and pharmaceutical companies. These include customers who use our products and technologies and are pursuing patent protection for discoveries, which may be similar or identical to our discoveries.  We cannot assure you that other parties have not sought patent protection relating to the biomarkers and pathways that we discovered or may discover in the future.  Our patent applications may conflict with prior applications of third parties or with prior publications.  They may not result in issued patents and, even if issued, our patents could be invalidated or may not be sufficiently broad to provide us with any competitive advantages.  U.S. and other patent applications ordinarily remain confidential for 18 months from the date of filing.  As a result, patent applications that we file which we believe are novel at the time of filing may be determined at a later stage to be inconsistent with earlier applications.  Additionally, the scope of patents we receive may not provide us with adequate protection of our intellectual property, which would harm our competitive position.  Any issued patents that cover our proprietary technologies may not provide us with substantial protection or be commercially beneficial to the business.  The issuance of a patent is not conclusive as to its validity or its enforceability.  Federal courts may invalidate these patents or find them unenforceable.  Competitors may also be able to design around our patents.  If we are unable to protect our patented technologies, we may not be able to commercialize our technologies, products or services and our competitors could commercialize our technologies. Any of these events could materially harm our business or financial results.
  24
  Litigation or other proceedings or third party claims of intellectual property infringement could prevent us, or our customers or collaborators, from using our discoveries or require us to spend time and money to modify our operations.
 
 The technology that we use to develop our products, and the technology that we incorporate in our products, may be subject to claims that they infringe the patents or proprietary rights of others. The risk of this occurring will tend to increase as the genomics, biotechnology and software industries expand, more patents are issued and other companies engage in other genomic-related businesses.  If we infringe patents or proprietary rights of third parties, or breach licenses that we have entered into with regard to our technologies and products, we could experience serious harm. If litigation is commenced against us alleging intellectual property rights infringement or if we initiate a lawsuit to assert claims of infringement, protect our trade secrets or know-how or to determine the enforceability, scope and validity of the proprietary rights of others, we may incur significant costs in litigating, whether or not we prevail in such litigation.  Regardless of the outcome, litigation can be very costly.  These costs would also include diversion of management and technical personnel to defend us against third parties or to enforce our patents (once issued) or other rights against others.  In addition, parties making claims against us may be able to obtain injunctive or other equitable relief that could prevent us from being able to further develop or commercialize.  Further, these lawsuits could result in the invalidation or limitation of the scope of our patents or the forfeiture of the rights associated with these patents.  This could also result in the award of substantial damages against us.  In the event of a successful claim of infringement against us, we may be required to pay damages and obtain one or more licenses from third parties.  If we are not able to obtain these licenses at a reasonable cost, if at all, we could encounter delays in product introductions while we attempt to develop alternative methods or products. Defense of any lawsuit or failure to obtain any of these licenses could prevent us from commercializing available products, all of which could negatively impact our business, financial condition or results of operations.  Moreover, during the course of these suits, there may be public announcements of the results of hearings, motions and other interim proceedings or developments in the litigation. Securities analysts or investors may perceive these announcements to be negative, which could cause the market price of our common stock to decline.
  Many of our services will be based on complex, rapidly developing technologies. Although we will try to identify all relevant third party patents, these products could be developed by the business without knowledge of published or unpublished patent applications that cover some aspect of these technologies. The biomarker industry has experienced intensive enforcement of intellectual property rights by litigation and licensing.  If we are found to be infringing the intellectual property of others, we could be required to stop the infringing activity, or we may be required to design around or license the intellectual property in question.  If we are unable to obtain a required license on acceptable terms, or are unable to design around any third party patent, we may be unable to sell some of our services, which could result in reduced revenue.
  We may acquire or make strategic investments in other businesses and technologies in the future, and these could prove difficult to integrate, disrupt our business, dilute stockholder value and adversely affect our operating results.
  If opportunities arise, we may consider making acquisitions of or investments in businesses, technologies, services or products.  These activities may involve significant cash expenditures, debt incurrence, additional operating losses and expenses that may have a material adverse effect on the operating results of our business.  Moreover, even if we acquire complementary businesses or technologies, we may be unable to successfully integrate any additional personnel, operations or acquired technologies into our business.
  Difficulties in integrating an acquired business or managing an investment could disrupt our business, distract our management and employees and increase our expenses.  Future acquisitions could expose us to unforeseen liabilities and result in significant charges relating to intangible assets.  Sizable acquisitions or investments may also divert senior management from focusing on our existing business plan.  Finally, if we make acquisitions using convertible debt or equity securities, existing stockholders may be diluted, which could affect the market price of our stock.
  We have identified a material weakness in our internal accounting control over financial reporting.
  Management has concluded that our internal control over financial reporting was not effective as of December 31, 2010.  Our Chief Executive Officer, who is also serving as our Principal Financial Officer, concluded that we have material weaknesses in our internal control over financial reporting because we do not have an adequate segregation of duties due to a limited number of employees among whom duties can be allocated. The lack of segregation of duties is due to the limited nature and resources of the Company.
  25
  All internal control systems no matter how well designed have inherent limitations. Therefore, even those systems determined to be effective may not prevent or detect misstatements and can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness 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.
  Risks Related to Our Industry
  There are many risks of failure in the development of drugs, therapies, diagnostic products and other life science products. These risks are inherent to the development and commercialization of these types of products.
  Risks of failure are inseparable from the process of developing and commercializing drugs, therapies, diagnostic products and other life science products. These risks include the possibility that any of these products will:
 ■
be found to be toxic or ineffective;■
fail to receive necessary regulatory approvals;■
be difficult or impossible to manufacture on a large scale;■
be uneconomical to market;■
fail to be developed prior to the successful marketing of similar products by competitors; or■
be impossible to market because they infringe on the proprietary rights of third parties or compete with superior products marketed by third parties.
  We are dependent on our customers’ commercialization of our discoveries.  Any of these risks could materially harm our business and financial results.
  The trend towards consolidation in the pharmaceutical and biotechnology industries may adversely affect us.
  The trend towards consolidation in the pharmaceutical and biotechnology industries may negatively affect us in several ways.  These consolidations usually involve larger companies acquiring smaller companies, which results in the remaining companies having greater financial resources and technological capabilities, thus strengthening competition in the industry.  In addition, continued consolidation may result in fewer customers for our products and services.
  We may be subject to product liability claims if products derived from our products or services harm people.
  We may be held liable if any product that is made with the use, or incorporation of, any of our technologies or data causes harm or is found otherwise unsuitable.  These risks are inherent in the development of genomics, functional genomics and pharmaceutical products.  If we are sued for any harm or injury caused by products derived from our services or products, our liability could exceed our total assets.  In addition, such claims could cause us to incur substantial costs, divert management’s attention from executing the Company’s business plan and subject us to negative publicity even if we prevail in our defense of such claims.
  Our business and the products developed by our collaborators may be subject to governmental regulation.
  New therapeutic or diagnostic products that may be developed by our collaborators will have to undergo a lengthy and expensive regulatory review process in the United States and other countries before it can be marketed.  It may be several years, or longer, before any therapy or diagnostic product that is developed by using our technologies, will be sold or will provide us with any revenues.  This may delay or prevent us from becoming profitable.  Changes in policies of regulatory bodies in the United States and in other countries could increase the delay for each new therapy and diagnostic products.
  Even if regulatory approval is obtained, a product on the market and its manufacturer are subject to continuing review.  Discovery of previously unknown problems with a product may result in withdrawal of the product from the market.
  Although we intend to become involved in the clinical phases in the future, we still expect to rely mainly on collaborators of our discovery activities to file regulatory approval applications and generally direct the regulatory review process.  We cannot be certain whether they will be able to obtain marketing clearance for any product that may be developed on a timely basis, if at all.  If they fail to obtain required governmental clearances, it will prevent them from marketing therapeutic or diagnostic products until clearance can be obtained, if at all.  This will in turn reduce our chances of receiving various forms of payments, including those relating to sales of marketed therapeutic or diagnostic products by them.
  26
  The law applicable to us may change in a manner that negatively affects our prospects.
  We must comply with various legal requirements, including requirements imposed by federal and state securities and tax laws. Should any of those laws change over the term of our existence, the legal requirements to which we may be subject could differ materially from current requirements, which could increase the cost of doing business or preclude us from undertaking certain parts of our business plan, would result in adverse consequences.
 
 If ethical and other concerns surrounding the use of genetic information become widespread, there may be less demand for our products and services.
  Genetic testing has raised ethical issues regarding confidentiality and the appropriate uses of the resulting information.  For these reasons, governmental authorities may call for limits on or regulation of the use of genetic testing or prohibit testing for genetic predisposition to various conditions, particularly for those that have no known cure.  Any of these scenarios could reduce the potential markets for our technologies in the field of predictive drug response, which could materially harm our business and financial results.
  ITEM 1B. UNRESOLVED STAFF COMMENTS
  Not Applicable.
  ITEM 2. PROPERTIES
  We do not own any real property.  We lease 1,261 square feet of office space in Savannah, Georgia, pursuant to a month to month lease dated March 1, 2011. We currently pay base rent in the amount of $2,388 per month. Our principal executive office is located at 2 East Bryan Street, Suite 610, Savannah, Georgia 31401, and our telephone number is (912) 443-1987.  Our principal executive office is well maintained and suitable for the business conducted in this location.
  On July 1, 2010, the company entered into a four year lease on a new office.  The Company estimated a move date sometime during the first quarter of 2011.  Given delays with the landlord in preparing the office space, the Company is renegotiating the terms of the lease as well as reconsidering the move to the new office space.  As a result, the current short term lease is sufficient for the Company’s operations, while the evaluation of potential new office space is reconsidered.
  ITEM 3.   LEGAL PROCEEDINGS
  None.
  ITEM 4.   (REMOVED AND RESERVED)
   PART II
  ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
 
 Our common stock is traded on the OTC Bulletin Board under the symbol HDVY.  The range of closing prices for our common stock, as reported on Bloomberg.com during each quarter of the last two fiscal years and last three most recent fiscal quarters was as follows.  These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
  High


LowFirst Quarter 2009

$
0.09


$
0.04Second Quarter 2009

$
0.08


$
0.03Third Quarter 2009

$
0.13


$
0.03Fourth Quarter 2009

$
0.40


$
0.09High


LowFirst Quarter 2010

$
0.36


$
0.18Second Quarter 2010

$
0.21


$
0.12Third Quarter 2010

$
0.22


$
0.14Fourth Quarter 2010

$
0.20


$
0.14
  27
  Holders of Record
  As of March 31, 2011, there were approximately 299 holders of record of our common stock.
  Dividends
  We have not paid any cash dividends for commons shares since inception, and we do not anticipate paying any in the foreseeable future on common shares.  We intend to retain future earnings, if any, to support the development and growth or our business.  Payment of future dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs and plans for expansion.  Under the Georgia Business Corporation Act, a company is prohibited from paying a dividend if, after giving effect to that dividend, either the company would not be able to pay its debts as they become due in the usual course of business or the company’s total assets would be less than the sum of its total liabilities plus the amount that would be needed if the company were to be dissolved at the time of the dividend to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the dividends.   If the Company were to pay dividends, the holders of the shares of  the Series B Preferred Stock have a right to first receive, or simultaneously receive, a dividend on each outstanding share of Series B Preferred Stock on an as if converted to common stock basis.  The holders of the shares of Series B Preferred Stock also accrue a 10% annual dividend and have a special dividend right to receive 15% of the Company’s net revenues, subject to certain limitations.
  Under the Georgia Business Corporation Act, a company is prohibited from paying a dividend on any share of its Capital Stock if, after giving effect to that dividend, either the company would not be able to pay its debts as they become due in the usual course of business or the company’s total assets would be less than the sum of its total liabilities plus the amount that would be needed if the company were to be dissolved at the time of the dividend to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the dividends.  The Company has had limited revenue since inception, has incurred recurring losses from operations, and has had to continually seek additional capital investment in order to fund operations.  Accordingly, depending on the Company’s financial condition, it may not be able to pay any dividends on any shares of its Capital Stock.  For further discussion of the Company’s liquidity and capital resources, see Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.
  Securities Authorized for Issuance Under Equity Compensation Plans
  The following table sets forth the equity securities of the Company which are authorized for issuance to employees, directors and consultants in consideration for services as of December 31, 2010:
  Equity Compensation Plan Information
  A



Number of
securities
to be issued

upon
exercise of
outstanding
options,
warrants
and rights


B



Weighted-
average
exercise
price of
outstanding
options,
warrants
and rights


C



Number of
securities
remaining
available for
future
issuance
under equity
compensation
plans
(excluding
securities
reflected in
Column A)Equity compensation plans approved by security holders


-



-



-Equity compensation plans not approved by security holders


19,750,000


$
.12



-Total


19,750,000


$
.12



-
  28
  Sales of Unregistered Securities
  In February 2010, Mr. D. Paul Graham was appointed to our board of directors. In connection with this appointment to the Company’s Board of Directors, the Company granted the new director an option to purchase 1,500,000 shares of the Company’s common stock. The options vest 250,000 shares every six months, have an exercise price of $0.26, and expire on February 24, 2015.  The fair value of each option granted was $0.205 and was estimated on the date of grant using the Black-Scholes pricing model with the following assumptions: dividend yield at 0%, risk-free interest rate of 2.73%, an expected life of 5 years, and volatility of 108.16%.  The aggregate computed value of these options was $307,469, and this amount will be charged as an expense over the three year vesting period.
  On May 10, 2010, the Company announced the appointment of Maher Albitar, M.D., to the position of Chief Medical Officer. On August 2, 2010,the company issued Dr. Albitar an option to purchase 1,000,000 shares of common stock. The options vest in four installments of 250,000 options and have a contingent vesting criteria based upon a market condition consisting of the commercialization of four new molecular diagnostic tests.  The options have an exercise price of $0.15, and expire on August 2, 2015.  The fair value of each option granted was $0.13 and was estimated on the date of grant using a probability weighted fair value model similar to a lattice valuation model with the following assumptions: dividend yield at 0%, risk-free interest rate of 1.62%, an expected life of 5 years, 10% probability of attaining the market condition, and volatility of 132.98%.  The aggregate computed value of these options is $13,025 and will be charged as an expense over the vesting period.
  On October 26, 2010, the Company announced that Thomas L. Gallagher has been appointed by the Board of Directors as President, Chief Operating Officer and General Counsel effective October 20, 2010. The Board of Directors also approved the grant to Mr. Gallagher of 2,500,000 options to purchase common stock.  The options are exercisable immediately at an exercise price of $0.19 per share (the closing price on the grant date) and expire ten years after the grant date.   The Company recorded a charge of $357,798 in the fourth quarter 2010 with respect to the option grant. The fair value of each option granted was $0.14 and was estimated on the date of grant using the Black-Scholes pricing model with the following assumptions: dividend yield at 0%, risk-free interest rate of 2.82%, an expected life of 5 years, and volatility of 99%.
  On February 22, 2011, Mr. Gallagher resigned as the President, Chief Operating Officer and General Counsel of  the Company. Mr. Gallagher served as the Company’s principal financial officer and principal accounting officer.
  Mr. Gallagher resigned in order to pursue a new opportunity.  The Company’s Board of Directors and Mr. Gallagher will soon begin discussions about a possible joint venture in order to pursue business opportunities with an emphasis on non-medical data-mining and business analytics using HDC’s technology. As currently contemplated, the proposed joint venture would grant Mr. Gallagher’s new company a non-exclusive license to Health Discovery Corporation’s substantial patent portfolio and know-how in exchange for a minority ownership interest in the new company.
  All of these issuances of equity securities were made in reliance upon exemptions from registration pursuant to Section 4(2) under the Securities Act of 1933, as amended.
  ITEM 6.  SELECTED FINANCIAL DATA
  As a smaller reporting company, we are not required to provide the information required by this item.
  ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Corporate Overview
  Our Company is a molecular diagnostics company that uses advanced mathematical techniques to analyze large amounts of data to uncover patterns that might otherwise be undetectable.  Our Company operates primarily in the emerging field of personalized medicine where such tools are critical to scientific discovery.  Our primary business consists of licensing our intellectual property and working with prospective customers on the development of varied products that utilize pattern recognition tools.  We also endeavor to develop our own product line of newly discovered biomarker-based diagnostic tests that include human genes and genetic variations, as well as gene, protein, and metabolite expression differences and image analysis.  In drug discovery, biomarkers can help elicit disease targets and pathways and validate mechanisms of drug action.  They may also be pharmacodynamic indicators of drug activity, response and toxicity for use in clinical development.
  29
  We intend to continue partnering with clinical laboratories to commercialize our clinical diagnostic tests and to provide pharmaceutical and diagnostic companies with all aspects of all phases of diagnostic and drug discovery, from expert assessment of the clinical dilemma to proper selection and procurement of high quality specimens.  Through the application of our proprietary analytical evaluation methods and state-of-the-art computational analysis to derive relevant and accurate clinical data, we intend to identify accurate biomarker and pathway discoveries, resulting in patent protection of our biomarker discoveries for future development.
  Our business is based on the belief that to discover the most clinically relevant biomarkers the computational component must begin at the inception of the clinical dilemma to be solved.  This process includes several critical levels of decision-making - all of which are part of our business strategy.  We intend to identify more relevant and predictable biomarkers for drug discovery so that new and better medicines and diagnostic markers can be developed for patients worldwide.
  Operational Activities
  The Company actively markets its technology and related developmental expertise to prospects in the healthcare field, including some of the world’s largest corporations in the pharmaceutical, biotech, and life sciences industries.  Given the scope of some of these prospects, the sales cycle can be quite long, but management believes that these marketing efforts will produce favorable results in the future.
  Licensing and Commercialization Developments
  HDC has identified, patent-protected and recently licensed a genetic biomarker signature that identifies clinically significant high grade prostate cancer cells based on analysis of tissue samples.  Upon the achievement of successful validation, the Company’s test may be used to analyze patients with elevated PSA or abnormal rectal exams, with negative biopsy results to determine if there is genomic evidence of grade three or higher cancer cells present in biopsy tissue, indicating the presence of a cancer potentially missed by the biopsy.
  On July 31, 2007, we announced our alliance and licensing agreement with Clarient, Inc. (recently acquired by GE Healthcare) for development of a new molecular diagnostic test for prostate cancer based on our discovered prostate cancer biomarker signature.  During 2008, the Company and Clarient successfully completed all phases of the clinical trial process with the hope of achieving the statistical significance necessary to validate the ability to commercialize a test.  Results from the Phase I, Phase II and Phase III double-blinded clinical validation studies were completed at Clarient and published in the peer reviewed journal UroToday International. These results demonstrated a high success rate for identifying the presence of Grade 3 or higher prostate cancer cells (clinically significant cancer), as well as normal BPH (benign prostatic hyperplasia) cells.  Clarient has not yet reported any commercial sales to us.  Clarient has not been actively marketing the 4-gene prostate cancer test because pathologists, not urologists, are their primary client. Due to cash constraints, Clarient did not have the funding to create a separate sales force focused on urologists. With the recent GE Healthcare acquisition, combining In Vivo imaging and In Vitro molecular diagnostics is now a primary focus for Clarient/GE Healthcare and prostate cancer is one of the primary diseases in which we believe they plan to combine the modalities for better patient management. Although Clarient/GE Healthcare is not currently marketing the prostate cancer test, the test is available through Clarient’s PATHSiTETM virtual reporting tool and accessible to Clarient/GE Healthcare’s entire pathology network.
  On January 30, 2009, we entered into a license agreement with Abbott Molecular Inc. (“Abbott”), pursuant to which, among other things, the Company granted Abbott a worldwide, exclusive, royalty-bearing license for in-vitro diagnostic rights to develop and commercialize reagent test kits for the Company’s prostate cancer molecular diagnostic tests in both biopsy tissue and urine.  We also granted Abbott a worldwide royalty bearing, co-exclusive license (co-exclusive with Quest) for developing and commercializing a laboratory developed urine based molecular diagnostic test (“LDT”) for clinically significant prostate cancer, which could be commercialized in a clinical laboratory and sold directly to physicians for their patients. Because Abbott is primarily in the In-Vitro Diagnostic (IVD) development business, Abbott may choose to develop, validate and commercialize the IVD version of the 4-gene prostate cancer test and not pursue the Laboratory Developed Test (LDT) development. If that is the case, we would ask Abbott to return the LDT rights to HDC. If Abbott returns the LDT rights to HDC, we will immediately begin licensing discussions with clinical laboratories in the US, Europe and China to pursue development, validation and commercialization of the LDT version of the HDC 4-gene prostate cancer test which potentially increases our global reach for commercialization of the LDT version of the test. Abbott paid a one-time initial signing fee of $100,000 and then reimbursed us $100,000 in development costs as required by the license agreement.  In addition, with respect to products subject to the license (the “Products”), Abbott will pay milestone payments to us upon achievement of the following events:  $250,000 upon completion of Phases 1 and 2 as described in the FDA Submission Plan; $250,000 upon completion of Phases3 and 4 as described in the FDASubmission Plan; $500,000 upon submission of either a 510(k) or Pre-Market Approval (“PMA”) submission to the FDA; and $500,000 upon the receipt of a written notification by the FDA of the approval of the applicable 510(k) or PMA submission. We will also receive royalty payments of 10% of Abbott’s Net Sales for the Products with medical utility claims for use on prostate biopsy tissue samples, and 5% of Abbott’s Net Sales for the Products with medical utility claims for use on urine samples. In addition to the royalty payments, with respect to the urine based products, Abbott will also pay us certain amounts upon the achievement of certain milestones as follows:  after the sale of 50,000 tests in a calendar year, a milestone payment of $200,000; after a sale of 200,000 tests in a calendar year, a milestone payment of $750,000; and after a sale of 500,000 tests in a calendar year, a milestone payment of $1,500,000.  ”Net Sales” is equal to Abbott’s gross revenue less 5%, subject to adjustments as described in the license.
  30
  We have now completed the Abbott clinical trial for Phase 1 and 2 of the urine prostate cancer test validation process. In addition, we have completed all clinical laboratory genomic testing on the clinical trial specimens at MD Anderson Cancer Center. We have fully analyzed the data and are pleased with the results. We have met with and submitted all of our results to Abbott for their independent analysis and are awaiting their comments. If Abbott is satisfied with these results, we expect to receive the $250,000 milestone payment for completion of Phase 1 and 2 and move on to Phase 3 and 4 as described in the FDA Submission Plan.  If  for some reason Abbott chooses not to move forward, we will immediately begin licensing discussions with other international IVD companies, as well as, clinical laboratories in the US, Europe and China.
  On January 30, 2009, we entered into a license agreement with Quest, pursuant to which the Company granted to Quest a non-exclusive, royalty bearing license for developing and commercializing a urine-based LDT for clinically significant prostate cancer which could be commercialized and sold by Quest’s clinical laboratories directly to physicians for their patients.  In consideration of granting the license to Quest, Quest paid a license fee to the Company and will pay ongoing royalty payments, certain milestone payments, and development fees.
  Quest Diagnostics has now completed the urine prostate cancer test clinical trial described in our Licensing and Development Agreement with them. In addition, Quest has completed all clinical laboratory genomic testing on the clinical trial specimens. The clinical trial has now been un-blinded and the patient information has been supplied to Quest.  Quest is now in the process of fully analyzing the data and validating the results.
  The Company is continuing to advance the development of the urine based prostate cancer test. The Company is pleased with the data and results completed to date.  In a recent clinical trial, we have now demonstrated that that the 4-gene urine test for clinically significant prostate cancer outperformed serum PSA, Digital Rectal Exam (DRE), as well as, published data for PCA3 and TMPRSS-ERG assays for the early detection of prostate cancer.
  Additionally, preliminary testing has demonstrated that mRNA transcripts from the four genes can be detected in the plasma (blood) of patients with benign prostate hyperplasia (BPH) as well as from patients with prostate cancer.  The levels in prostate cancer have been shown to be different from those in benign prostate hyperplasia (BPH). Further validation and a larger scale study are needed to confirm this preliminary observation and to establish correlation with clinical behaviors.
  We continue to progress towards the goal of commercialization of the 4-gene urine-based prostate cancer test at Quest and with Abbott  Upon completion of development and validation to the satisfaction of Quest, the 4-gene urine test for prostate cancer can be immediately commercializedas an LDT under the current CLIA regulations.Upon regulatory approval, Abbott could immediately begin commercialization and sale of the individual In-VitroDiagnostic (IVD) test kits to additional national, regional and local clinical laboratories, as well as hospital, academic and physician laboratories around the world.
  HDC licensed its two breast cancer diagnostic technologies (MammoSIGHT, for detecting malignancy in mammograms and MetastaSIGHT, for identifying circulating tumor cells in the blood) to Smart Personalized Medicine, LLC (“SPM”) pursuant to an amended license agreement in exchange for a 20% ownership position in SPM and a per test royalty up to 7.5% based on net proceeds received from the sale of the new breast cancer prognostic test other than by Quest Diagnostics Incorporated (“Quest”).  The detection component of these technologies finds the areas of particular interest in the image and separates these objects from the background.  The feature extraction component formulates numerical values relevant to the classification task from the segmented objects.  HDC’s patented technology can be used within all diagnostic imaging radiology techniques, including PET scans, CT scans, and MRIs.
  31
  Effective March 11, 2010, the Company and SPM amended (the “Amendment”) the original License Agreement, dated August 22, 2008 (the “SPM License Agreement”), pursuant to which we had licensed our intellectual property to SPM for use in the development of breast cancer products. As amended, we will receive all payments under the Quest Development Agreement and License Agreement directly from Quest, and SPM will not be required to make any additional payments to the Company related to either such agreement.  With respect to SPM proceeds received unrelated to the arrangement with Quest, we will receive a per test royalty up to 7.5% based on net proceeds received from a Test (as defined in the SPM License Agreement) and such additional allocation and distribution of license fees and royalties received from future sublicenses with third parties as may be agreed.  In addition, our equity percentage interest in SPM was increased from 15% to 20%, and such equity percentage interest may be diluted only to the same extent and in the same manner as each other initial equity percentage interest holder; provided, however, that when raising additional equity, SPM must obtain our prior written approval of the terms and conditions of such equity offering.  SPM expects that once the laboratory test is developed with Quest, it can provide physicians and their patients a way to better determine the probability of relapse, allowing patients with good prognosis results an opportunity to avoid unnecessary expensive and traumatic chemotherapy treatments.
  On March 11, 2010, the Company, Quest and SPM entered into a Development Agreement (the “Quest Development Agreement”) pursuant to which the Company and SPM will assist Quest in the development of new laboratory tests for aiding in the selection of breast cancer therapies. The Company, SPM and Quest also entered a related Licensing Agreement (the “Quest License”).
  Pursuant to the Quest License, SPM granted a co-exclusive (with SPM) sublicense to utilize the Licensed Patent Rights to the extent necessary to enable Quest to develop Products and perform the Validation Work under the Quest Development Agreement. Quest has the right to use SPM’s Breast Cancer Database developed in association with a world renowned academic cancer center (the “Database”).  In consideration for the license, Quest has separately made payments to SPM and us. Such payments to us include a $500,000 “License Fee (which has been paid in full), License Maintenance Fees” equal to $8,750 for the first year and $17,500 for each year thereafter (with such fees being credited against the “Royalty Payments” described below), upon the publication of a study performed for the Validation Work an “Initial Product License Fee” of $125,000 for each of the first two Products, and “Royalty Payments” equal to 2.45% of the Net Sales of each Licensed Product (i.e., each breast cancer test) sold by Quest. Quest will reimburse SPM and us for costs incurred related to any Validation Work done with respect to a Product.
  Pursuant to the Quest License, in the event of a termination for cause by Quest prior to the termination of any products, Quest has the right to receive a refund of pro rata portion of the License Fee based on the ratio of the number of months from the date of termination until the eighteenth month anniversary of the agreement to such eighteenth month period.
 
 Pursuant to the Quest Development Agreement, we are required to use the support vector machine technology and other intellectual property and expertise licensed to SPM to analyze data for the development and/or validation of applications of clinical laboratory services, In Vitro Diagnostic kits, clinical trial services and the other elements of “Field” (collectively, the “Products”).
  In consideration for our efforts under the Quest Development Agreement, Quest agreed to pay us $375,000 in development fees of which $291,662 has been received by HDC, with $83,338 remaining to be paid under the contract. These amounts are in addition to the $500,000 License Fee previously received as described above. Quest timely paid the first seven development fee monthly installments; however, the final two installment payments have not been made as required under the agreement.
  A collaborative effort between SPM and HDC is underway at the MD Anderson Cancer Center (“MDACC”) in Houston, Texas.  The Principal Investigator at MDACC is completing the review of the breast cancer tissue blocks maintained in the tissue repository, to identify those subjects who meet the inclusion criteria for the study.  Once the tissue blocks have been identified for the study, they will be assessed for hormone and HER-2 protein receptor status and subjected to multi parameter protein and gene expression assays, followed by SVM based pattern recognition analysis to identify those features that best predict cancer recurrence, time to recurrence and overall patient survival.
  In February 2010, the Company entered into an agreement with the Pancreas, Biliary and Liver Surgery Center of New York (the “Pancreas Center”) to develop new molecular diagnostic tests for the early detection of pancreatic cancer. The Pancreas, Biliary and Liver Surgery Center is under the leadership of Drs. Michael Wayne, Franklin Kassim and Avram Cooperman.  Under the terms of the agreement, the Pancreas, Biliary and Liver Surgery Center will provide all specimens from their collected specimen banks, specimens on all new patients and all associated clinical and outcomes data. The specimens will include tissue, blood and urine.
  32
  The Company’s relationship with the Pancreas Center continued without interruption, irrespective of the fact that Saint Vincent Catholic Medical Centers located in New York City, has opted to close its operations.  The Pancreas Center has affiliated with Beth Israel Medical Center and is expected to affiliate with other hospitals in the New York City region in the near future.
  To date, over 55 fresh frozen pancreatic tissues with accompanying blood specimens have now been collected and stored for the genomic analysis.  We plan to perform both gene expression profiling and profiling of micro-RNAs on specimens from pancreatic cancers, cysts and pancreatitis tissues.  SVM based pattern recognition analysis will then be used to identify the features that can discriminate these three tissues.  We will then interrogate the blood specimens to quantitate the gene transcripts (mRNA) and micro-RNAs and establish a gene based test to permit the early detection of pancreatic cancer. The Company will use its patent protected SVM-based discovery technology and science team in an attempt to develop these new molecular diagnostic tests for pancreatic cancer in a similar fashion to the urine-based prostate cancer test developed by the Company and licensed for development and commercialization to Quest Diagnostics and Abbott on a royalty-based, world-wide co-exclusive basis.  The Company will own all of the intellectual property and commercialization rights to these newly discovered molecular diagnostic tests for pancreatic cancer. Now that the Company has these development pancreatic tissues collected and stored, we can advance our discussions to partner with a large clinical laboratory and a large diagnostic instrument company for development, marketing and commercialization of these new pancreatic cancer tests.
  HDC has identified and patent-protected a subset of genes that separates benign prostatic hyperplasia (BPH) from prostate cancer with a high degree of accuracy.  This same set of genes also separated BPH from normal tissue patterns, indicating that BPH is a disease with molecular characteristics of its own.  This discovery could be used to develop a new non-invasive diagnostic test for BPH, which does not currently exist, as well as a completely new type of therapy for patients with this disease.  This patent-protected gene set was developed in association with an international pharmaceutical company to be used as a surrogate biomarker for their clinical trial evaluating a new BPH drug.
  We have identified and patent protected fifty gene biomarkers representing 5 gene pathways involved with the development of benign prostatic hypertrophic disease (BPH).   All of these protein products of the genes are known to be secreted into the circulation or are highly likely to be secreted proteins from prostatic cells.  This blood protein test may be useful as companion diagnostic for use in clinical trials of new drug treatments. We intend to seek a strategic pharmaceutical partner, which has BPH drugs in the market currently or under development to finish development, finalize validation and commercialize a new molecular diagnostic test for BPH.
  HDC has identified and patent-protected colon cancer-specific biomarkers that can be used in the development of diagnostic assays for cancer detection, disease discrimination, and even a potential vaccine.  The aim of this early biomarker discovery project was to define the gene expression patterns associated with colon cancer.  Our RFE-SVM served as an effective tool for sifting through the voluminous data of thousands of measurements to highlight only those genes that optimally contributed to the study focus.
  In February 2010, we announced that we are developing a melanoma/skin cancer mobile phone application which will enable customers to take a picture of a mole, lesion or birthmark, send it to HDC, and receive a risk assessment for melanoma and other skin cancer on their mobile phone.  This first-ever melanoma/skin cancer mobile phone application using our SVM technology will employ sophisticated image analysis techniques using patent protected algorithms for evaluating moles, lesions and birthmarks.  Since mid-February 2010, the Company has made progress on our melanoma risk management mobile phone application. . We have selected Apple’s iPhone as our initial mobile platform and have been focused on tuning image capture and analysis capabilities for skin lesions and moles for that platform.   In addition to the images we used to successfully train our melanoma app, we have now licensed a set of skin lesions including melanomas from Johns Hopkins University known as Dermatlas. We processed all the melanoma images from Dermatlas and a subset of the benign moles using the iPhone app. The results indicate a high sensitivity and specificity. In addition, we have been able to successfully eliminate images that are not skin lesions with a 99% accuracy rate. The Company has initiated discussions with potential U.S. and non-U.S. laboratory partners, dermatologists and marketing partners.  A beta version of the app has been completed and is currently being tested in the field. A more advanced version of the app with features and a user interface optimized for consumer use is in the final stages of development.  In addition to the potential revenue generated from the app itself, we may generate revenue from skin biopsies being referred by our app for Dermatopathology review with our clinical laboratory partners. It is important for us to have our global clinical laboratory partnerships in place before formally launching the melanoma app so that we can maximize the revenue stream from our referrals. We continue to have these partnership discussions with clinical laboratories both inside the US and internationally.
  33
  Management believes that our research agreement with a leading biotech company to develop an SVM-based diagnostic test to help interpret flow cell cytometry data for myelodysplastic syndrome (pre-leukemia) has resulted in a successful proof of concept. The Company is pleased with the development progress to date, and the Company is now in discussions with clinical laboratories capable of completing development, final validation and commercialization of the new diagnostic test for the interpretation of flow cytometry data.
  The Company is currently developing a software tool for the computer assisted analysis of chromosome abnormalities, referred to as cytogenetic analysis, using pattern recognition combined with image analysis techniques.  Innovative techniques for image processing are being developed to address the challenges in the cytogenetics product, which is to properly accommodate the variability of the chromosome images while retaining sensitivity to recognize subtle abnormalities in the chromosomes. The preprocessing techniques are designed to improve the performance of the subsequent SVM learning system. The initial implementation of the software system incorporating the new techniques is scheduled for validation in the second quarter of 2011. Large scale testing of the system is expected to start immediately after the software release. Performance data from the test will be collected and analyzed to guide the further improvements of the system. The Company is in discussions with a large national clinical laboratory for development, validation and commercialization of this new image analysis tool for cytogenetic analysis.
  We have developed a set of sophisticated image processing operations to isolate the potentially abnormal cells in a high resolution digitized Pap smear image. Features relevant to the recognition problem can be extracted from the segmented cells. A set of fundamental geometrical, statistical, and topological features have been defined. These features can be used to facilitate SVM training, with other high level classification systems.  The data generated to date supports the development a laboratory developed test (LDT) for the interpretation of Pap smear images.  We are in discussions with a clinical laboratory to develop, validate and commercialize the LDT version of this computer assisted Pap smear interpretation tool.
  In January 2007, SVM Capital, LLC was formed as a joint venture between HDC and Atlantic Alpha Strategies, LLC (“Atlantic Alpha”) to explore and exploit the potential applicability of our SVM technology to quantitative investment management techniques.  Atlantic Alpha’s management has over thirty years of experience in commodity and futures trading.  Atlantic Alpha reports that the SVM technology is now working well with dynamic time series for S&P data accumulated over the past fifty-eight years as well as a limited pilot program of real-time trading activity, and that the latest SVM-derived models generated by SVM Capital have successfully outperformed the static buy-and-hold model both in increased returns as well as in reduced risk.  After more than 2 years of successful live trading, Atlantic Alpha has now deployed the SVM K-2 model to over 30 securities.  These include nation ETF’s, large cap equities and commodities.  Atlantic Alpha is now exclusively trading SVM’s K-2 model and will begin offering this technology to the public via a new fund which began trading in January 2011.  HDC owns a 45% equity position in SVM Capital.
  We continue our dialogue with several other important industry players in the healthcare field and, in certain situations, related to the field of molecular diagnostics, including proposed projects with some of the world’s largest pharmaceutical and diagnostic companies, such as the potential development and commercialization of our colon cancer molecular diagnostic test with an international diagnostics company, and other prospective partnership opportunities with additional companies and research institutions.  We also continue to pursue development opportunities with our existing licensing customers.
  While we have a number of negotiations in process with potential licensing and CLIA approved clinical laboratory partners, there is a possibility that we will be unable to reach agreement with any party, that the negotiations continue but are not finalized in the near term, or that those that may be finalized do not provide the economic return that we expect.
  The Company has recorded revenue of $2,013,741 from inception through December 31, 2010. This amount includes deferred revenue yet to be recognized of $945,898 shown as a liability on the balance sheet.
  Intellectual Property Developments
  The U.S. Patent and Trademark Office issued one new patent to the Company in March 2010, which covers a method for identifying biomarkers using protein mass spectrographic data.  In August 2010, the U.S. Patent and Trademark Office issued one new patent to the Company for an SVM-based method for analyzing data contained within a text document to identify patterns within the text.  Such methods may be incorporated into search engines.  In September 2010, the U.S. Patent and Trademark Office issued two new patents to the Company, the first covering a computer system through which a remote user may submit data over the internet to a service provider for SVM processing for a fee.  The second patent covers a feature selection technique that can be used to identify and rank the most important components of input data that are needed to solve complex pattern recognition problems. In December 2010, the Canadian Intellectual Property Office issued a new patent to the Company covering its RFE-SVM technology.  With the issuance of these patents, the Company now holds the exclusive rights to 50 issued U.S. and foreign patents covering uses of SVM and FGM technology for discovery of knowledge from large data sets.
  34
  In February 2010, the Company filed a continuation patent application based on its two earlier applications covering SVM analysis of spectral data to seek further broadened claims.  This method is of particular importance in the field of proteomics and protein biomarker discovery, but also covers other applications in which data is in the form of spectra.  In June 2010, the Canadian Intellectual Property Office issued a notice of allowance of the Company’s pending patent application covering pre-processing and post-processing of data for enhancing knowledge discovered using a support vector machine. The European Patent Office issued a notice of intent to grant a patent on the European counterpart of this application the following October.  Also in June, the Company filed a new continuation patent application to seek further expanded coverage of a computer system for providing support vector machine processing services for pay to users who transmit their data over the internet.   In August 2010, the European Patent Office issued a notice of intent to grant a patent covering the Company’s RFE-SVM technology. The grant of this patent will open the door to pursuing a number of unauthorized users of the RFE-SVM method in Europe. Also in August, the Company filed a new continuation application covering a method for recognizing and eliminating noise within data to facilitate more accurate classification of the data.
  In September 2010, the Company filed a new continuation application covering an SVM-based method for evaluating features within data that have been identified as significant by another feature selection method.  This method is particularly useful in flagging false positives within classification results performed by other methods. In October 2010, the U.S. Patent and Trademark Office issued a notice of allowance for the Company’s method for unsupervised, cluster-based recognition of patterns in characters or words within speech or written text.  In November 2010, the U.S. Patent and Trademark Office issued a notice of allowance for the Company’s third patent application for a web-based data mining system that utilizes multiple support vector machine models to analyze combinations of biological data of many different types to produce ranked lists of genes or proteins that may be used as biomarkers.  The claims of this application were filed to seek expanded coverage of the previously-patented system. Also in November, the Company filed a new continuation application covering its RFE-SVM method.  This application includes claims copied from an Intel patent that claimed RFE-SVM, and was filed to provoke an interference proceeding in the U.S. Patent and Trademark Office to seek an administrative decision that the Company is the exclusive owner of all rights in the RFE-SVM method. In December 2010, another continuation application was filed with further expanded claims to the RFE-SVM method.  The claims of this application correspond to those granted in the corresponding European application.  That same month, the Company filed patent applications in the U.S. Patent and Trademark Office and in the World Intellectual Property Office covering its system and method for remote melanoma screening using a smart phone.  These applications incorporated the disclosures of four provisional applications that had been filed in late 2009 and early 2010.  Also in December 2010, the Canadian Intellectual Property Office issued a notice of allowance of the Company’s pending patent application for a method of enhancing knowledge discovered from multiple data sets using multiple support vector machines.
  The Company plans to initiate its new academic/research institution licensing program in the second quarter of 2011.  Universities and research institutions that have reported the use of SVMs in published reports such as academic journals and conference proceedings will be contacted and offered a paid-up license against past and future infringement of the Company’s patented technology for a nominal one-time license administrative fee plus a percentage of any revenue generated when the results of the SVM usage are licensed for commercialization.  The program will begin first with admitted usages of the Company’s SVM-RFE method.  To date, over 30 U.S. institutions have been identified as using RFE through review of academic publications, with many of the reported uses relating to biomarker discovery and medical diagnostics.  The Company plans to expand its licensing efforts to European institutions once all formalities have been completed for validation of the recently-granted European SVM-RFE patent.  The program will later be broadened to other reported uses of SVM and other technology covered by the Company’s patents.
  35
  Year Ended December 31, 2010 Compared with Year Ended December 31, 2009
  Revenue
  Since December 31, 2005, the Company has received cash from revenue generating activities totaling $2,013,741, which consists of recorded revenue of $1,067,843 through December 31, 2010 and deferred revenue yet to be recognized of $945,898 at December 31, 2010.
  For the year ended December 31, 2010, revenue was $396,176 compared with $61,803 in revenue for the year ended December 31, 2009.  Revenue is recognized for licensing and development fees over the period earned, which in most cases is the length of the license.  The revenue recognized in 2010 was primarily the recognition of revenue of $291,662 associated with our breast cancer development agreement with Quest.  As of December 31, 2010, the Company had deferred revenue of $945,898, which includes cash received but not yet recognized as revenue. Deferred revenue was $843,935 at December 31, 2009. The increase is due to the new agreements signed in 2010.
  Operating and Other Expenses
  Amortization expense, which is the amortization of costs of acquiring or filing of patents over their estimated useful lives, was $262,719 for the twelve months ended December 31, 2010 and 2009.
  Professional and consulting fees totaled $776,122 for 2010 compared with $67,646 for 2009.  These fees consist primarily of patent filing and maintenance costs, accounting fees, and FDA advisory fees.  The increase was principally due to the change in accounting estimate related to equity grants for Scientific Advisory Board members that was reflected in the 2009 period in which a credit of $325,676 was recorded to reflect this change.  In addition, our patent filing and maintenance increased due to the continued additions to our patent portfolio.
  Legal fees totaled $1,012,500 during the period ending December 31, 2010, and were $312,945 during the same period 2009.  The increase was primarily due to legal costs associated with settlement agreements reached by the Company in 2010. The Company is pleased to have the issues related to these costly settlement agreements behind us as we moved forward and continue to focus our attention on monetizing our IP portfolio.
  Research and development fees were $435,249during 2010 and $26,195 for the same period in 2009. This increase relates primarily to the costs associated with the prostate cancer test clinical trials, the pancreatic cancer specimen collection efforts and the development of the melanoma mobile device image analysis application.
  Compensation expense of $1,763,101 for the twelve months ended December 31, 2010 was higher than the $939,029 reported for the comparable period of 2009. This increase is due to additional compensation expense related to employees hired in the fourth quarter of 2009 to manage the business and to develop and nurture new strategic partnerships as well as executive bonuses.
  Other general and administrative expenses increased from $461,257 in 2009 to $929,954 in 2010.  This increase principally was due to increased travel costs related to business development opportunities and options granted to a director.  As the Company has increased its staff and entered into new licensing agreements, additional salary and travel expences were incurred which attributed to substantially higher general and administrative expenses in 2010.
  Loss from Operations
  The loss from operations for the twelve months ended December 31, 2010 was $4,783,469 compared to a loss from operations of $2,007,988 for the prior year.  The increased loss was due to the increase in expenses as previously discussed.
  Other Income and Expense
  Interest income was $15,502 for the twelve months ended December 31, 2010, compared to $6,393 in 2009.  Interest income increased because the Company had more cash on hand to invest throughout the 2010 period.
  The Company entered into settlement agreements with the lead purchaser in the Company’s 2007 Private Placement and with R. Scott Tobin in the amounts of $1,877,647 and $396,779 respectively.  As a result, the Company realized a settlement charge of $2,274,426 in 2010. For the period ending December 31, 2009 there were no settlement charges.
  36
  Interest expense of $159 for the period ended December 31, 2010 was significantly less than the $15,276 recorded for the same period 2009.  The reduction is a result of company retiring all of its short and long term debt in 2009.
  Net Loss
  The net loss for the twelve months ended December 31, 2010 was $7,042,553 compared to a net loss of $2,016,871 for the twelve months ended December 31, 2009.  The increased loss was due to the overall increase in expenses as previously discussed. Specifically, the increases in legal fees and settlement costs were responsible for the majority of the increased loss.
  Net loss per share attributable to common shareholders was $0.03 and $.01 for twelve months ended December 31, 2010 and 2009, respectfully.
  Liquidity and Capital Resources
  At December 31, 2010, the Company had $3,295,630 in cash and cash equivalents and total current liabilities of $1,079,073.  Additionally, during the first quarter of 2011, we received approximately $135,156 in cash from the receipt of a final payment under the Qualified Therapeutic Development Program (“QTDP”) grant program from the United States Government.  On March 30, 2011, our total cash and cash equivalents was approximately $2,500,000.  As a result we believe we have sufficient resources to meet all of our current obligations.  Our net loss for the twelve months ended December 31, 2010 was $7,042,553.  However, cash used by operating activities for the twelve months ended December 31, 2010 was $5,396,098. Net cash provided by investment activities was $615,405 due to the acquisition of fixed assets and the redemption of $622,358 in certificates of deposit.  Cash provided by financing activities was $5,747,411, from the issuance of common stock as a result of warrant exercises.
  The following table summarizes the due dates of our contractual obligations.
  Total


1 Year

Or Less


More Than

1 YearAccrued Compensation

$
59,000


$
59,000


$
-Office Lease*


204,160



40,140


$
164,020Total

$
263,160


$
99,140


$
164,020
  * The Company is in the process of renegotiating its lease.
  The Company has relied primarily on equity and debt financing for liquidity.  The Company produced sales, licensing, and developmental revenue starting in late 2005 and must increase revenues in order to generate sufficient cash to continue operations.  The Company’s plan to have sufficient cash to support operations is comprised of generating revenue through licensing its significant patent portfolio, providing services related to those patents, and obtaining additional equity or debt financing.  The Company has been and continues to be in meaningful discussions with a variety of parties, which if successful may result in significant revenue, as further described above.  In the meantime, the Company has implemented a cash conservation program.
  Cash Flow from Operating Activities
  Cash flow for the period ending December 31, 2010 consisted primarily of the previously discussed Quest licensing and development agreements initiated in the first quarter of 2010.  As a result, the company realized current revenue of $291,622 and increase deferred revenue by $500,000.
  In September 2010 we received royalty proceeds of $6,478 related to our licensing agreement with Bruker Daltonics.  The royalties relate to Bruker Daltonics’ sales of its ClinProToolsTM clinical proteomics product line for its mass spectrometers, which contains HDC’s SVM technology.
  Cash outflow from operating activities included legal costs of $1,012,500 and settlement charges of $2,274,426 which are not expected to continue in future periods.
  Cash Flow from Financing Activities
  In connection with the 2007 private placement, the Company issued warrants to purchase 51,538,822 shares of restricted common stock at an exercise price of $0.14 (the “Tranche 1 Warrants”) and warrants to purchase 51,538,822 shares of restricted common stock at an exercise price of $0.19 (the “Tranche 2 Warrants”).The Company exercised its call rights relating to certain of the Tranche 2 Warrants during the first quarter of 2010.  As a result, the holders of the Tranche 2 Warrants who received the Company’s call notice were obligated to purchase 14,731,217 shares of restricted common stock or forfeit an equal number of Tranche 2 Warrant shares.   The number of shares of common stock purchased relating to the call notice was 11,729,390 and 3,001,827 Warrants were forfeited.  The Company received $2,228,584 in gross proceeds from the purchase of the common stock related to the call provision.
  37
  Warrants that were exercised independent of the Tranche 2 Warrant call totaled 4,531,250 warrant shares with proceeds to the Company of $810,938.
  On September 7, 2010, the warrants related to the 2007private placement expired. As a result, 10,952,261 warrants, representing both the $0.14 and the $0.19 tranches, were exercised on or before September 7,2010 resulting in proceeds of $1,654,436 to be delivered to the Company.
  In addition to the warrant conversions described above, there were 6,875,000 warrants converted into shares as part of the settlement on July 27, 2010, with the lead purchaser in the 2007 private placement. Therefore, in addition to the warrants converted on or before September 7, 2010, 6,875,000 warrants were converted and$1,134,375 was credited to Prime Mover Capital Partners, LP in order to cover the aggregate price of the warrants.
  Warrants exercised in of 2010 that were exercised independent of the 2007 private placement totaled 300,000 warrant shares with proceeds to the Company of $24,000.
  See Note J – Stockholders’ Equity to our financial statements for the fiscal years ended December 31, 2010 and 2009 for further information with respect to the warrants issued in connection with the 2007 private placement.
 
 The Series B Preferred Stock  accrues dividends at the rate of 10% of the Series B Original Issue Price per year, which shall be satisfied by the fifth anniversary of the issuance of such shares of the Series B Preferred Stock (the “Original Issue Date”) by the Company’s issuance of the number of shares of Common Stock equal to such accrued dividends divided by the average closing price of the Company’s Common Stock as reported on the Over-the-Counter-Bulletin Board or other exchange on which the Company’s Common Stock trades during the prior ten business days or by the payment of cash, as the Company may determine in its sole discretion. Dividends have been accrued for the Series B Preferred Stock in the amount of $189,819 as of December 31, 2010 and $14,993 as of December 31, 2009.
  During the second quarter of 2010, the Company paid $99,614 to the Series B holders for the special dividend. Also, during the fourth quarter of 2010, one Series B holder requested, and the Company complied with the Series B holder’s request to convert 625,000 Series B Preferred Stock to Common Stock.  The Company also paid the Series B holder who chose to convert, their portion of the accrued special dividend and accrued dividend.  The total paid to this Series B holder was $5,758.
  On June 30, 2009, we issued a promissory note for $500,000 to a director and long-term shareholder.  The promissory note contained an 8% annual interest rate and was due on January 4, 2010.  The promissory note was secured by certain intellectual property and other assets of the Company.  The proceeds from the promissory note were used for general working capital purposes.  This short term debt financing was intended to serve as a bridge to anticipated future licensing revenues in a manner which is not dilutive to shareholders.  On November 11, 2009, the Company paid in full the outstanding balance of $500,000, with a total payment, including interest, of $514,437, thus eliminating this debt and any collateral obligations on the Company’s intellectual property or other assets.
  The Company continues to incur maintenance fees (fees to various governmental patent offices on previously filed patents) for its patent portfolio and expects those fees to be approximately $250,000 during 2011.
  The Company has relied primarily on equity funding plus debt financing for liquidity.  While the Company has produced limited revenue, it must continue to do so in order to generate sufficient cash to continue operations.  The Company believes it currently has sufficient cash to support operations until it is able to generate revenue through royalty payments from the molecular diagnostic deals signed, revenue generation from the melanoma risk assessment and additional new licensing fees from its significant patent portfolio and additional new licensing fees from its significant patent portfolio and development fees for providing services related to those patents.   In addition, the Company has been and continues to be in meaningful discussions with a variety of parties related to the commercialization efforts discussed above, which if successful, may result in significant revenue.  Should it prove necessary, the Company may also consider such alternatives as raising additional equity through private placements and/or debt offerings.
  38
  Subsequent Events
   On January 19, 2011, the European Patent Office published the notice of grant of the Company’s RFE-SVM patent in the European Patent Bulletin.  On February 2, 2011, a new continuation application was filed including claims directed to identification of gene co-regulation patterns using unsupervised clustering.  Such a method is useful when some of the data is missing labels.  The parent of this application, covering the use of clustering methods for recognizing patterns in text or speech, issued later the same month.  Also in February, the U.S. Patent and Trademark Office issued a notice of allowance for the Company’s patent application with claims directed to an SVM-based method for evaluating features within data that have been identified as significant by another feature selection method.  This application had been filed in September 2010. In March 2011, the Canadian Intellectual Property Office issued a new Canadian patent covering the Company’s method for pre-processing and post-processing of data for enhancing knowledge discovered using a support vector machine. With the new filing, and issuances, the Company now has 49 issued and 39 pending U.S. and foreign patent applications.
 
 Critical Accounting Policies, Estimates and Assumptions
  We consider our accounting policies related to revenue recognition, impairment of intangible assets and stock based compensation to be critical accounting policies. A number of significant estimates, assumptions, and judgments are inherent in our determination of when to recognize revenue, how to evaluate our intangible assets, and stock-based compensation expense. These estimates, assumptions and judgments include deciding whether the elements required to recognize revenue from a particular arrangement are present, estimating the fair value of an intangible asset, which represents the future undiscounted cash flows to be derived from the intangible asset, and estimating the useful life and volatility of stock awards granted. We base our estimates and judgments on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates.
  Valuation of intangible and other long-lived assets.
  We assess the carrying value of intangible and other long-lived assets at least annually, which requires us to make assumptions and judgments regarding the future cash flows related to these assets.  The assets are considered to be impaired if we determine that the carrying value may not be recoverable based upon our assessment of events or changes in circumstances such as:
  ■
the asset’s ability to continue to generate income from operations and positive cash flow in future periods;
  ■
loss of legal ownership or title to the asset;
  ■
significant changes in our strategic business objectives and utilization of the asset(s); and
  ■
the impact of significant negative industry or economic trends.
  If the assets are considered to be impaired, the impairment we recognize is the amount by which the carrying value of the assets exceeds the fair value of the assets. In addition, we base the useful lives and related amortization or depreciation expense on our estimate of the period that the assets will generate revenues or otherwise be used by us. We also periodically review the lives assigned to our intangible assets to ensure that our initial estimates do not exceed any revised estimated periods from which we expect to realize cash flows from the technologies. If a change were to occur in any of the above-mentioned factors or estimates, the likelihood of a material change in our reported results would increase.
  Revenue Recognition
  We recognize revenue principally from license and royalty fees for intellectual property and from development agreements with research partners. Each element of revenue recognition requires a certain amount of judgment to determine if the following criteria have been met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the seller’s price to the buyer is fixed or determinable; (iv) collectability is reasonably assured, and (v) both title and the risks and rewards of ownership are transferred to the buyer. We are required to make significant estimates involving our recognition of revenue from license and royalty fees. Our license and royalty fees revenue estimates depend upon our interpretation of the specific terms of each individual arrangement and our judgment to determine if the arrangement has more than one deliverable and how each of these deliverables should be measured and allocated to revenue. In addition, we have to make significant estimates about the useful life of the technology transferred to determine when the risk and rewards of ownership have transferred to the buyer to decide the period of time to recognize revenue. In certain circumstances we are required to make judgments about the reliability of third party sales information and recognition of royalty revenue before actual cash payments for these royalties have been received.  Changes to these assumptions or market conditions could cause changes in revenues.
  39
  Share-Based Compensation
  Share-based compensation expense is significant to our financial position and results of operations, even though no cash is used for such expense. In determining the period expense associated with unvested options, we estimate the fair value of each option at the date of grant. We believe it is important for investors to be aware of the high degree of subjectivity involved when using option pricing models to estimate share-based compensation. The determination of the fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, our valuation methodology, the expected term, expected stock price volatility over the term of the awards, the risk-free interest rate, expected dividends and pre-vesting forfeitures. If any one of these factors changes and we employ different assumptions in future periods, the compensation expense that we record could differ significantly from what we have recorded in the current period.
  For share-based awards, we estimated the expected term by considering various factors including the vesting period of options granted, employees’ historical exercise, and post-employment termination behavior; however, due to the limited history of our Company, such data is limited.  We estimated the expected life will be substantially longer than the vesting period given the early stagenature of our operations and accordingly have used the contractual life as the expected term. Our estimated volatility was derived using our historical stock price volatility. We have never declared or paid any cash dividends on our Common Stock and currently do not anticipate paying such cash dividends. The risk-free interest rate is based upon U.S. Treasury securities with remaining terms similar to the expected term of the share-based awards. For criteria share based award with vesting contingent upon meeting a market condition, we also make assumptions as to the probability of the market condition being met.
  Off-Balance Sheet Arrangements
  The Company has no off-balance sheet arrangements that provide financing, liquidity, market or credit risk support or involve leasing, hedging or research and development services for our business or other similar arrangements that may expose us to liability that is not expressly reflected in the financial statements.
  ITEM 7A.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  As a smaller reporting company, we are not required to provide the information required by this item.
  ITEM 8.         FINANCIAL STATEMENTS
  The following consolidated financial statements are included beginning on page F-1 of this report:
  PageReport of Independent Registered Public Accounting Firm

F-1Balance Sheets as of December 31, 2010 and 2009

F-2Statements of Operations for the years ended December 31, 2010 and 2009

F-3Statements of Stockholders’ Equity for the years ended December 31, 2010 and 2009

F-4Statements of Cash Flows for the years ended December 31, 2010 and 2009

F-5Notes to Consolidated Financial Statements

F-6
  ITEM 9.         CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  None.
  40
  ITEM 9A.       CONTROLS AND PROCEDURES
  Evaluation of Disclosure Controls and Procedures
  As of the end of the period covered by this report (the “Evaluation Date”), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer, who is also serving as our Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon this evaluation, our Chief Executive Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports that are filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms and that our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management including our Chief Executive Officer, as appropriate to allow timely decisions regarding required disclosure.
  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that the Company’s disclosure controls and procedures will detect or uncover every situation involving the failure of persons within the company to disclose material information otherwise required to be set forth in the Company’s periodic reports.
 
 Management’s Annual Report on Internal Controls over Financial Reporting
  The Company’s management is also responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
  Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness 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.
  In connection with the preparation of our annual financial statements, management has undertaken an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2010 based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of those controls.
  Based on this evaluation, under that framework, management has concluded that our internal control over financial reporting was not effective as of December 31, 2010. Our Chief Executive Officer, who is also serving as our Principal Financial Officer, concluded that we have material weaknesses in our internal control over financial reporting because we do not have an adequate segregation of duties due to a limited number of employees among whom duties can be allocated. The lack of segregation of duties is due to the limited nature and resources of the Company.
  This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal controls over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
  41
  Changes In Internal Controls over Financial Reporting
  No changes were made in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
  ITEM 9B.  OTHER INFORMATION
  None.
  PART III
  ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
  Our executive officers, directors are:
  Name
Age
PositionStephen D. Barnhill, M.D.
51
Chairman and Chief Executive Officer, Principal Financial Officer and Principle Accounting OfficerJoseph McKenzie, D.V.M.
60
Lead DirectorD. Paul Graham
48
DirectorCurtis G. Anderson

Herbert A. Fritsche, Ph.D.

John A. Norris

Ramananda Madyastha, M.D., Ph.D.
69

69

63

73
Director

Senior Vice President, Chief Science Officer

Senior Vice President, Chief Regulatory and Technology Officer

Senior Vice President, Research and DevelopmentHong Zhang, Ph.D.
48
Senior Vice President, Computational Medicine
 
 In addition to the information presented in the biographical details below regarding each director’s specific experience, qualifications, attributes and skills that led us to conclude that he should serve as a director, we also believe that all of our directors have a reputation for integrity, honesty and adherence to high ethical standards.  They each have demonstrated business acumen and an ability to exercise sound judgment, as well as a commitment of service to the Company and our Board.
  Stephen D. Barnhill, M.D.,is currently our Chief Executive Officer and has been since September 2003. He also serves as our Chairman of the Board and has been a member of the Board of Directors since November 2003.  On March 28, 2011, Dr. Barnhill was appointed our Principal Financial Officer and Principal Accounting Officer on an interim basis.  He is a physician trained in laboratory medicine and clinical pathology. He has developed and used artificial intelligence, pattern-recognition, and computational techniques in Medicine, Genomics, Proteomics, Diagnostics and Drug Discovery.
  Dr. Barnhill is or has been a Fellow of the American College of Physician Inventors, the American College of International Physicians, the American Medical Association, the American College of Physician Executives, the American Association of Artificial Intelligence, the American College of Managed Care Medicine, the Association of Clinical Scientists, the American Society of Contemporary Medicine and Surgery, the American Society of Law, Medicine and Ethics, the Southern MedicalSociety, the American Federation for Clinical Research, and the National Federation of Catholic Physicians.
  Dr. Barnhill founded the Barnhill Clinical Laboratories in 1988 and served as Chairman, CEO, President and Medical Director. This laboratory was later acquired by Corning-Metpath in 1989 and after the acquisition he served as Medical Director of this clinical laboratory until 1992.
  In 1992, Dr. Barnhill founded National Medical Specialty Laboratories and served as Chairman, CEO, President, and Medical Director. This research laboratory was founded to utilize pattern-recognition mathematics and artificial intelligence techniques in cancer diagnosis.  Dr. Barnhill is an inventor on some of the very first patents issued by the United States Patent and Trademark Office for the use of neural networks in medicine. This company was acquired by Horus Therapeutics, a New York based pharmaceutical company.  Dr. Barnhill served as Executive Vice-President and Chairman of the Scientific Advisory Board for Horus Therapeutics until 1998. Johnson & Johnson later acquired the Horus patents invented by Dr. Barnhill.
  42




In 1999, Dr. Barnhill founded and served as Chairman, President and CEO of Barnhill BioInformatics, Inc., which later became Barnhill Genomics, Inc. and BioWulf Technologies, LLC and raised over $13.5 million in private placement funding.   The primary focus of these companies was to utilize the next generation of artificial intelligence and pattern-recognition techniques, known as support vector machines, to identify genes that cause cancer. Dr. Barnhill is the sole inventor on the very first patents issued by the United States Patent and Trademark Office for the use of support vector machines in medicine.  From the summer of 2000 until he organized The Barnhill Group L.L.C. in the summer of 2003, Dr. Barnhill was not engaged in any professional activities as the result of a non-compete agreement signed by Dr. Barnhill when he left the employment of Barnhill Genomics, Inc.
  Joseph McKenzie, D.V.M.,has been a member of the Board of Directors since April 2009. Dr. McKenzie practices veterinary medicine, having founded and managed the multi-million dollar growth of multiple veterinary practices in Georgia, South Carolina and Florida. He also created and built the community “drug dog” program, which over the years and across the nation has become a generally accepted and highly successful weapon against drug smuggling at the port of Savannah as well as in the community at large. Dr. McKenzie has also been honored for his years of valuable service on the Board of Directors of the Georgia Veterinary Medical Association. Dr. McKenzie holds a degree in chemistry from Armstrong Atlantic State University, where he was recently honored as its most outstanding alumnus. He also holds a doctorate in veterinary science from the University of Georgia’s College of Veterinary Medicine. The Company expects to enter into a new equity option agreement with Dr. McKenzie within the next several weeks.  The agreement will be consistent with similar options agreements offered to other directors of the Company.
  D. Paul Graham,has been a member of the Board of Directors since February 2010.  In 1997, after a successful 12-year career with one of Canada’s premier transportation companies, Mr. Graham opened offices in Toronto, Canada to bring M&A experience and value to what he considered the underserviced sector of the small to middle market.  In 2002, he added offices in Atlanta, Georgia and in 2005 opened offices in Savannah, Georgia, which is now his principal office.
  As CEO of Graham Capital Partners, LLC (“GCP”), Mr. Graham fuels the Company’s strategic direction.  GCP provides investment banking and business advisory services to the small and middle markets for companies achieving revenues between $10 million and $100 million.
  GCP undertakes multi-industry transactions and mandates with an emphasis on transportation, logistics, distribution, manufacturing, and business services.  Mr. Graham has been involved in acquisitions, divestitures, and financings totaling over $200,000,000 in transaction value in North America and abroad.
  Leveraging his multifaceted experience gained in over two decades of day to day operations and finance of privately held companies, Mr. Graham leads GCP in M&A and advisory services in North America, Europe and North Africa.
  Mr. Graham was educated at Lakehead University and York University in the disciplines of accounting and finance.  Mr. Graham serves in an advisory capacity and as a director for a number of privately held corporations and is a member of the Atlanta chapter of the Association for Corporate Growth.
 
 Curtis G. Anderson,has been a member of the Board of Directors since October 2010. Mr. Anderson served in the U.S. Navy and then spent 19 years in the corporate and investment banking field. Mr. Anderson founded Anderson Capital Corporation, a privately held venture capital company, in 1986. Mr. Anderson also served as president and chief operating officer for the Kuhlman Corporation in Savannah, Georgia from 1994 to 1999.  Mr. Anderson earned his bachelor’s degree and his master’s in business administration from the University of Washington. Mr. Anderson served in the U.S. Navy from 1963 to 1965. He is active in numerous charitable and civic organizations. The Company expects to enter into an equity option agreement with Mr. Anderson within the next several weeks.  The agreement will be consistent with similar options agreements offered to other directors of the Company.
  43
  The following sets forth the biographical information for our executive officers:
  Herbert A. Fritsche, Ph.D., was appointed as our Senior Vice President, Chief Science Officer on September 1, 2010. Prior to this position, Dr. Fritsche was Professor of Laboratory Medicine and Chief of the Clinical Chemistry Section at The University of Texas, M.D. Anderson Cancer Center in Houston, Texas.   During his 42 years at M.D. Anderson Cancer Center, Dr. Fritsche has focused his research activities on the development and validation of cancer diagnostics.   Dr. Fritsche has participated in the validation and FDA clearance process for every commercial serum tumor marker product currently in use in the United States.Dr. Fritsche has served as President of the Clinical Ligand Assay Society (CLAS) and on various committees for both the CLAS and the American Association for Clinical Chemistry (AACC).   He is a fellow of the National Academy of Clinical Biochemistry and was awarded the National Award for Contributions in Education by the AACC; the Outstanding Clinical Chemist Award by the Texas Section, AACC; a Dean’s Excellence Award for the University of Texas Graduate School of Biomedical Science; a Distinguished Scientist Award from the CLAS; and the Johnson and Johnson Award for Outstanding Research and Contributions to Clinical Biochemistry from the National Academy of Clinical Biochemistry. Dr. Fritsche currently serves on the Expert Panel for developing Tumor Marker Practice Guidelines for the American Society of Clinical Oncology, and the Laboratory Practice Guidelines Committee for the National Academy of Clinical Biochemistry.   In addition, he serves on the Editorial Board of six international scientific journals. Dr. Fritsche serves as a consultant/advisor to the National Cancer Institute and for some major international diagnostic companies and biotech start-up companies.   Dr. Fritsche has published over 170 peered reviewed scientific papers, invited articles and book chapters.   Dr. Fritsche holds 3 patents and has 2 other applications on file.   He has lectured extensively for many years at international and national meetings.
  John A. Norris,has served as our Senior Vice President, Chief Regulatory and Technology Officer since October 2010. Mr. Norris served as our Chief Operating Officer from September 2009 to October 2010.  Mr. Norris also serves as Chairman of Norris Capital.  From March 2007 to November 2008, Mr. Norris served as the Chairman and CEO of Needlebot, Inc.  From May 1999 to June 2005 Mr. Norris served as the Chairman and CEO of Coprindm Corporation (now Decision View).Mr. Norris is a former Principal Deputy Commissioner and COO of the US FDA in Washington, DC, where he led the last major FDA reform initiative, from May 1984 to May 1988.  This work was performed under the overall leadership and guidance of President Ronald Reagan, HHS Secretaries Margaret Heckler and Dr. Otis Bowen, FDA Commissioner Dr. Frank Young, Senator Orrin Hatch and Congressman Paul Rogers.  Mr. Norris also taught healthcare policy and management (including healthcare-reform, Medicare-reform, healthcare-IT-reform, personalized-medicine-reform, and FDA-reform) at Harvard University, and was founder and faculty-editor-in-chief of the American Journal of Law, Medicine, and Ethics, a leading academic publication covering healthcare policy, law, regulation, management, finance, and ethics.  Mr. Norris has been the CEO to a significant number of successful life-sciences and healthcare-IT companies and has served on the boards of and/or consulted with dozens more.  For example, he helped the billion dollar turn-around of the laser eye surgery company, Summit Technology.  Additionally, he has consulted with senior executives of leading companies, including Pfizer, Merck, Johnson & Johnson, and Glaxo Smithkline, among others.
  Ramananda Madyastha, M.D., Ph.D., has served as our Senior Vice President of Research and Development since 2003.  Dr. Madyastha is the Recipient of the Raja Ravi Sher Singh of Kalsia Memorial Cancer Research Prize for outstanding contributions in the field of cancer research. He served on the Faculty of the Basic and Clinical Immunology and Microbiology Department at the Medical University of South Carolina. Dr. Madyastha has been an active member of the American Association of Cancer Research for more than 20 years. In addition, he is Board Certified by the American Board of Managed Care Medicine and is a licensed Clinical Laboratory Director. Dr. Madyastha was involved in the development of the first neural network based diagnostic tests for prostate and ovarian cancer.
  Hong Zhang, Ph.D.,has been ourSenior Vice President, Computational Medicine since 2004.  As visiting faculty at Johns Hopkins University, Dr. Zhang lectured at the Center for Biomarker Discovery on Bioinformatics: Peak Detection Methods for Mass Spectral Data.  Currently a Yamacraw Associate Professor at Armstrong Atlantic University, Dr. Zhang was the Vice President and CIO for a neural network and computer assisted medical diagnostic systems company that employs neural network and mathematical/statistical preprocessing techniques.  In this position, Dr. Zhang was involved in digital image processing and pattern recognition for medical image processing as well as software design and programming for support vector machine applications.  Dr. Zhang was a professor in the Department of Mathematical Sciences at Purdue University from 1989 to 1996.  He has held numerous academic positions, including Adjunct Associate Professor, Associate Professor with Tenure, and Assistant Professor.  He was a visiting Associate Professor in 1995 in the Department of Biometry at the Medical University of South Carolina.
  Throughout his academic career, Dr. Zhang has consulted on many software and analytical development projects for Union Switch and Signal, Inc., General Electric Company, and the Department of Pharmacology at the University of Pittsburgh.  Dr. Zhang has published numerous articles on the use of neural networks in the detection of cancers.  He has been published in more than twenty medical and technical journals.  Dr. Zhang received a Ph.D., Mathematics at the University of Pittsburgh, 1989, M.A., Mathematics, University of Pittsburgh, 1986, M.S.E.E., Electrical Engineering, University of Pittsburgh, 1984, B.S., Computer Science, Fudan University, 1982.  Dr. Zhang’s numerous awards and honors include: National Cancer Institute SBIR Grant, 1999, 2000; Purdue Research Foundation Summer Faculty Grant, 1993; IPFW Summer Research Grant, 1992; Andrew Mellon Fellowship, 1986-1987; Andrew Mellon Fellowship, 1985-1986; First Place, Fudan University Mathematics Competition, 1979.
  44
  The directors named above will serve until the next annual meeting of our stockholders.  Absent an employment agreement, officers hold their positions at the pleasure of the Board of Directors
  Audit Committee and Compensation Committee
  The Board of Directors formed an Audit Committee and a Compensation Committee on August 2, 2010. D. Paul Graham, Joseph McKenzie, D.V.M. and Stephen D. Barnhill, M.D., comprise the Audit Committee. Given the size of the Company and the difficulty in attracting additional directors, the Board has not designated an audit committee financial expert.
  Mr. Graham and Dr. McKenzie comprise the Compensation Committee. HDC does not have a separately designated nominating and corporate governance committee.
 
 Nominees for Directors
  In filling vacancies and otherwise identifying candidates for our Board of Directors, we seek individualswho will be able to guide our operations based on their business experience,both past and present, or their education. Responsibility for our operations iscentralized within management.
 
 Shareholder Nomination of Candidates for Board of Directors
  Nominations of persons for election to the Board of Directors may be made by any shareholder who complies with the notice provisions set forth in the Bylaws, which provides that a shareholder’s notice must be delivered or mailed and received at the principal executive office of the Company not less than thirty days before the date of the meeting; provided, however, that in the event that less than forty days’ notice or prior public disclosure of the date is given, notice by the shareholder to be timely must be so received not later than the close of business on the tenth day following the day on which the public announcement of the meeting date was made.  Such shareholder’s notice shall set forth (i) as to each person whom the shareholder proposes to nominate for election or reelection as a Director, all information relating to such person as required to be disclosed in solicitation of proxies for election of Directors made in compliance with Regulation 14A under the Securities and Exchange Act of 1934, as amended (including such person’s written consent to being named in a proxy statement as a nominee and to serving as a Director if elected); and (ii) as to the shareholder giving the notice (A) the name and address, as they appear on the books of the Company, of such shareholder and (B) the class and number of shares of the Company’s capital stock that are beneficially owned by such shareholder.  At the request of the Board of Directors, any person nominated by the Board of Directors for election as a Director shall furnish to the Executive Vice President of the Company that information required to be set forth in a shareholder’s notice of nomination which pertains to the nominee.  No person shall be eligible for election as a Director of the Company unless nominated in accordance with the applicable provisions of the Company’s Bylaws.
  Code of Ethics
  The Company has adopted a Code of Ethics applicable to our Chief Executive Officer and Principal Financial Officer.  This Code of Ethics is posted on our website at www.healthdiscoverycorp.com.  The Code of Ethics is also available without charge upon request directed to Investor Relations, Health Discovery Corporation, 2 East Bryan Street, Suite 610, Savannah, Georgia  31401.  The Company intends to disclose amendments or waivers of the Code of Ethics required to be disclosed by posting such information on its website.
  45
 
 ITEM 11. EXECUTIVE COMPENSATION
  Summary Compensation Table
  The following table sets forth various elements of compensation for our Named Executive Officers for each of the last two fiscal years:
 Name and Principal

Position

Year

Salary ($)


Bonus ($)


Option

Awards

($)


All Other Compensation

($)


TotalStephen D. Barnhill, M.D.

2010

$
300,000


$
184,173



-


$
33,202
(2)

$
517,375Chief Executive Officer

2009

$
300,000


$
8,508



-


$
31,855
(2)

$
340,363Thomas L. Gallagher

2010

$
120,000


$
90,000


$
357,798
(1)


-


$
567,798Former President, Chief Operating Officer & General Counsel

2009

$
10,000



-



-



-


$
10,000John A. Norris

2010

$
120,000



-






$
22,000
(2)

$
144,000Senior Vice President, Chief Regulatory and Technology Officer

2009

$
40,000



-



-



-


$
40,000R. Scott Tobin

2010

$
85,000


$
100,000


$
127,164
(1)

$
282,825
(3)

$
594,989Former President & General Counsel

2009

$
84,461



-


$
175,331
(1)

$
8,752
(2)

$
268,544
  (1)
See Note I –Stock Compensation and Equity Based Payments, to the Company’s Financial Statements for the fiscal year ended December 31, 2010 for disclosure of assumptions made in the valuation of options.(2)
Represents health insurance premiums and reimbursed healthcare costs.(3)
Represents health insurance premiums and reimbursed healthcare costs of $13,210 and settlement charges of $269,615.
 
 Employment Agreements
  Dr. Stephen D. Barnhill
  On August 15, 2008, the Company entered into an employment agreement with Dr. Stephen D. Barnhill for his employment as Chief Executive Officer.   The employment agreement had a term of two years and terminated on August 14, 2010; however the Company and Dr. Barnhill have agreed to extend the terms and conditions of the terminated employment agreement on a month-to-month basis while the parties negotiate the terms of a new employment agreement.  Under the terms of the employment agreement, Dr. Barnhill received a one-time retention signing bonus of $50,000 and his annual base salary is $300,000.  Dr. Barnhill is also be eligible to receive a cash bonus equal to 10% of the Company’s revenue received during the term of the employment agreement; but such cash bonus could not exceed 300% of his annual base salary.  Dr. Barnhill was also granted an option to purchase an aggregate of 6,000,000 shares of the Company’s Common Stock at an exercise price of $0.08; 5,000,000 of which have vested while the remaining 1,000,000 did not vest and were forfeited as a result of the Company’s common stock not achieving a minimum share price.
  Dr. Barnhill is eligible to be reimbursed monthly for reasonable and necessary business expenses and to receive health insurance benefits and other benefits maintained by us for our executives.  Dr. Barnhill will be entitled to twenty paid vacation days during the calendar year.  If Dr. Barnhill’s employment is terminated for Cause, as that term is defined in the employment agreement, or if Dr. Barnhill terminates the employment agreement for Good Reason, as that term is defined in the employment agreement, then Dr. Barnhill will receive as severance the amount of his base salary for the remainder of the term and an amount equal to the actual cost of ninety days of his COBRA premium payments.  If the employment agreement is terminated for any other reason than for Cause or for Good Reason, Dr. Barnhill is not eligible to receive severance.  The employment agreement also generally provides that Dr. Barnhill will keep confidential information confidential and that he will not compete with us in our business nor solicit our customers or employees for a period of 12 months following termination of employment.
  46
  The Compensation Committee of the Board of Directors is in discussion with Dr. Barnhill about entering into a new written employment agreement.
 
 R. Scott Tobin
  The Company entered into an employment agreement with Mr. R. Scott Tobin effective April 15, 2009. The employment agreement had an initial term of eighteen (18) months, beginning April 15, 2009.   Mr. Tobin received an annual base salary of $120,000 and was also be eligible to receive a bonus, which would be paid in cash, stock, enhanced employee benefits or a combination thereof as determined by the Company, of up to one hundred percent (100%) of his salary, based on objectives jointly determined by Mr. Tobin and the Chairman and CEO.   Mr. Tobin was also granted an option to purchase an aggregate of 4,500,000 shares of the Company’s Common Stock at an exercise price of $0.08, which vest over an eighteen (18) month period, and with respect to a portion of the options, the Company attaining certain performance metrics, since achieved.  Mr. Tobin was eligible to receive health insurance benefits and other benefits maintained by us for our executives.  On July 13, 2010, Mr. Tobin was informed by the two independent members of the Board of Directors that the Company agreed not to renew his employment agreement when it expired on October 15, 2010.
  On October 2, 2010, Mr. Tobin executed a release agreement which formally terminated his employment with the Company effective October 9, 2010. Pursuant to the release agreement, the Company has agreed (i) to pay Mr. Tobin $271,931.07, (ii) to extend the exercise period of 4,500,000 vested options until January 15, 2012, and (iii) to allow Mr. Tobin to pay with a portion of his HDC shares up to $170,000 related to any option conversion tax liability. The Company incurred an expense of $127,164 in the fourth quarter relating to the release agreement.Mr. Tobin has further agreed that for a period of three years, he will not (i) solicit proxies or consents to vote any securities of HDC, (ii) engage in short selling the common stock of HDC, (iii) act alone or in concert with others to seek to control or influence the management, board of directors or policies of HDC, and (iv) cooperate with any party seeking to do any of the foregoing.
  John A. Norris
  On September 15, 2009, HDC employed Mr. John A. Norris as Chief Operating Officer.  Upon the appointment of Mr. Gallagher to serve as the Chief Operating Officer of the Company on October 20, 2010, Mr. Norris was appointed Senior Vice President, Chief Regulatory and Technology Officer. The Company expects to enter into an equity option agreement with Mr. Norris within the next several weeks.  The agreement will be consistent with similar options agreements offered to other executives of the Company.
  Thomas L. Gallagher
  Effective November 29, 2009, HDC employed Mr. Thomas L. Gallagher as Executive Vice President and Managing Director, Global IP Strategies.  On October 26, 2010, Mr. Gallagher was appointed President, Chief Operating Officer and General Counsel of the Company. For 2010, Mr. Gallagher receives a monthly salary of $10,000 and is eligible for a bonus of 100% of his salary. In connection with his appointment as President and Chief Operating Officer, Mr. Gallagher was granted an option to purchase 2,500,000 shares of Common Stock at an exercise price of $0.19 per share.
  On February 22, 2011, Mr. Gallagher resigned as the President, Chief Operating Officer and General Counsel of Health Discovery Corporation (the “Company”). Mr. Gallagher served as the Company’s principal financial officer and principal accounting officer.
  Mr. Gallagher resigned in order to pursue a new opportunity.  The Company’s Board of Directors and Mr. Gallagher will soon begin discussions about a possible joint venture in order to pursue business opportunities with an emphasis on non-medical data-mining and business analytics using HDC’s technology. As currently contemplated, the proposed joint venture would grant Mr. Gallagher’s new company a non-exclusive license to Health Discovery Corporation’s substantial patent portfolio and know-how in exchange for a minority ownership interest in the new company.
  47
  Herbert A. Fritsche, Ph.D.
  On September 1, 2010, the Company entered into a two-year employment agreement with Herbert A. Fristche, Ph.D. pursuant to which Dr. Fristche will serve as Senior Vice President, Chief Science Officer. Under the employment agreement, the Company will pay Dr. Fristche an annual salary of $250,000. Dr. Fristche will also be entitled to participate in a mutually acceptable equity and bonus program.
  Outstanding Equity Awards at Fiscal Year-End
  Option AwardsName

Number of Securities Underlying Unexercised Options (#) Exercisable (1)


Number of Securities Underlying Unexercised Options (#) Unexercisable


Option

Exercise Price

Option Expiration

DateStephen Barnhill M.D.


5,0000,000



-


$
0.08

August  15,  2018John A. Norris


-



-



-

-Thomas L. Gallagher


2,5000,000



-


$
0.19

October 21,  2020R. Scott Tobin


4,5000,000
(2)


-


$
0.08

January 15,  2012
 
 (1)
All options are fully vested and exercisable.(2)
Mr. Tobin’s employment with HDC terminated effective October 9, 2010 pursuant to a settlement agreement with HDC entered into on October 2, 2010. Under the settlement agreement, the expiration date on all 4,500,000 options granted to Mr. Tobin was extended to January 15, 2012.
 
 Director Compensation
  Outside directors are paid $1.00 each year.  Each outside director is awarded options to purchase shares of Company Common Stock as described below.
  Name

Fees Earned or Paid in Cash

($)


Option Awards

($)


Total

($)Stephen D. Barnhill, M.D.

$
0.00


$
0.00


$
0.00Joseph McKenzie, D.V.M. (1)

$
1.00


$
7,068


$
7,069Curtis G. Anderson

$
1.00


$
0.00


$
1.00D. Paul Graham (2)

$
1.00


$
93,962


$
93,963
  (1)
500,000 options granted in 2009 are fully vested as of December 31, 2010.(2)
1,500,000 options granted in 2010 in 2010, 250,000 were vested as of December 31, 2010. An additional 250,000 options vested in February 2011.
  48
  ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
  The following table sets forth information concerning the beneficial ownership of our Common Stock as of March 31, 2011 by (i) each of our directors, (ii) each of our executive officers, (iii) each person who is known to us to be the beneficial owner of more than five percent of our Common Stock, and (iv) all of our executive officers and directors as a group.  At March 31, 2011, there were 229,475,747 shares of Common Stock outstanding and 18,777,675shares of Series B Preferred Stock outstanding.  At March 31, 2011 there were no shares of Series A Preferred Stock outstanding. Unless otherwise noted, the address of each beneficial owner below is 2 East Bryan Street, Suite 610, Savannah, Georgia 31401.
  Name and Address of Beneficial Owner

Amount and Nature

of

Beneficial Owner


Percent of

Class (1)Stephen D. Barnhill, M.D., Chairman and Chief Executive Officer


20,955,722
(2)


8.9
%Joseph McKenzie, D.V.M., Lead Director


6,056,225
(3)


2.6
%Curtis G. Anderson, Director


9,881,985



4.3
%D. Paul Graham, Director


500,000
(3)


*William F. Quirk, Jr.

10 Walter Witch Crossing

Savannah, Georgia 31411


32,759,126
(4)


13.6
%Prime Mover Capital Partners, L.P.

54 Thompson Street

4th Floor

New York, New York  10012


17,048,008
(5)


7.2
%All executive officers and directors as a group (8 persons)


37,393,932
(6)


15.9
%
 
 *
Less than 1%(1)
The percentage assumes the exercise by the stockholder or group named in each row of all options or warrants for the purchase of our Common Stock held by such stockholder or group and exercisable within 60 days as of March 31, 2011.(2)
Includes 5,000,000 currently exercisable options. The shares are held by The Barnhill Group LLC, which is wholly owned by Dr. Barnhill.(3)
Consists of currently exercisable options.(4)
Includes 11, 000,000 currently exercisable warrants.(5)
Includes 6,875,000 currently exercisable warrants.(6)
None of the executive officers that are not listed above currently own any shares or options that are exercisable within 60 days of March 31, 2011. Management anticipates that the Board of Directors will adopt an equity incentive plan in which these executive officers will participate.
  For Equity Compensation Plan Information Table, see “Item 5 – Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities”.
  49
  ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
  On June 30, 2009, we issued a promissory note for $500,000 to Joseph McKenzie D.V.M., a director and long term shareholder.  The promissory note contained an 8% annual interest rate and was due on January 4, 2010.  The promissory note was secured by certain intellectual property and other assets of the Company.  The proceeds from the promissory note were used for general working capital purposes.  This short term debt financing was intended to serve as a bridge to anticipated future licensing revenues in a manner which is not dilutive to shareholders.  On November 11, 2009, the Company paid in full the outstanding balance of $500,000, with a total payment, including interest, of $514,437, thus eliminating this debt and any collateral obligations on the Company’s intellectual property or other assets.
 
 The Company has adopted the independence standards promulgated by the New York Stock Exchange and has made a determination that, as of March 31, 2011, the following directors are independent according to those standards: Joseph McKenzie, D.V.M, Curtis G. Anderson, and D. Paul Graham. Stephen D. Barnhill, M.D., who serves on the Audit Committee, is not independent according to the New York Stock Exchange independence standards.
  ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES
  The following table sets forth the fees billed by Hancock Askew & Co. LLP for 2010 and 2009.
  2010


2009Audit Fees

$
74,615


$
72,938Audit-Related Fees

$
23,333



12,325Tax Fees

$
7,250


$
-Sub-Total

$
105,198


$
85,263All Other Fees

$
25,895


$
-Total Fees

$
131,093


$
85,263
  Audit Fees.  This category includes aggregate fees billed for professional services rendered for the audit of the Company’s annual financial statements for the years ended December 31, 2010 and 2009, review for the annual report on Form 10-K and for the limited reviews of quarterly condensed financial statements (Forms 10-Q) included in periodic reports filed with the Securities and Exchange Commission during 2010 and 2009, including out of pocket expenses.
  Audit-Related Fees.  This category includes fees billed for professional services associated with consultation concerning financial accounting and reporting standards.
  Tax Fees.  This category includes the aggregate fees billed or to be billed for tax services for the years ended December 31, 2010 and 2009.  No such fees were billed in 2009.
 
 All Other Fees.  This category includes the aggregate fees billed for all other services, exclusive of the fees disclosed above, rendered to the Company.
  The services provided by the independent auditors were pre-approved by the Board of Directors of the Company to the extent required under applicable law.  The Board of Directors of the Company requires pre-approval of all audit and allowable non-audit services.
  50
  PART IV
  ITEM 15.  EXHIBITS
  (a)
Documents filed as part of this Report:(1)
Financial Statements - all financial statements of the Company as set forth under Item 8 of   this Report.(2)
Financial Statement Schedules - As a smaller reporting company we are not required to provide the information required by this item.(3)
Exhibits
 
 
 
 (b)
The following exhibits are attached hereto or incorporated by reference herein (numbered to correspond to Item 601(b) of Regulation S-K, as promulgated by the Securities and Exchange Commission) and are filed as part of this Form 10-K:
  3.1
Articles of Incorporation. Registrant incorporates by reference Exhibit 3.1 to Form 8-K filed July 18, 2007.3.1(a)
Articles of Amendment to Articles of Incorporation.  Registrant incorporates by reference Exhibit 99.1 to Form 8-K filed October 10, 2007.3.1(b)
Articles of Amendment to Articles of Incorporation.  Registrant incorporates by reference Exhibit 3.1(b) to Form 10-K filed March 31, 2009.3.1(c)
Amended and Restated Articles of Amendment to Articles of Incorporation.  Registrant incorporates by reference Exhibit 3.1 to Form 10-Q filed November 16, 2009.3.2
By-Laws. Registrant incorporates by reference Exhibit 3.2 to Form 8-K filed July 18, 2007.4.1
Copy of Specimen Certificate for shares of Common Stock. Registrant incorporates by reference Exhibit 4.1 to Registration Statement on Form SB-2, filed June 4, 2001.4.1(a)
Copy of Specimen Certificate for shares of Common Stock. Registrant incorporates by reference Exhibit 4.1 (b) to Form 10-KSB, filed March 30, 2004.4.1(b)
Copy of Specimen Certificate for shares of Series A Preferred Stock.  Registrant incorporates by reference Exhibit 4.1(b) to Form 10-K filed March 31, 2008.4.1(c)
Copy of Specimen Certificate for shares of Series B Preferred Stock.  Registrant incorporates by reference Exhibit 4.1(c) to Form 10-K filed March 31, 2009.10.1
Employment Agreement between the Company and Stephen Barnhill dated August 15, 2008.  Registrant incorporates by reference Exhibit 10.2 to Form 8-K filed August 18, 2008. *10.2
License Agreement between the Company and Clarient, Inc. dated July 31, 2007.  Registrant incorporates by reference Exhibit 10.1 to Form 8-K filed August 3, 2007.10.2(a)
Amendment to License Agreement between Health Discovery Corporation and Clarient, Inc., dated January 13, 2009.  Registrant incorporates by reference Exhibit 10.2 to Form 8-K filed February 5, 2009.10.3
Securities Purchase Agreement by and among the Company, the Cash Purchasers and the Lender Purchasers.  Registrant incorporates by reference Exhibit 10.11 to Form 10-QSB filed August 16, 2007.10.4
Form of Warrant to Cash and Lender Purchasers.  Registrant incorporates by reference Exhibit 10.14 to Form 10-K filed March 31, 2008.
  51
  10.5
Amendment to Stock Purchase Warrant with Dr. Richard Caruso.  Registrant incorporates by reference Exhibit 10.1 to Form 8-K filed August 18, 2008.10.6
Option Award to Stephen D. Barnhill, M.D. dated August 15, 2008.  Registrant incorporates by reference Exhibit 10.3 to Form 8-K filed August 18, 2008. *10.7
License and Development Agreement by and between the Company and DCL Medical Laboratories, LLC dated July 14, 2008.  Registrant incorporates by reference Exhibit 10.17 to Registration Statement on Form S-1 filed September 19, 2008.
 
 10.7(a)
Mutual Termination and Release Agreement between the Company and DCL Medical Laboratories, LLC dated January 28, 2010.  Registrant incorporates by reference Exhibit 10.7(a) to Form 10-K filed on March 31, 201010.8
License Agreement between Health Discovery Corporation and Abbott Molecular Inc., dated January 30, 2009.  Registrant incorporates by reference Exhibit 10.13 to Form 10-K filed March 31, 2009. **10.9
License Agreement between Health Discovery Corporation and Quest Diagnostics Incorporated, dated January 30, 2009. Registrant incorporates by reference Exhibit 10.3 to Form 8-K filed February 5, 2009. **10.10
Form of Securities Purchase Agreement.  Registrant incorporates by reference Exhibit 10.15 to Form 10-K filed March 31, 2009.10.10(a)
Form of Amendment to Securities Purchase Agreement.  Registrant incorporates by reference Exhibit 10.7(a) to Form 10-K filed on March 31, 2010.10.10(b)
Form of Amended and Restated Securities Purchase Agreement.  Registrant incorporates by reference Exhibit 10.7(a) to Form 10-K filed on March 31, 2010.10.11
Employment Agreement between the Company and R. Scott Tobin dated as of April 15, 2009.  Registrant incorporates by reference Exhibit 10.1 to Form 8-K filed May 5, 2009. *10.12
Option Award to R. Scott Tobin dated April 29, 2009.  Registrant incorporates by reference Exhibit 10.2 to Form 8-K filed May 5, 2009. *10.13
Employment Agreement between the Company and John Norris dated as of September 1, 2009.  Registrant incorporates by reference Exhibit 10.1 to Form 8-K filed September 18, 2009. *10.14
Secured Promissory Note by the Company in favor of Joseph McKenzie.  Registrant incorporates by reference Exhibit 99.1 to Form 8-K filed July 7, 2009. *10.15
Form of 2009 Option Award.  Registrant incorporates by reference Exhibit 10.7(a) to Form 10-K filed on March 31, 2010. *10.16
Form of 2010 Option Award. Registrant incorporates by reference Exhibit 10.7(a) to Form 10-K filed on March 31, 2010 *10.17
Development Agreement by and among the Company, Smart Personalized Medicine, LLC and Quest Diagnostics Incorporated dated March 11, 2010.  Registrant incorporates by reference Exhibit 10.7(a) to Form 10-K filed on March 31, 2010.10.18
Licensing Agreement by and among the Company, Smart Personalized Medicine, LLC and Quest Diagnostics Incorporated dated March 11, 2010. Registrant incorporates by reference Exhibit 10.7(a) to Form 10-K filed on March 31, 2010.10.19
License Agreement, dated August 22, 2008, by and between the Company and Smart Personalized Medicine, LLC.  Registrant incorporates by reference Exhibit 10.7(a) to Form 10-K filed on March 31, 2010.10.20
Amendment to License Agreement by and between the Company and Smart Personalized Medicine, LLC dated as of March 11, 2010.  Registrant incorporates by reference Exhibit 10.7(a) to Form 10-K filed on March 31, 2010.  52
  10.21
Employment Agreement by and between the Company and Thomas Gallagher effective December 1, 2009.  Registrant incorporates by reference Exhibit 10.7(a) to Form 10-K filed on March 31, 2010. *10.22
Settlement and Release Agreement with Prime Mover Capital Partners, LP. Registrant incorporates by reference Exhibit 10.1 to Form 10-Q/A filed on February 11, 2011.10.23
Settlement and Release Agreement between the Company and William F. Quirk, Jr. dated as of September 22, 2010. Registrant incorporates by reference Exhibit 10.2 to Form 10-Q filed on November 15, 2010.10.24
Release Agreement between the Company and R. Scott Tobin dated October 2, 2010. Registrant incorporates by reference Exhibit 10.24 to Registration Statement on Form S-1 (333-171120) filed on December 8, 2010.10.25
Employment Agreement Extension by and between the Company and Stephen D. Barnhill, M.D., effective March 28, 2011.  Filed herewith.21.1
Subsidiaries of the Registrant.  Registrant incorporates by reference Exhibit 10.7(a) to Form 10-K filed on March 31, 2010.23.1
Consent of Hancock Askew & Co. LLP. Filed herewith.31.1
Rule 13a-14(a)/15(d)-14(a) Certification of Chief Executive Officer and Principal Financial Officer  Filed herewith.32.1
Section 1350 Certification of Chief Executive Officer and Principal Financial Officer  Filed herewith.99.1
Proxy Statement and Form of Proxy dated September 24, 2010 (furnished herewith).
 
 * Management contract or compensatory plan or arrangement

**  Portions of exhibit have been omitted pursuant to a confidentially agreement
  53
  SIGNATURES
  Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
  HEALTH DISCOVERY CORPORATIONBy:
/s/ Stephen D. Barnhill, M.D.Chairman, Chief Executive Officer,Principal Financial Officer, and Principal Accounting OfficerDate:  March 29, 2011
  Pursuant to the requirements of the Securities Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
  Name


Title


Date/s/ Stephen D. Barnhill M.D.


Chairman, Chief Executive Officer,


March 29, 2011Stephen D. Barnhill M.D.


Principal Financial Officer, and Principal Accounting Officer/s/ Joseph McKenzie, D.V.M.


Lead Director


March 29, 2011Joseph McKenzie, D.V.M./s/ Curtis G. Anderson


Director


March 29, 2011Curtis G. Anderson/s/ D. Paul Graham


Director


March 29, 2011D. Paul Graham
  Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the Act by
 Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act
  On or about September 24, 2010, Health Discovery Corporation sent a proxy statement and form of proxy to its shareholders with respect to a meeting of shareholders held on October 21, 2010.  Health Discovery Corporation is furnishing to the Commission for its information, at the time of filing this Annual Report on Form 10-K, copies of the proxy statement and form of proxy as Exhibit 99.1 to this Annual Report.
  54
  Hancock Askew & Co LLP
 100 Riverview Drive
 Savannah, Georgia 31404
  Report of Independent Registered Public Accounting Firm
  Board of Directors
 Health Discovery Corporation
 Savannah, Georgia
  We have audited the accompanying balance sheets of Health Discovery Corporation as of December 31, 2010 and 2009, the related statements of operations, changes in stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2010.  These financial statements are the responsibility of the management of Health Discovery Corporation.  Our responsibility is to express an opinion on these financial statements based on our audits.
  We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.
  In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Health Discovery Corporation as of December 31, 2010 and 2009 and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America.
  /s/ Hancock Askew & Co., LLPSavannah, Georgia

March 29, 2011
  F-1
  HEALTH DISCOVERY CORPORATION
  Balance Sheets
  December 31, 2010 and 2009
 December 31,


December 31,2010


2009AssetsCurrent AssetsCash

$
3,295,630


$
2,328,912Certificates of Deposit


-



622,358Accounts Receivable


334,988



112,500Prepaid Expenses and Other Assets


172,034



15,570Total Current Assets


3,802,652



3,079,340Equipment, Less Accumulated Depreciation of $27,397 and $19,251


23,475



24,667Other AssetsDeferred Charges


51,740



10,336Patents, Less Accumulated Amortization of $1,731,132 and $1,468,413


2,254,662



2,517,382Total Assets

$
6,132,529


$
5,631,725Liabilities and Stockholders’ EquityCurrent LiabilitiesAccounts Payable - Trade

$
820,126


$
570,837Accrued Liabilities


122,152



214,122Dividends Payable


22,760



-Deferred Revenue


114,035



39,375Total Current Liabilities


1,079,073



824,334Long Term LiabilitiesDeferred Revenue


831,863



504,560Dividends Payable


189,819



14,993Total Liabilities


2,100,755



1,343,887Stockholders’ EquitySeries B Preferred Stock, Convertible,20,625,000 Shares Authorized, 18,777,675 Issued and Outstanding


1,490,015



1,490,015Common Stock, No Par Value, 300,000,000 Shares Authorized229,475,747 Shares Issued and Outstanding December 31, 2010194,462,847 Shares Issued and Outstanding December 31, 2009


25,593,728



18,807,239Accumulated Deficit


(23,051,969
)


(16,009,416
)Total Stockholders’ Equity


4,031,774



4,287,838Total Liabilities and Stockholders’ Equity

$
6,132,529


$
5,631,725
    F-2
  HEALTH DISCOVERY CORPORATION
  Statement of Operations
  2010


2009Revenues:Licensing & Development

$
396,176


$
61,803Operating Expenses:Amortization


262,719



262,719Professional and Consulting Fees


776,122



67,646Legal Fees


1,012,500



312,945Research & Development Fees


435,249



26,195Compensation & Benefits


1,763,101



939,029Other General and Administrative Expenses


929,954



461,257Total Operating Expenses


5,179,645



2,069,791Loss From Operations


(4,783,469
)


(2,007,988
)Other Income (Expense)Interest Income


15,502



6,393Settlement Charges


(2,274,426
)


-Interest Expense


(159
)


(15,276
)Total Other Income (Expense)


(2,259,084
)


(8,883
)Net Loss


(7,042,553
)


(2,016,871
)Preferred Stock Dividends


312,502



14,993Loss Attributable to Common Shareholders

$
(7,355,054
)

$
(2,031,864
)Weighted Average Outstanding Shares


215,644,462



173,679,300Loss Per Share (basic and diluted)

$
(0.03
)

$
(0.01
)
  See accompanying notes to financial statements.
  F-3
  HEALTH DISCOVERY CORPORATION
  Statements of Changes in Stockholders’ Equity
  For the Year Ended December 31, 2010 and 2009
  Issued and Outstanding
   Preferred A Shares


Preferred B Shares


Common Shares


Preferred A Amount


Preferred B Amount


Common Amount


Accumulated Deficit


Total Stockholder’s EquityBalance – January 1, 2009


7,437,184



-



169,522,590


$
594,975



-


$
15,744,873


$
(13,992,545
)

$
2,347,303Share-based Compensation and Expense


-



-



-



-



-



31,954



-



31,954Series A Preferred Stock Exchanged for Common Stock


(7,437,184
)


-



7,437,184



(594,975
)






594,975Stock issued in connection with sales of Series B Preferred Stock


-



19,402,675











1,490,015











1,490,015Shares issued pursuant upon the exercise of warrants


-



-



17,503,073











2,450,430







2,450,430Series B Preferred Stock Dividends






















(14,993
)






(14,993
)Net Loss


-



-



-



-



-



-



(2,016,871
)


(2,016,871
)-Balance - December 31, 2009


-



19,402,675



194,462,847



-


$
1,490,015


$
18,807,239


$
(16,009,416
)

$
4,287,838Shares issued pursuant upon the exercise of warrants


-



-



34,387,900



-



-



5,852,333



-



5,852,333Share-based Compensation and Expense


-







-



-



-



1,236,665



-



1,236,664Series B Preferred Stock Exchanged for Common Stock


-



(625,000
)


625,000



-



-



-



-



-Series B Preferred Stock Dividends


-



-



-



-



-



(302,509
)






(302,508
)Net Loss


-







-



-



-



-



(7,042,553
)


(7,042,553
)Balance - December 31, 2010


-



18,777,675



229,475,747



-


$
1,490,015


$
25,593,728


$
(23,051,969
)

$
4,031,774
  See accompanying notes to financial statements.
  F-4
  HEALTH DISCOVERY CORPORATION
  Statements of Cash Flows
  For the Years Ended December 31, 2010 and 2009
 2010


2009Cash Flows From Operating ActivitiesNet Loss

$
(7,042,553
)

$
(2,016,871
)Adjustments to Reconcile Net Loss to Net CashUsed by Operating Activities:Stock-based Compensation


383,605



31,954Services Exchanged for Warrants


128,248



-Warrants Issued for Settlements (Note I)


724,811



-Depreciation and Amortization


270,865



269,062Changes in Accounts:Increase in Deferred Charges


(41,405
)


-Increase in Accounts Receivable


(221,638
)


-Increase in Deferred Revenue


401,963



90,220(Increase) Decrease in Prepaid Expenses and Other Assets


(157,314
)


8,448Increase in Accounts Payable – Trade


249,288



349,865Decrease in Accrued Liabilities


(91,968
)


(31,618
)Net Cash Used by Operating Activities


(5,396,098
)


(1,298,940
)Cash Flows From Investing Activities:Redemption (Purchase) of Certificates of Deposit


622,358



(622,358
)Purchase of Equipment


(6,953
)


(16,122
)Net Cash Provided by Investing Activities


615,405



(638,480
)Cash Flows From Financing Activities:Proceeds from Sales of  Preferred B Stock


-



1,490,015Proceeds from the Exercise of Warrants


5,852,333



2,450,430Proceeds from Related Party Note Payable


-



500,000Repayment of Related Party Note Payable


-



(500,000
)Dividends Paid


(104,922
)


-Net Cash Provided by Financing Activities


5,747,411



3,940,445Net Increase in Cash


966,718



2,003,025Cash, at Beginning of Period


2,328,912



325,887Cash, at End of Period

$
3,295,630


$
2,328,912Supplemental Disclosures of Cash Flow Information:Cash Paid for Interest

$
159


$
15,276
    F-5




HEALTH DISCOVERY CORPORATION
 
 Notes to Financial Statements
  Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  DESCRIPTION OF BUSINESS
  Health Discovery Corporation (the “Company”) is a biotechnology-oriented company that has acquired patents and has patent pending applications for certain machine learning tools, primarily pattern recognition techniques using advanced mathematical algorithms to analyze large amounts of data thereby uncovering patterns that might otherwise be undetectable.  Such machine learning tools are currently in use for diagnostics and drug discovery, but are also marketed for other applications.  The Company licenses the use of its patented protected technology and may provide services to develop specific learning tools under development agreements or to sell to third parties.
  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, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period.  Accordingly, actual results could differ from those estimates.  Significant estimates that are particularly susceptible to change in the near-term include the valuation of share-based compensation and consideration for services and the recoverability of the patents.
  REVENUE RECOGNITION
  Revenue is generated through the sale or license of patented technology and processes and from services provided through development agreements.  These arrangements are generally governed by contracts that dictate responsibilities and payment terms.  The Company recognizes revenues as they are earned over the duration of a license agreement or upon the sale of any owned patent once all contractual obligations have been fulfilled.  If a license agreement has an undetermined or unlimited life, the revenue is recognized over the remaining expected life of the patents. Revenue is recognized under development agreements in the period the services are performed.
  CASH AND CASH EQUIVALENTS
  Cash and cash equivalents include cash and monies invested in overnight funds with financial institutions.
  ACCOUNTS RECEIVABLE
  Trade accounts receivable for licensing fees and development services are recorded at net contract value based upon the written agreement with the customer. In certain cases, accounts receivable may include royalties’ receivable from customers based upon those customers estimated sales of the products or diagnostic tests containing patented processes and technologies. The Company considers amounts past due based on the related terms of the agreement and reviews its exposure to amounts receivable based upon collection history and specific customer credit analysis.  The Company provides an allowance for doubtful amounts if collectability is no longer reasonably assured.  As of December 31, 2010 and 2009, all amounts receivable were from a single customer and a Grant from the Department of Health and Human Services.  All amounts receivable are considered fully collectable and no allowance for doubtful accounts was recorded.
  PROPERTY AND EQUIPMENT
  Property and equipment, which consists of office furniture, computer equipment and leasehold improvements, are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, which range from 3 to 10 years. Leasehold improvements are amortized using the straight-line method over the estimated useful lives of the assets or the term of the lease, whichever is shorter.
  F-6
  HEALTH DISCOVERY CORPORATION
  Notes to Financial Statements, continued
  Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
  PATENTS
  Initial costs paid to purchase patents are capitalized and amortized using the straight line method over the remaining life of the patent. The Company capitalizes the external costs and filing fees associated with obtaining patents on its new discoveries and amortizes these costs using the straight-line method over the shorter of the legal life of the patent or its economic life, generally 17 years, beginning on the date the patent is issued.  Annual patent maintenance costs and annual license and renewal registration fees are expensed as period costs. If the applied for patents are abandoned or are not issued, the Company will expense the capitalized costs to date in the period of abandonment or earlier if abandonment appears probable.  The carrying value of patents is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. As of December 31, 2010, the Company does not believe there has been any impairment of its intangible assets.
  INVESTMENTS
  The Company uses the equity method to account for its equity investments in ventures for which it has 50% or less ownership and the ability to exercise significant influence over operating and financial policies, but does not control. The Company uses the cost method to account for its investments in companies that it does not control and for which it does not have the ability to exercise significant influence over operating and financial policies.
  INCOME TAXES
  The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for future tax benefits and expenses or consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income for the years in which those temporary differences are expected to be recovered or settled.
  In the event the future tax consequences of differences between the financial reporting bases and tax bases of the Company’s assets and liabilities result in deferred tax assets, an evaluation of the probability of being able to realize the future benefits indicated by such assets is made. A valuation allowance is provided for the portion of the deferred tax asset when it is more likely than not that some portion or all of the deferred tax asset will not be realized. In assessing the probability of realizing the deferred tax assets, management considers the scheduled reversals of deferred tax liabilities, projected future taxable income and tax planning strategies.
  STOCK-BASED COMPENSATION
  Stock-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized as expense over the requisite service period.
  Valuation and Amortization Method – The fair value awards of stock which do not contain a market condition target are estimated on the grant date using the Black-Scholes option-pricing model. The fair value of options which contain a market condition, such as a specified hurdle price, is estimated on the grant date using a probability weighted fair value model similar to a lattice valuation model.  Both the Black-Scholes and the probability weighted valuation models require assumptions and estimates of expected volatility, expected life, expected dividend yield and expected risk-free interest rates.
  Expected Term – The expected term of the award represents the period that the Company’s stock-based awards are expected to be outstanding and was determined based on historical experience, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior.  Given the lack of historical data and early-stage nature of the Company’s operations, the expected term is estimated as the contractual term.
  Expected Volatility –Volatility is a measure of the amounts by which a financial variable such as stock price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. The Company uses the historical volatility, employing a prior period equivalent to the expected term to estimate expected volatility.
  F-7
  HEALTH DISCOVERY CORPORATION
  Notes to Financial Statements, continued
  Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
  Risk-Free Interest Rate – The Company bases the risk-free interest rate used in the Black-Scholes valuation method on the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equivalent to the expected term of a stock award.
  RESEARCH AND DEVELOPMENT EXPENSE
  The Company’s research and development costs consist of expenses paid to consultants and external laboratories and related primarily to the costs of co-development studies, clinical trials,and projects undertaken in 2010.The R&D costs were $435,249 in 2010 and $26,195 in 2009.
  FAIR VALUE OF FINANCIAL INSTRUMENTS
  The Company’s financial instruments consist of cash, accounts receivable, accounts payable and accrued expenses.  The Company considers the carrying values of its financial instruments in the financial statements to approximate their fair value due to the short term nature of such items.
  NET LOSS PER SHARE
  Basic Earnings Per Share (“EPS”) includes no dilution and is computed by dividing income or loss available to common shareholders by the weighted average number of common shares outstanding for the period.  Diluted EPS reflects the potential dilution of securities that could share in the earnings or losses of the entity. Due to the net loss in all periods presented the calculation of diluted per share amounts would cause an anti-dilutive result and therefore is not presented. Potentially dilutive shares at December 31, 2010 and 2009 include options and warrants outstanding of 36,625,000 and 100,615,177 at December 31, 2010 and 2009, respectively.
  CONCENTRATIONS OF CREDIT RISK
  The Company maintains its cash balances at financial institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 per account.  From time-to-time, the Company’s cash balances exceed the amount insured by the FDIC.  Management believes the risk of loss of cash balances in excess of the insured limit to be low.
  RECENT ACCOUNTING PRONOUNCEMENTS
  ASC Topic 105 incorporates the July 2009, FASB issuance of SFAS No. 168,Codification and the Hierarchy of Generally Accepted Accounting Principles, which establishes the FASB Accounting Standards Codification (the “Codification” or “ASC”) and supersedes all existing accounting standards as the single source of authoritative non-governmental U.S. GAAP.  All other accounting literature not included in the Codification is considered non-authoritative, except for additional authoritative rules and interpretive releases of the SEC and applicable only to SEC registrants.  The Codification is organized by topic, subtopic, section, and paragraph, each of which is identified by a numerical designation.  This statement applied beginning in the third quarter 2009.  All accounting references have been updated, and therefore SFAS references have been replaced with ASC references.
  In August 2009, the FASB issued ASU No. 2009-05, Fair Value Measurements and Disclosures (Topic 820) – Measuring Liabilities at Fair Value.  This update provides clarification for the fair value measurement of liabilities in circumstances in which a quoted price in an active market for an identical liability is not available. ASU also clarifies that when estimating a fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability.  This update is effective for interim periods beginning after August 28, 2009. The adoption of this standard did not have a material effect on our financial position or results of operations.
  F-8
  HEALTH DISCOVERY CORPORATION
  Notes to Financial Statements, continued
  Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
  In September 2009, the FASB issued ASC 810, Consolidations, to improve financial reporting by enterprises involved with variable interest entities by addressing (1) the elimination of the qualifying special-purpose entity concept and (2) constituent concerns about the application of accounting and disclosures which do not provide timely and useful information about an enterprise’s involvement in a variable interest entity. The Company adopted this statement on January 1, 2010 and the adoption of this standard did not have a material effect on our financial position or results of operations.
  In February 2010, the SEC issued a policy statement and staff work plan regarding the potential use by United States issuers of financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”). IFRS is a comprehensive series of accounting standards published by the International Accounting Standards Board. Under the proposed timeline set forth by the SEC, we could be required in the future to prepare financial statements in accordance with IFRS, and the SEC is expected to make a determination in 2011 regarding the mandatory adoption of IFRS. Management is currently assessing the impact that this potential change would have on our consolidated financial statements, and will continue to monitor the development of the potential implementation of IFRS.
  Note B – DEFERRED REVENUE
  Deferred revenue represents the unearned portion of payments received in advance for licensing or service agreements.
  The Company received $500,000 in cash in March 2010 in connection with a licensing agreement completed in the first quarter of 2010. Deferred revenue of $500,000 was recorded and will be recognized as income over the estimated remaining term of the underlying patents of approximately 9 years, subject to the terms of the license agreement.
  The Company treats the incremental direct cost of revenue arrangements, which consists principally of employee bonuses, as deferred charges. As such incremental direct costs are amortized to expense using the straight-line method over the same term as the revenue arrangement, subject to the terms of the license agreement.
  The Company had total unearned revenue of $945,898 as of December 31, 2010. The long term portion of unearned revenue represents the remaining term of the agreements or the remaining lives of the underlying patents, as appropriate, and ranges from one to fifteen years.
  The expected future annual recognition of revenue is as follows:
  For the Year Ending December 31,2011

$
114,0352012


114,0352013


114,0352014


114,0352015


114,035Thereafter


375,723Total expected future annual amortization

$
945,898
  F-9
  HEALTH DISCOVERY CORPORATION
  Notes to Financial Statements, continued
  Note C – PATENTS
  The Company has acquired a group of patents related to biotechnology and certain machine learning tools used for diagnostic and drug discovery.
  The cost and accumulated amortization for 2010 and 2009 are as follows:
  2010


2009Cost of Patents

$
3,985,794


$
3,985,794Accumulated Amortization


(1,731,132
)


(1,468,412
)Patents, Net of Amortization

$
2,254,662


$
2,517,382
  Amortization charged to operations for each of the years ended December 31, 2010 and 2009 was $262,719.  The weighted average remaining amortization period for patents is 9 years.  Estimated amortization expense for the next five years is $262,719 per year.
  Note D – INVESTMENTS
  At December 31, 2009, the Company had certificates of deposit at a financial institution with maturities ranging from 3 months to 9 months.  These certificates of deposits earned interest at rates from 1.00% to 1.39%.  The fair value of the certificates of deposit approximates the carrying value due to the short maturity on the investment and comparison to similar instructions. At December 31, 2010, the Company did not hold any certificates of deposits.
  On March 27, 2007, the Company and an investment partner formed SVM Capital LLC as an equity investment for purposes of utilizing SVMs as a quantitative investment management technique.  The Company owns 45% of the membership interest and has significant influence with the operation of the entity but does not have control over the entity. The Company does not have any obligation to fund or provide support to SVM Capital LLC.  Accordingly, the investment is accounted for using the equity method of accounting.  The Company’s initial investment was $5,000 and the license to use the SVM technology applied to financial markets.  The carrying value of this investment was zero as of December 31, 2010 and December 31, 2009.
  In August 2008, pursuant to a license agreement, as amended, we contributed a license to Smart Personalized Medicine, LLC (“SPM”) in return for a 20% equity interest.  SPM is a company founded by a former director and current senior advisor to attempt to develop a breast cancer prognostic test using our SVM technology in collaboration with a prominent cancer research hospital. There was no financial activity in this entity in 2009. The only activity for this entity in 2010 was the Quest license and development agreements for which there was an allocation of 50% to each of HDC and the other partner. In March 2010, the Company announced a deal with Quest Diagnostics and SPM to develop breast cancer products.   With respect to SPM revenues received unrelated to the arrangement with Quest Diagnostics, we will receive a per test royalty up to 7.5% based on net proceeds received from the sale of the new breast cancer prognostic test.   This royalty arrangement is addition to distributions the Company is entitled to as a result of our 20% equity interest. The Company does not have any contractual obligation to provide any funds to this venture.   The net value of the investment was zero as of December 31, 2010 and December 31, 2009.
  Note E – LICENSE FEES EXPENSE - LUCENT AGREEMENT
  Effective September 26, 2004, the Company was assigned a patent license agreement with Lucent Technologies GRL Corporation (“Lucent”).  The patent license agreement was associated with the patents acquired July 30, 2004. The Company agreed to pay royalty fees to Lucent in the amount of the greater of an annual fee of $10,000 or at the rate of five percent (5%) on each licensed product which is sold, leased, or put into use by the Company, until cumulative royalties equal $40,000 and at the rate of one percent (1%) subsequently.  The license granted will continue for the entire unexpired term of Lucent’s patents.  During both 2010 and 2009, the Company paid $10,000 in royalty fees to Lucent.
  F-10
  HEALTH DISCOVERY CORPORATION
  Notes to Financial Statements, continued
  Note F – INCOME TAXES
  The Company has incurred net losses since inception, and we have determined that it is more likely than not we will be unable to benefit in the future from the accumulated  net operating loss.  Consequently, we have not recorded any U.S. federal or state income tax expense or benefit.  We have no recorded income tax provision or benefit for the fiscal years ending December 31, 2010 or 2009.
  The following items comprise the Company’s net deferred tax assets (liabilities) as of December 31, 2010 and 2009.
  2010


2009Deferred tax assets:Net operating loss carry-forward

$
6,177,101


$
4,305,217Deferred revenue


321,605



184,938Contributions


9,001



3,340Depreciation and amortization


3,740



(2,011
)Warrants and options granted


673,296



272,026Total


7,184,743



4,763,510Less valuation allowance


(7,164,281
)


(4,763,510
)Deferred Tax liability


(20,462
)


-Net deferred taxes


-



-
  As of December 31, 2010, an increase in the valuation allowance of $2,400,771 has been recorded for the deferred tax asset, as management has determined that it is more likely than not that the deferred tax asset will not be realized.
  Total income tax expense (benefit) differed from the amounts computed by applying the U.S. Federal statutory tax rates to pre-tax loss for the fiscal years ending December 31, 2010 and 2009 as follows:
  2010


2009Total expense (benefit) computed by:Applying the U.S. Federal statutory rate


(34.0
)%


(34.0
)%State income taxes, net of federal tax benefit


(3.0
)


(3.0
)Valuation allowance


37.0



37.0Effective tax rate (benefit)


-



-
 The Company has unused net operating loss carry-forwards of approximately $18.2 million that are available to offset future income taxes payable. The net operating losses will begin to expire in 2021.
  Based in its evaluation of tax positions, the Company has concluded that there are no significant uncertain tax positions requiring recognition in its financial statements.  The Company’s evaluation was performed for all tax years which remain subject to examination and adjustment by major tax jurisdictions as of December 31, 2010.
  Note G – NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE
  On June 30, 2009, the Company issued a secured promissory note to a director of the Company in the amount of $500,000.  The note contained an 8% annual interest rate and was due on January 4, 2010.  The note was completely repayable by the Company at any time without any related fees or penalties.  The holder had the right to demand payment of the note upon certain Events of Default (as defined in the note).  The note was secured by certain intellectual property and other assets of the Company. On November 11, 2009, the Company paid in full the outstanding balance of this $500,000 secured promissory note with a total payment, including interest, of $514,437, thus eliminating all Company debt under the note and any collateral obligations on the Company’s intellectual property or other assets.
  F-11
  HEALTH DISCOVERY CORPORATION
  Notes to Financial Statements, continued
  Note H – COMMITMENTS AND CONTINGENCIES
  Operating Lease
  The Company leases 1,261 square feet of office space in Savannah, Georgia, pursuant to a month to month lease. We currently pay base rent in the amount of $2,388 per month.
  On July 1, 2010, the company entered into a four year lease on a new office with a rental rate of $49,200 per year.  Due to delays caused by the landlord in preparing the office space, the Company may not be obligated under this lease.
  Settlements
  As previously disclosed, the Company received a complaint from the lead purchaser (the “Investor”) in the Company’s 2007 private placement (“2007 Private Placement”),  claiming, among other things, (a) that rights to receive up to 146,664,375 additional shares of the Company’s common stock for no additional consideration have been triggered by certain actions of the Company, (b) breaches of its contractual rights to approve certain issuances of options and warrants, (c) breaches of other covenants made by the Company in the 2007 Private Placement, (d) the Company had violated its SEC disclosure obligations, and (e) various breaches by the members of the Board of Directors of their fiduciary duties.
  The Company denied the Investor’s claims and allegations.  However, due to the expense, distraction and uncertainty of potential litigation regarding the claims, the Company negotiated a settlement with the Investor, effective July 27, 2010.  Pursuant to the settlement agreement, the Company agreed, among other things, to (a) pay $145,625 to cover certain expenses of the Investor, (b) credit $1,134,375 to reimburse the Investor for the aggregate exercise price of  warrants to purchase 6,875,000 shares of the Company’s common stock held by the Investor,  (c) issue to the Investor a new two year warrant to purchase an additional 6,875,000 shares of common stock at an exercise price of $0.17 per share, and (d) file a registration statement covering the resale of the shares of common stock underlying the new warrant.  In exchange, the Investor agreed, among other things, to (a) release the Company and certain related persons from all claims through the date of the settlement (including the claims relating to the 2007 Private Placement), (b) waive all future rights under the 2007 Private Placement agreements, and (c) standstill from certain actions related to the Company and its equity securities for a period of five years from the date of settlement.  Neither the Company nor the Investor admitted liability or wrongdoing in connection with the settlement.
  The Company has recognized a charge of $1,877,647 related to the settlement, including $597,647 in non-cash charges related to the issuance of the new warrants. Each of the 6,875,000 warrants has an exercise price of $0.17 (market price of the Company’s stock on the date of the settlement) and expires on July 26, 2012.  The fair value of each warrant was $0.087 and was estimated on the date of settlement using the Black-Scholes pricing model with the following assumptions: dividend yield at 0%, risk-free interest rate of .65%, an expected life of 2 years, and volatility of 132.98%.
 
 The Company announced on May 6, 2010 that William F. Quirk, Jr., a shareholder of HDC, filed a declaratory judgment action in Georgia state court.  The warrants in question were issued to Mr. Quirk in September 2007 in HDC’s 2007 Private Placement transaction and consisted of (i) a warrant to purchase up to 16,263,888 shares of HDC common stock at a price of $0.14 per share, and (ii) a warrant to purchase up to 16,263,888 shares of HDC common stock at a price of $0.19 per share.  Although the stated expiration date for these warrants was September 7, 2010, Mr. Quirk contendedthat the expiration date for shareholders holding more than 10% of HDC’s common stock is extended automatically by two years. Accordingly, Mr. Quirk was seeking a judicial declaration that he may exercise his warrants at any time prior to September 7, 2012.
  F-12
  HEALTH DISCOVERY CORPORATION
  Notes to Financial Statements, continued
  Note H – COMMITMENTS AND CONTINGENCIES, continued
  On September 23, 2010 the Company announced that the declaratory judgment lawsuit brought by William F. Quirk, Jr., related to his 32,527,776 warrants issued pursuant to the 2007 Private Placement transaction, was settled. Pursuant to the settlement agreement, Mr. Quirk exchanged his 32,527,776 warrants (16,263,888 warrants with an exercise price of $0.14 per share and 16,263,888 warrants with an exercise price of $0.19 per share) for three new warrants, two of which are for 3,333,333 shares each and one warrant for 3,333,334 shares (for a total of 10 million shares), with strike prices of $0.20, $0.25 and $0.30, and exercise terms of 12 months, 18 months and 24 months, respectively.  The modification of Mr. Quirk’s warrants did not result in a charge to the company as the estimated fair value of the warrants surrendered by Mr. Quirk in the exchange was less than the estimated fair value of the replacement warrants granted to Mr. Quirk.
  In addition to the exchange of warrants in connection with the settlement with Mr. Quirk, the Company will provide an exercise price adjustment equal to the fair market value of two million shares. The value of this exercise price adjustment, based on the closing price on the date prior to the date of exercise of the new warrants, will be applied towards the exercise price of all or a part of any of the three replacement warrants granted to Mr. Quirk aggregating  ten million shares. Mr. Quirk will not receive cash or stock related to this exercise price adjustment.
  On October11, 2010, the Company announced that R. Scott Tobin, its President, General Counsel, Principal Financial Officer, Principal Accounting Officer and Director, has stepped down from all positions.
  As part of his employment agreement, Mr. Tobin’s 4.5 million options vested options would have been required to be exercised within 90 days of his separation from the company or be forfeited.  In connection with the release agreement, the Company has agreed (i) to pay Mr. Tobin $269,615, (ii) to extend the exercise period of his options until January 15, 2012, and (iii) to allow Mr. Tobin an exchange feature enabling him to pay with a portion of his HDC shares up to $170,000 related to any option conversion tax liability.  The Company incurred an expense of $127,164 for extending his options until January 15, 2012. The aggregate cost of this settlement was $396,779.
  Other
  Accounts payable in the accompanying December 31, 2010 balance sheet contains an accrued liability of approximately $483,656 which the Company has recorded for professional services provided.  The Company contests   this amount with the provider of these services and has begun discussions with the service provider regarding potential settlement of this matter.
  Note I – STOCK COMPENSATION AND EQUITY BASED PAYMENTS
  Information about options and warrants outstanding for 2010 and 2009 is summarized below:
  Number of Warrants and Options Issued

2010


Weighted Average

Exercise Price


2009

Weighted Average

Exercise PriceOutstanding beginning of year


100,615,177


$
0.16



128,777,644

$
0.16Granted*


21,875,000


$
0.22



5,000,000

$
0.08Exchanged*


(32,527,776
)

$
0.17



-


-Exercised


(34,387,903
)

$
0.17



(17,503,073
)

0.14Expired un-exercised


(18,949,498
)

$
0.18



(15,659,394
)
$
0.15Outstanding end of the year


36,625,000


$
0.16



100,615,177

$
0.16Exercisable   December 31


34,375,000


$
0.15



92,615,177

$
0.16
  * Please refer to Note H with regard to Mr. Quirk for additional detail regarding this item
  F-13
  HEALTH DISCOVERY CORPORATION
  Notes to Financial Statements, continued
  Note I – STOCK COMPENSATION AND EQUITY BASED PAYMENTS, continued
 
 December 31, 2010Exercise Prices

Number

Outstanding


Weighted-

Average

Remaining

Contractual

Life (years)


Number

Exercisable


Weighted

Average

Remaining

Contractual Life

(years) of

Exercisable

Warrants$
0.08


12,250,000



2.0



12,250,000



2.0$
0.13


2,500,000



2.0



2,500,000



2.0$
0.15


1,000,000



5.0



-



-$
0.17


6,875,000



2.0



6,875,000



2.0$
0.19


2,500,000



10.0



2,500,000



10.0$
0.25


10,000,000



1.5



10,000,000



1.5$
0.26


1,500,000



4.0



250,000



4.5Total


36,625,000







34,375,000
  As of December 31, 2010, there was approximately $221,138 of unrecognized cost related to stock option and warrant grants.  The cost is to be recognized over the remaining vesting periods that average approximately 1 year.  The weighted average remaining life of all outstanding warrants and options at December 31, 2010 is 4.5 years.  The aggregate intrinsic value of all options and warrants outstanding and exercisable as of December 31, 2010 was $636,237.
  The Company entered into an award agreement on August 15, 2008 with the Chief Executive Officer granting 6,000,000 stock options.  The options vest in the following increments once both the service condition, indicated by the applicable Vesting Date, and the market condition, indicated by attaining the minimum share price for any 20 consecutive trading days, are satisfied.
  Vesting Date

Minimum

Share Price

Number of

OptionsAugust 15, 2008

$
0.10

1,000,000January 1, 2009

$
0.15

2,000,000January 1, 2010

$
0.20

2,000,000January 1, 2010

$
0.25

1,000,000
  F-14
  HEALTH DISCOVERY CORPORATION
  Notes to Financial Statements, continued
  Note I – STOCK COMPENSATION AND EQUITY BASED PAYMENTS, continued
  The conditions have been satisfied with respect to 5,000,000 of these stock options and 1,000,000 of these options did not vest.
  The fair value of each option was $0.03 and was estimated on the date of the grant using a probability weighted fair value model similar to a lattice valuation model with the following assumptions: dividend yield at 0%, risk free interest rate of 3.50%, an expected life of 6 years, and volatility of 106.52%.  The aggregate computed value of these options was $172,485 and this amount was charged as expense over the 1.4 year vesting period.  Expense of $119,898 was recorded in 2009.  Due to 1,000,000 of the options not vesting, the Company recognized a reduction of stock compensation expense of $28,748 in 2010 for the cost of those non vesting options.
  On April 29, 2009, the Company entered into an employment agreement with the Company’s former President and General Counsel.  Pursuant to the terms of the employment agreement, an option to purchase an aggregate of 4,500,000 shares of the Company’s common stock at an exercise price of $0.08 was granted.  One million of the options vested immediately and the rest vest over an eighteen (18) month period provided that the Company attains certain performance metrics, as more fully described below.
  Each portion of the option grant vests as shown in the table below only if and when (1) the executive has been continuously employed by the Company through the applicable vesting date, and (2) with respect to the options that have vesting dates of January 1 and September 15, 2010, the option shall not vest until either the Company has (i) cash on hand in excess of $800,000, or (ii) a positive, trailing 90-day EBITDA, or (iii) raised an additional $1,000,000 in capital from new investments, excluding any proceeds from the exercise of any warrants or options.
  Vesting Date

Number of OptionsApril 10, 2009


1,000,000January 1, 2010


1,500,000September 15, 2010


2,000,000
  One million options granted vested immediately.  The January 1, 2010 conditions were satisfied, as have the performance metrics related to the September 15, 2010 vesting date stock options.
  The fair value of each option was $0.03 and was estimated on the date of the grant using a probability weighted fair value model similar to a lattice valuation model with the following assumptions: dividend yield at 0%, risk free interest rate of 3.50%, an expected life of 6 years, and volatility of 104.86%.  The aggregate computed value of these options was $175,331 and this amount has been charged as expense over the 1.7 year vesting period. Expense of $54,557 was recorded in 2010 and $120,774 was recorded in 2009 in connection with this option grant. In October of 2010, as a part of the previously discussed settlement with Mr. Tobin, the Company extended the expiration of these options until January 15, 2012.
  During the second quarter of 2009, in connection with an appointment to the Company’s Board of Directors, the Company granted the Dr. Joseph McKenzie an option to purchase 500,000 shares of the Company’s common stock. The options vest 250,000 shares every six months, have an exercise price of $0.08, and expire on April 29, 2015.  The fair value of each option granted was $0.06 and was estimated on the date of grant using the Black-Scholes pricing model with the following assumptions: dividend yield at 0%, risk-free interest rate of 3.50%, an expected life of 6 years, and volatility of 104.91%.  The aggregate computed value of these options was $28,292, and this amount has been recognized as expense over the one year vesting period.
  In February 2010, Mr. D. Paul Graham was appointed to the Company’s Board of Directors. In connection with this appointment to the Company’s Board of Directors, the Company granted the Mr. Graham an option to purchase 1,500,000 shares of the Company’s common stock. The options vest 250,000 shares every six months, have an exercise price of $0.26, and expire on February 24, 2015.  The fair value of each option granted was $0.205 and was estimated on the date of grant using the Black-Scholes pricing model with the following assumptions: dividend yield at 0%, risk-free interest rate of 2.73%, an expected life of 5 years, and volatility of 108.16%.  The aggregate computed value of these options was $307,469, and this amount will be charged as an expense over the three year vesting period.
  F-15
  HEALTH DISCOVERY CORPORATION
  Notes to Financial Statements, continued
  Note I – STOCK COMPENSATION AND EQUITY BASED PAYMENTS, continued
  On May 10, 2010, the Company announced the appointment of Maher Albitar, M.D., to the position of Chief Medical Officer. On August 2, 2010,the company issued Dr. Albitar an option to purchase 1,000,000 shares of common stock. The options vest in four installments of 250,000 options and have a contingent vesting criteria based upon a market condition consisting of the commercialization of four new molecular diagnostic tests.  The options have an exercise price of $0.15, and expire on August 2, 2015.  The fair value of each option granted was $0.13 and was estimated on the date of grant using a probability weighted fair value model similar to a lattice valuation model with the following assumptions: dividend yield at 0%, risk-free interest rate of 1.62%, an expected life of 5 years, 10% probability of attaining the market condition, and volatility of 132.98%.  The aggregate computed value of these options is $13,025 and will be charged as an expense over the vesting period.
  On October 26, 2010, the Company announced that Thomas L. Gallagher was appointed by the Board of Directors as President, Chief Operating Officer and General Counsel effective October 20, 2010. The Board of Directors also approved the grant to Mr. Gallagher of 2,500,000 options to purchase common stock.  The options are exercisable immediately at an exercise price of $0.19 per share (the closing price on the grant date) and expire ten years after the grant date.   The Company recorded a charge of $357,798 in the fourth quarter 2010 with respect to the option grant.The fair value of each option granted was $0.14 and was estimated on the date of grant using the Black-Scholes pricing model with the following assumptions: dividend yield at 0%, risk-free interest rate of 2.82%, an expected life of 5 years, and volatility of 99%.
  Stock-based expense included in the 2010 net loss consisted of $1,236,665 in compensatory warrants, options and stock for professional consulting services, compensation and settlement warrants.  Stock-based expense included in the net loss for 2009 consisted of $31,954 for the issuance of common stock, warrants and options.
  The following table reflects stock-based compensation and expense recorded in 2010 and 2009:
  2010


2009Options and Warrants Issued for Services

$
128,249


$
86,967Stock Based Compensation Expense


412,353



240,663Warrants Issued for Settlements Expense


724,811



-Stock Based Compensation Expense Reversal


(28,748
)


(295,676)Net Increase

$
1,236,665


$
31,954
  During the 2010, the Company recognized $724,811 of expense attributed to warrants issued for settlements with Mr. Tobin and the lead investor in the 2007 Private Placement which was Prime Mover Capital Partners, LP.  The settlement details for Mr. Tobin and Prime Mover Capital Partners, LP was discussed previously (please see Note H).
  F-16
  HEALTH DISCOVERY CORPORATION
  Notes to Financial Statements, continued
  Note J - STOCKHOLDERS’ EQUITY
  In connection with the 2007 private placement, the Company issued warrants to purchase 51,538,822 shares of restricted common stock at an exercise price of $0.14 (the “Tranche 1 Warrants”). Pursuant to the terms of the Tranche 1 Warrants, certain of the holders were obligated to exercise fifty percent of the Tranche 1 Warrants if the market price for the Company’s common stock is $0.17 for a period of thirty consecutive calendar days, which occurred on November 6, 2009, or forfeit the right to acquire those shares.  On November 7, 2009, the Company exercised its call rights related to certain of the Tranche 1 Warrants.  As a result, the holders of the Tranche 1 Warrants who received the Company’s call notice were obligated to purchase 17,637,467 shares of common stock or forfeit an equal number of Tranche 1 Warrants.  The number of Tranche 1 warrant shares not called by the Company was 8,131,944. During 2009, 15,878,073 shares of common stock were purchased relating to the call notice and Tranche 1 Warrants to purchase 1,759,394 shares were forfeited. Additional warrants not subject to the call notice totaling 1,625,000 shares were also exercised.
  Also, in connection with the 2007 private placement, the Company issued warrants to purchase 51,538,822 shares of restricted common stock at an exercise price of $0.19 (the “Tranche 2 Warrants”). Pursuant to the terms of the Tranche 2 Warrants, certain of the holders were obligated to exercise fifty percent of the Tranche 2 Warrants if the average of the last reported closing bid and asked prices on the Over-the-Counter Bulletin Board for the Company’s common stock was $0.24 for a period of thirty consecutive calendar days, which occurred on February 28, 2010, or forfeit the right to acquire those shares.  The Company exercised its call rights relating to certain of the Tranche 2 Warrants during the first quarter.  As a result, the holders of the Tranche 2 Warrants who received the Company’s call notice were obligated to purchase 14,731,217 shares of restricted common stock or forfeit an equal number of Tranche 2 Warrant shares.   The number of shares of common stock purchased relating to the call notice was 11,729,390 and 3,001,827 Warrants were forfeited.  The Company received $2,228,584 in gross proceeds from the purchase of the common stock related to the call provision.
  Warrants issued as a part of the 2007 private placement that were exercised independent of the Tranche 2 Warrant call totaled 4,531,250 warrant shares with proceeds to the Company of $810,938.
  On September 7, 2010, the warrants related to the 2007private placement expired. As a result, 10,952,261 warrants, representing both the $0.14 and the $0.19 tranches, were exercised on or before September 7,2010 resulting in proceeds of $1,654,436 to be delivered to the Company.
  In addition to the warrant conversions described above, there were 6,875,000 warrants converted into shares as part of the settlement on July 27, 2010, with the lead purchaser, Prime Mover Capital Partners, LP, in the 2007 Private Placement. Therefore, in addition to the warrants converted on or before September 7, 2010, 6,875,000 warrants were converted.
  Warrants exercised in of 2010 that were exercised independent of the 2007 private placement totaled 300,000 warrant shares with proceeds to the Company of $24,000.
  Series A Preferred Stock
  The shares of Series A Preferred Stock were entitled to be converted by the holders into common stock by of the Company at any time without the payment of additional consideration.  The Series A Preferred Stock had to be converted into common stock of the Company when the trading value of the common stock of the Company exceeded $0.12 per share for a period of 30 consecutive calendar days.  The holder of the Series A Preferred Stock had the right to receive dividends, the right to vote on matters presented to the common stockholders, and a preference right in the event of liquidation in an amount equal to $594,975.  The Company had a right to redeem the shares of Series A Preferred Stock upon the fifth anniversary of the issue date at a redemption price of $0.08 per share if not previously converted.  On November 4, 2009, as a result of the trading value of the Company’s common stock exceeding $0.12 per share for a period of 30 consecutive calendar days, all outstanding shares of Series A Preferred Stock converted by its terms into 7,437,184 shares of common stock.
  F-17
  HEALTH DISCOVERY CORPORATION
  Notes to Financial Statements, continued
  Note J – STOCKHOLDERS’ EQUITY, continued
  Series B Preferred Stock
  During the first quarter of 2009 the Board of Directors authorized the designation of Series B Preferred Stock. The number of shares originally constituting the Series B Preferred Stock was 13,750,000; however, during the fourth quarter of 2009 the Board of Directors authorized the increase in the number of shares constituting the Series B Preferred Stock to 20,625,000. The Company sold to individual investors a total of 19,402,675 shares of Series B Preferred Stock for $1,490,015, net of associated expenses, in 2009.  The Series B Preferred Stock has not been registered under either federal or state securities laws and must be held until a registration statement covering such securities is declared effective by the Securities and Exchange Commission or an applicable exemption applies.
  The Series B Preferred Stock may be converted into Common Stock of the Company at the option of the holder, without the payment of additional consideration by the holder, so long as the Company has a sufficient number of authorized shares to allow for the exercise of all of its outstanding warrants and options. The Shares of Series B Preferred Stock must be converted into Common Stock of the Company upon the demand by the Company after the fifth anniversary of the date of issuance.
  The Series B Preferred Stock  accrues dividends at the rate of 10% of the Series B Original Issue Price per year, which shall be satisfied by the fifth anniversary of the issuance of such shares of the Series B Preferred Stock (the “Original Issue Date”) by the Company’s issuance of the number of shares of Common Stock equal to such accrued dividends divided by the average closing price of the Company’s Common Stock as reported on the Over-the-Counter-Bulletin Board or other exchange on which the Company’s Common Stock trades during the prior ten business days or by the payment of cash, as the Company may determine in its sole discretion. Dividends have been accrued for the Series B Preferred Stock in the amount of $189,819 as of December 31, 2010 and $14,993 as of December 31, 2009.
  Subject to the limitations set forth in the Amended and Restated Articles of Amendment to Articles of Incorporation and applicable law, as long as the Series B Preferred Stock remain outstanding, the Company pay the holders of the Series B Preferred Stock a special dividend equal to 15% of Company Net Revenue collected beginning with the Original Issue Date and ending on the date the Series B Preferred Stock cease to be outstanding (the “Cash Bonus”).  Company Net Revenue will include, but not be limited to, revenue derived from development fees, license fees and royalties paid to the Company and revenue collected as a result of the sale of any asset of the Company or distributions from SVM Capital, LLC (each a “Revenue Contract”), reduced by the amount of any out-of-pocket costs or expenses that are directly related to obtaining, negotiating or documenting the Revenue Contracts and the performance of such Revenue Contracts, but shall not include the proceeds of any capital infusions from the exercise of outstanding options or warrants or as a result of any capital raise undertaken by the Company.  At any time following the Original Issue Date, the Company may satisfy the special dividend right in its entirety if the aggregate payments made to the Series B Holders are equal to that value which provides an internal annual rate of return of twenty percent (20%) on the Series B Preferred Stock.  The maximum Cash Bonus to be paid each year shall be the aggregate Series B Original Issue Price, and no amounts in excess of such amount shall accrue or carry-over to subsequent years. Dividends in the amount of $22,760 have been accrued for Series B Preferred Stock special dividend as of December 31, 2010 while there was no amount accrued as of December 31, 2009.
  During the second quarter of 2010, the Company paid $99,614 to the Series B holders for the special dividend. Also, during the fourth quarter of 2010, one Series B holder requested, and the Company complied with the Series B holder’s request to convert 625,000 Series B Preferred Stock to Common Stock.  The Company also paid the Series B holder who chose to convert, their portion of the accrued special dividend and accrued dividend.  The total paid to this Series B holder was $5,758.
  No dividend payment will be made if, after the payment of such dividend, the Company would not be able to pay its debts as they become due in the usual course of business, or the Company’s total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the Company were to be dissolved, to satisfy the preferential rights upon the dissolution to shareholders whose preferential rights are superior to those receiving the dividend.
  F-18
  HEALTH DISCOVERY CORPORATION
  Notes to Financial Statements, continued
  Note K – SUBSEQUENT EVENTS
  The Company received a payment of $338,048 on March 30, 2010 from Quest.  This amount represents reimbursable costs related to completing the 4-gene urine prostate cancer test clinical trial as described in the Licensing Agreement. As of December 31, 2010, approximately $199,832 of this amount was reflected as a portion of accounts receivable.
   The Company previously announced that it was awarded $244,479 by the United States government under the Qualifying Therapeutic Discovery Project (QTDP) Program to advance the development of the company’s SVM and RFE-SVM technology. The QTDP grant program provides support for innovative projects that are determined by the U.S. Department of Health and Human Services to have reasonable potential to result in new therapies, to treat areas of unmet medical need, or to prevent, detect, or treat chronic or acute diseases and conditions, or to reduce long-term health care costs in the United States, or to significantly advance the goal of curing cancer. The Company received the final payment of this grant on March 15, 2011.
  Note L – COMMITMENTS AND CONTINGENCIES
  The Company is subject to various claims primarily arising in the normal course of business.  Although the outcome of these matters cannot be determined, the Company does not believe it is probable that any such claims will result in material costs and expenses.