UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 
 FORM
10-KSB
 
 (Mark
One)
 ý
              ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OFTHE
      SECURITIES EXCHANGE ACT OF 1934For
      the fiscal year ended December 31, 2007ORo
              TRANSITION
      REPORT UNDER TO SECTION 13 OR 15(d) OFTHE
      SECURITIES EXCHANGE ACT OF 1934For
      the transition period from to
 
 Commission
File No. 333-62216
 
 
 HEALTH
DISCOVERY CORPORATION
 (Name
of small business issuer 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 #601, Savannah, GA
              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:
 None
 
 Securities
Registered Pursuant to Section 12 (g) of the Act:
 None
 
  Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act. Yes o No o
  Check
whether the issuer:  (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes x No o
  Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. x
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12(b)-2 of the Exchange Act). o
  State
issuer’s revenues for its most recent fiscal
year.  $57,905
  The
aggregate market value of the voting common stock held by non-affiliates as of
March 24, 2008 was approximately $4,854,064.  There were 169,007,206
shares of common stock outstanding as of March 24, 2008.  There were
7,437,184 shares of Series A Preferred Stock outstanding as of March 24,
2008.
  Transitional
Small Business Disclosure Format (Check one): Yes ___, No  X
 
 
 
 
 PART
I
 
 ITEM
1. DESCRIPTION OF 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 in
medicine, genomics, proteomics, diagnostics and drug
discovery.  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 payments due to Direct Wireless Corporation
were terminated.
  Subsequently,
we amended our charter to change our name to Health Discovery Corporation (“HDC”
or the “Company”).  Direct Wireless Communications (DWCM) officially
became Health Discovery Corporation on November 6, 2003, at which time the new
trading symbol (HDVY) became effective.
  On
September 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.  In addition to the shares
of common stock of the Company issued for the acquisition of Fractal Genomics,
LLC’s assets, the Company agreed to execute a note for $500,000 payable in
$62,500 quarterly installments to the seller beginning on January 1, 2004 with
the final payment being made in October 2005.  Our acquisition of
Fractal Genomics’ assets was completed on December 30, 2003.
  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 was
associated with the patents acquired July 30, 2004. We agreed to pay minimum
royalty fees to Lucent, which increases as a percentage of revenue based on 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.
  The
conversion was approved by the shareholders holding at least two-thirds of the
outstanding common shares of the Company at the reconvened special meeting of
the shareholders held on June 13, 2007.  Articles of Conversion were
filed with the Secretaries of State of Texas and Georgia on July 12, 2007 to
effect the reincorporation.
  1
  In
connection with the conversion, we filed Articles of Incorporation in the State
of Georgia, which increased the number of authorized shares of common stock, no
par value, from two hundred million (200,000,000) shares to three hundred
million (300,000,000) shares and authorized thirty million (30,000,000) shares
of preferred stock, no par value, with the rights and preferences to be
determined by the Company’s Board of Directors prior to issuance.  We
also amended and restated our Bylaws.  The Articles of Incorporation
and Bylaws were submitted to the shareholders and were approved on June 13,
2007.
  On
October 9, 2007, we filed Articles of Amendment (the “Amendment”) with the
Secretary of State of the State of Georgia to amend our Articles of
Incorporation.  The Amendment sets forth the rights and preferences of
the Series A Preferred Stock, including the right to receive 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 A
Preferred Stock into Common Stock.  The Amendment was authorized by
the Board of Directors on October 5, 2007.
  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.
  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 artificial
intelligence 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 70 patents 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.
  2
  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
vitro diagnostics (IVD) can be
further divided into several major segments including clinical chemistry,
immunochemistry, hematology/cytometry, microbiology, and molecular
diagnostics.
  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 the 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.  Roche, Abbott, and Johnson & Johnson have
diagnostics divisions that generated $8.8 billion, $4.0 billion, and $1.5
billion in revenue in 2006, respectively, while Siemens and General Electric
operate medical imaging segments that are expanding in
diagnostics.  Other market players include large technology companies
like Becton-Dickinson, Beckman Coulter, and Bio-Rad.
  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.
  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.  Molecular
diagnostics determines how these genes and proteins interact in patients by
focusing on patterns – gene and protein 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 earlier,
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.
  3
  The
molecular diagnostics industry is an increasingly powerful health care
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 is a rapidly growing and rapidly changing market
with explosive potential, multiple opportunities for entry and growth, and
intensifying competition.  New tests and new instruments to perform
automated analysis continue to expand the capabilities of companies in this
segment.  The identification and validation of novel genes, gene
products, and biomarkers makes it possible to develop and introduce even more
tests.  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 procedures.  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 will increasingly utilize
multiplexing platforms such as DNA microarrays that perform parallel biomarker
analysis.
  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.  Today, genomic testing is responsible for
driving growth of the overall market, currently constituting approximately 7%–8%
of the clinical testing service market.  In the service segment,
genomic testing is growing by about 60%–75% per year.
  4
  Other
market segments include traditional genomics, personalized medicine, and cancer
with 13%, 9%, and 8% of the U.S. clinical lab services market,
respectively.  Experts predict that the cancer segment is growing at
20% a year, traditional genomics about 15% a year, and personalized medicine
about 20% a year, compared to the 5-10% growth rate for infectious
diseases.
  From a
demographic standpoint, 12% of the U.S. population was 65 years old or older in
2000. By 2030, that segment is anticipated to grow to 20% of the population,
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 will
require greater product development and marketing of assays, including molecular
tests.
  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 SVM
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 pathway 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 segment offers us an excellent 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, fierce
competition for products that are not so well protected, and ongoing
consolidation as major companies acquire smaller players to add new products to
existing pipelines.
  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.
  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, 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.  With its February 2007
approval of MammoPrint,
Agendia’s multi-gene expression breast cancer prognosis test, the FDA signaled
its 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 promise of a completely new paradigm in the
care of patients suffering from cancer and other diseases.
  5
  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 surrogate molecular 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.
  Current
diagnostic tools, such as blood marker-based immunoassays, imaging techniques,
and biopsy analyses, provide valuable information and have played an important
role in increasing survival rates of cancer patients.  However, these
tools have inherent limitations in accuracy (i.e. sensitivity and specificity)
and remain quite expensive.  There is a significant need 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 is
required for this type of discovery.  SVM technology is
recognized as a superior pattern recognition tool available today as evidenced
in hundreds of scientific papers worldwide.
  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 the strongest possible 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.
  6
  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.
  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 based on specificity or sensitivity.  The Company
believes that its two RFE-SVM patents are currently the only RFE patents issued
in the world.
  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.
  7
  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 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.
  Our
Scientific Achievements
  HDC’s
world renowned scientific team is uniquely experienced in the design, analysis
and application of machine learning technology, having invented the concepts and
many of the methodologies used to exploit domain knowledge.  In
addition, through pattern recognition, our science team has identified and
patent-protected biomarkers as possible treatment advances for several diseases,
including Benign Prostatic Hyperplasia (BPH), prostate cancer, leukemia, colon
cancer, and AIDS.
  Benign
Prostatic Hyperplasia (BPH)
  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 is the subject of discussions with an international
pharmaceutical company to be used as a surrogate biomarker for their clinical
trial evaluating a new BPH drug.
  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.
  Prostate
Cancer
  HDC has identified,patent-protectedand recently licenseda
genetic biomarker signature that identifies clinically significant high grade
prostate cancer cells based on analysis of tissue samples.  More than
one million men a year undergo biopsies of the prostate gland after a
cancer-screening test reveals moderately elevated levels of prostate specific
antigen (PSA) in the blood.  Upon the achievement of successful
validation, the Company’s test will be used to analyze patients with elevated
PSA, abnormal rectal exams, but 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 missed by the biopsy.
  8
  Prostate
cancer is the second-leading cause of cancer death in men, after lung 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.
  Leukemia
  HDC has identified and
patent-protected a set of leukemia genes that can separate ALL-T-cell
leukemia from ALL-B-cell leukemia with a high degree of accuracy.  The
Company collaborated with the University of Texas M.D. Anderson Cancer Center to
analyze a gene expression database to identify new biomarkers and pathways
involved in leukemia.  The Company intends to further validate this
finding in anticipation of developing a molecular diagnostic product for
commercialization.
  Leukemia
is a type of cancer that originates in the bone marrow. The accumulation of
malignant cells interferes with the body's production of healthy blood cells and
makes the body unable to protect itself against infections. The National Cancer
Institute (NCI) estimates that more than 44,000 new cases will be diagnosed in
the U.S. in 2008, with almost 22,000 deaths.
  Colon
Cancer
  HDC has identified and
patent-protectedcolon 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 noise of thousands
of measurements to highlight only those genes that optimally contributed to the
study focus.  The Company is currently validating these findings in
anticipation of developing a molecular diagnostic product for
commercialization.
  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.
  AIDS
  HDC identified and
patent-protected an AIDS expression signature that separated AIDS brain
cells from non-AIDS brain cells with a high degree of accuracy.
  This
biomarker discovery was accomplished in conjunction with Dr. Paul Shapshak,
Director of the Dementia/HIV Laboratory at the University of Miami Medical
School, and a group of leading scientists using HDC's proprietary FGM analysis
technique.  HDC sold the biomarker discovery to the University of
Miami in November 2005.
  HIV-related
dementia occurs in 40-60% of all cases of HIV infection that are left untreated.
Even when treated, dementia occurs in 10 percent of all cases of HIV infection,
with the number continuing to rise as the virus becomes resistant to treatment.
The dementia is related to inflammation in the brain caused by HIV infection, a
problem whose underlying genetic causes are complex and largely
unknown.
  Breast
Cancer
  HDC is
developing two breast cancer diagnostic technologies; one for detecting
malignancy in mammograms (MammoSIGHT) and another for
identifying circulating tumor cells in the blood (MetastaSIGHT). 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.
  9
  For
women, breast cancer is the most common non-skin cancer and the second leading
cause of cancer-related death in the United States.  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.
  Studies
have shown that among newly diagnosed breast cancer cases in which the patients
have previous mammograms, 75% of the cases will have abnormality detectable in
the old films. In fact, missed cancer reading in mammography is a major source
of lawsuits in radiology.  Detecting malignancy in mammograms can be
very difficult. Individual mammograms are unique and there can be great
variation within “normal” images.  Unlike CT and MRI, 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.  The features 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.
  MammoSIGHT
  HDC’s
MammoSIGHT technology
introduces the use of SVMs in detecting malignancy in mammograms. The SVM
classifier produces an index discriminating between the benign and malignant
cases. The individual components can be developed in parallel because of the
modular structure. In developing the calcification segmentation component, a
selected set of malignant, benign and normal cases representing a wide range of
images was used to guide and test the design in order to produce a general,
robust and accurate algorithm. At the same time, the SVM classifier was
developed and tested with manually prepared input data. A set of 300 images (150
benign and 150 malignant cases) was used in training the SVM. An independent set
of 328 images was used for testing. High dimensional input features were used to
ensure a sufficient capacity for automatically extracted features.
  10
  Clusters
of micro calcifications are characterized by their relatively small sizes and
high densities. The algorithm combines a recursive peak seeking technique with
morphological operations to achieve a highly accurate calcification detection
and segmentation.
  MetastaSIGHT
  Cancer
cells have the ability to migrate from the organ of its origin to any distant
organ throughout the body. This is known as metastasis, the hallmark of
malignant cancers. During metastasis, cancerous cells break through barriers to
travel through the body's circulatory system to invade other organs. These cells
form new cells in vital organs throughout the body, becoming secondary tumors
that destroy normal cells by depriving them of nutrition.
  Even with
today’s best treatment when the cancer is forced into remission, metastasis will
not necessarily leave the body. Metastasis cannot be eliminated by surgery.
Often, malignant cells circulate in the bloodbefore detection by
clinical examination.  MetastaSIGHT uses an
SVM-based approach to introduce new cellular imaging technology that identifies
circulating tumor cells in the blood.
  Employees
  On
December 31, 2007, we had 4 full time employees.  We do not expect any
significant change in the number of employees over the next 12
months.
  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-KSB, quarterly reports on Form 10-QSB 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.
  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.  Companies
licensing our discoveries or technologies will be responsible for all costs
involved in such approvals.  If we are not successful in licensing
these discoveries and 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 governmental regulations that will affect the Company’s current operations
or products.
  11
  Intellectual
Property
  In
connection with the SVM Acquisition, we obtained rights to the intellectual
property within the “SVM portfolio” that currently consists of twenty-seven
patents which were or have since issued as well as thirty-nine 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
              05/07/2022Australian
      Patent No.  764897
              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.
              05/24/2020
  12
  German
      Patent No. DE60024452.0-08
              Enhancing
      Knowledge Discovery from 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.
              05/24/2020South
      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.
              10/27/2020Australian
      Patent No.  2002243783
              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
              01/24/2022Canadian
      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
              05/01/2019Hong
      Kong Application No. 011065063
              Pre-Processing
      and Post-Processing for Enhancing Knowledge Discovery Using Support Vector
      Machines
              05/01/2019Indian
      Application No.  2000/00580
              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
              05/24/2020Indian
      Application No.  2001/01329
              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
              05/24/2020Canadian
      Application No. 2,388,595
              Method
      of Identifying Patterns in Biological Systems and Method of
      Uses
              08/07/2020European
      Publication No. 1236173
              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. 2007/0092917
              Biomarkers
      for Screening, Predicting, and Monitoring Prostate Disease
              05/01/2019U.S.
      Application No. 11/926,129
              System
      for Providing Data Analysis Services Using a Support Vector Machine for
      Processing Data Received from a Remote Source
              05/01/2019U.S.
      Patent Publication No. 2008/0033899
              Feature
      Selection Using Support Vector Machine Classifier
              05/01/2019European
      Publication No.  1828917
              Biomarkers
      for Screening, Predicting, and Monitoring Prostate Disease
              11/14/2025
  13
  Canadian
      Application No. 2,435,254
              Methods
      of Identifying Patterns in Biological Systems and Uses
    Thereof
              01/24/2022European
      Publication No. 1459235
              Methods
      of Identifying Patterns in Biological Systems and Uses
    Thereof
              01/24/2022Japanese
      Application No. 2002-560076
              Methods
      of Identifying Patterns in Biological Systems and Uses
    Thereof
              01/24/2022European
      Publication No. 1384155
              Spectral
      Kernels for Learning  Machines
              02/19/2023U.S.
      Application No. 11/929,354
              Kernels
      and Methods for Selecting Kernels for Use in a Learning
      Machine
              05/07/2022European
      Publication No. 1393196
              Kernels
      and Methods for Selecting Kernels for Use in a Learning
      Machine
              05/07/2022U.S.
      Patent Publication No.  2006/0224539
              Computer-Aided
      Image Analysis
              05/24/2020Canadian
      Application No. 2,435,290
              Computer
      Aided Image Analysis
              01/23/2022European
      Publication No. 1356421
              Computer
      Aided Image Analysis
              01/23/2022U.S.
      Application No. 11/929,213
              Methods
      for Feature Selection in a Learning Machine
              08/07/2020U.S.
      Patent Publication No. 2005/0071140
              Model
      Selection for Cluster Data Analysis
              05/17/2022U.S.
      Application No. 11/929,522
              Model
      Selection for Cluster Data Analysis
              05/17/2022U.S.
      Patent Publication No. 2006/0064415
              Data
      Mining Platform for Bioinformatics
              08/07/2020U.S.
      Application No. 11/928,606
              Data
      Mining Platform for Knowledge Discovery from Heterogeneous Data Types
      and/or Heterogeneous Data Sources
              08/07/2020U.S.
      Application No. 11/928,641
              Data
      Mining Platform for Bioinformatics
              08/07/2020U.S.
      Patent Publication No. 2005/0228591
              Kernels
      and Kernel Methods for Spectral Data
              08/07/2020U.S.
      Application No. 11/929,169
              Kernels
      and Kernel Methods for Spectral Data
              08/07/2020U.S.
      Patent Publication No. 2005/0131847
              Pre-Processed
      Feature Ranking for a Support Vector Machine
              08/07/2020U.S.
      Application No. 11/928,784
              Pre-Processed
      Feature Ranking for a Support Vector Machine
              08/07/2020European
      Publication No. 1449108
              Pre-Processed
      Feature Ranking for a Support Vector Machine
              11/07/2022U.S.
      Application No. 11/829,039
              Biomarkers
      for Screening, Predicting, and Monitoring Benign Prostate
      Hyperplasia
              01/24/2022U.S.
      Application No. 12/025,724
              Biomarkers
      Upregulated in Prostate Cancer
              01/24/2022
  14
  U.S.
      Provisional Application No. 60/976,791
              Biomarkers
      for Screening, Predicting, and Monitoring Prostate Disease
              01/24/2022U.S.
      Provisional Application No. 61/027,416
              Analysis
      of Flow Cytometry Data Using Support Vector Machines
              02/08/2028
 
  HDC also
owns intellectual property rights in U.S. and foreign patents and pending patent
applications covering the FGM technology.  The FGM portfolio includes
two issued patents and three pending patent applications, 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.
              01/19/2021European
      Patent No.: 1252588
              Method
      for the Manipulation, Storage, Modeling, Visualization and Quantification
      of Datasets.
              01/19/2021U.S.
      Patent Publication No.: 2005/0079524
              Method
      for Identifying Biomarkers Using Fractal Genomics
Modeling.
              01/19/2021U.S.
      Patent Publication No.: 2005/0158735
              Method
      for Studying Cellular Chronomics and Causal Relationships of Genes Using
      Fractal Genomics Modeling.
              01/19/2021U.S.
      Patent Publication No.: 2005/0076190
              Method
      for the Manipulation, Storage, Modeling, Visualization and Quantification
      of Datasets.
              01/19/2021
 
 Our
Competition
  HDC’s
main service/product is Biomarker
Discovery.  While a number of companies perform Biomarker Discovery, we feel
that our SVM and FGM technologies give us a distinct advantage over
competing technologies.  Neither classical statistical analysis nor
neural networks (the two competing technologies) can handle the large amounts of
inputs necessary to produce fully validated biomarkers.
  Customers
and Licensees
  We have
produced sales, licensing, and developmental revenue since 2005 through
agreements with a few customers and licensees. We have a strategic alliance and
licensing agreement with Clarient, Inc. for commercialization of a new molecular
diagnostic test for prostate cancer based on our discovered prostate cancer
biomarker signature.  Pursuant to our agreement, Clarient, Inc.
obtained an exclusive license to the prostate cancer test in exchange for our
30% royalty interest from all reimbursements of the test once
commercialized.  Since entering into the agreement, together we have
completed implementation of necessary assays and specimen transfer from an
internationally known cancer center required to validate the PCR based tests at
Clarient prior to the commercial launch as a CLIA diagnostic test for prostate
cancer.  We also received our first royalty proceeds related to our
licensing agreement with Bruker Daltonics in December 2007.  These
royalties relate to Bruker Daltonics’ sales of its ClinProToolsTM
clinical proteomics product line for its mass spectrometers, which contains our
SVM technology.  While the initial royalty was relatively small, it
represents HDC’s first royalty check from this relationship and offers the
opportunity of future royalties for the life of the patents related to future
sales of the Bruker product.   We have also been and continue to
be in meaningful discussions with a variety of parties, which, if successful,
may result in additional customers and licensees, and as a result, additional
revenue.
  While we
have a number of negotiations in process with potential licensing partners,
including in the field of anatomic pathology imaging (which includes such things
as PAP smear tests, biopsies, surgical specimens, and cytology specimens), there
is a possibility that we will be unable to reach agreement with any party, that
the negotiations continue but are not finalized, or that those that may be
finalized do not provide the economic returns that we expect.
  15
  Research
and Development
  Our past
Research and Development costs have been minimal due to the unique relationships
we have maintained with the members of our scientific team and their
institutions.  Our total R&D costs have consisted solely of the
consultant fees paid to Dr. Stamey, Dr. Vapnik, and Dr. Guyon.  These
fees consisted of $46,432 in cash for 2007 and $70,734 in cash for
2006.
  ITEM
1A.  RISK FACTORS
  This
document 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 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 and other such matters 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,
and the inability to retain a significant number of customers.  All
written or oral forward-looking statements attributable to us are expressly
qualified in their entirety by the foregoing cautionary statement.
  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.  Consequently, we have a limited history on which to
base an evaluation of our business and prospects.  Thus, 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.  If our efforts are unsuccessful or
other unexpected events occur, purchasers of the common stock offered hereby
could lose their entire investment.
  We
expect to incur future losses, and we may never achieve or sustain
profitability.
  We expect
to continue to incur net losses and have negative cash flows in the future due
in part to high research and development expenses, including enhancements to our
technologies and investments in new technologies.  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.
  16
  Our
business is difficult to evaluate because we have a limited history of
operations.
  Since
reorganizing in 2003, our focus and our business model have been continually
evolving.  Accordingly, we have a history of operations in which there
is limited information to identify any historical pattern. Even if we could
discern such a pattern, the rapidly evolving nature of the biotechnology and
pharmaceutical industries would make it very difficult to identify any
meaningful information in such short a history.  Therefore, it is also
difficult to make any projections about the future of our
operations.  This difficulty may result in our shares trading below
their value.
  We
will have negative operating income and may never become
profitable.
  Our
operating expenses are expected to exceed our income until we successfully
complete transactions resulting in sufficient revenue and thus 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
may need additional financing.
  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. No binding arrangements have
been made to secure such financing, and there can be no assurance that such
additional financing will be available when required on terms acceptable to
us.  If we fail to raise sufficient funds, we may have to cease
operations, which would materially harm our business and financial results. 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.
  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:
  §
              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,
      including operating losses of acquired businesses;§
              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;§
              changes
      in intellectual property laws that affect our rights in genetic
      information that we sell; and§
              payments
      of milestones, license fees or research payments under the terms of our
      increasing number of external
alliances.
  17
  Research
and development costs associated with our technologies and services, as well as
personnel costs, marketing programs and overhead, account for a substantial
portion of our operating expenses. 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.
  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
$0.04.  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.
  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 recently. 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
novel 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.  We are a drug and diagnostic
discovery company, which incorporates ideas and methods from mathematics,
computer science and physics into the disciplines of biology, organic chemistry
and medicine. Our objective is to significantly increase the probability of
success of drug discovery and diagnostic development.  Our approach
and the products and technologies derived from our approach are novel. 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.  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.
  18
  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
acquired SVM Portfolio utilizes technology 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
acquired SVM Portfolio utilizes technology covered by the original hyperplane
patent (Pat. No. 5,649,068) invented by members of our Scientific Advisory Board
and owned by Lucent Technologies, Inc. - GRL
Corp. (“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
Support Vector Machine 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 one company that provides the full suite of services that we do, we
compete with entities in the U.S. and elsewhere 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.
  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.
  19
  We
anticipate that if we experience a period of growth in the future, a period of
significant expansion will be required to address potential growth in our
customer base and market opportunities. 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 and experience a reduction in our growth rate and damage to 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.
  We
may not be able to find business partners to develop and commercialize product
candidates deriving from our discovery activities.
  Our
strategy for the development and commercialization of diagnostic markers 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.
  20
  Our
dependence on licensing and other collaboration agreements with third parties
subjects us to a number of risks.
  We may
not be able to enter into licensing or other collaboration agreements on terms
favorable to us.  Collaborators may typically be afforded significant
discretion in electing whether to pursue any of the planned
activities.  In most cases, our collaborators or licensees will have
responsibility for formulating and implementing key strategic or operational
plans. Decisions by our collaborators or licensees 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 or a licensee’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 Chief Executive
Officer, Board of Directors, and Scientific Advisory Board.  While
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.
  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 businesses,
technologies, services or products.  Acquisitions 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.
  21
  Difficulties
in integrating an acquired business 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 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.
  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.
  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 predicted 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.  The patent positions
of biotechnology 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.
  22
  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.  Any of these events could
materially harm our business or financial results.
  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.
  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 for intellectual
property rights infringement, we may incur significant costs in litigating,
whether or not we prevail in such litigation.  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.  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.
  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.
  As is
typical in the genomics, biotechnology and software industries, we will probably
receive in the future notices from third parties alleging patent
infringement.  We believe that we are not infringing the patent rights
of any third parties.  No third party has filed a patent lawsuit
against us.  We may, however, be involved in future lawsuits alleging
patent infringement or other intellectual property rights
violations.  In addition, litigation may be necessary to:
  §
              assert
      claims of infringement;§
              enforce
      our patents as they are granted;§
              protect
      our trade secrets or know-how; or§
              determine
      the enforceability, scope and validity of the proprietary rights of
      others.
  23
  We may be
unsuccessful in defending or pursuing these lawsuits.  Regardless of
the outcome, litigation can be very costly and can divert management’s
efforts.  An adverse determination may subject us to significant
liabilities or require us to seek licenses to other parties’ patents or
proprietary rights.  We may also be restricted or prevented from
licensing or selling our products and services.  Further, we may not
be able to obtain any necessary licenses on acceptable terms, if at
all.
  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.
  Our
business also relies on a combination of trade secrets, copyrights and
trademarks, non-disclosure agreements and other contractual provisions and
technical measures to protect our intellectual property rights. While we
generally require employees, collaborators, consultants and other third parties
to enter into confidentiality agreements where appropriate, it is not always
possible to enforce these arrangements.
  Monitoring
the unauthorized use of our technology is difficult, and the steps we have taken
may not prevent unauthorized use of our technology. The disclosure or
misappropriation of our intellectual property for any of the above reasons could
harm our ability to protect our rights and our competitive
position.
  We may become involved in disputes
regarding our patents and other intellectual property rights, which could result
in the forfeiture of these rights, expose the business to significant liability
and divert management’s focus.
  In order
to protect or enforce our patent rights, our business may need to initiate
patent litigation against third parties.  In addition, we may be sued
by third parties alleging that we are infringing their intellectual property
rights.  These lawsuits are expensive, take significant time and
divert management’s focus from other business concerns. These lawsuits could
result in the invalidation or limitation of the scope of our patents, forfeiture
of the rights associated with these patents or an injunction preventing Health
Discovery from selling any allegedly infringing product. In addition, we may not
prevail or a court may find damages or award other remedies in favor of the
opposing party in any of these suits.  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.
  24
  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 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 and licensees may be
subject to governmental regulation.
  Any new
therapy or diagnostic product that may be developed by our collaborators or by
our licensees 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 product.
  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.
  25
  Although
we intend to become involved in the clinical phases in the future, we still
expect to rely mainly on collaborators or licensees 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.
  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
  None.
  ITEM
2. DESCRIPTION OF PROPERTY
  We do not
own any real property.  We lease 908 square feet of office space in
Savannah, Georgia, pursuant to a three year lease dated July 1, 2007 for a cost
of $1,678 per month.  Our principal executive office is located at 2
East Bryan Street, Suite #601, 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 it.
  ITEM
3. LEGAL PROCEEDINGS
  None.
 
 ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
  No matter
was submitted during the fourth quarter of the fiscal year ended December 31,
2007 to a vote of our shareholders, through the solicitation of proxies or
otherwise.
  PART
II
   ITEM
5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND SMALL
BUSINESS 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 was as
follows.  These quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual
transactions.
  26
  High
              
              
              LowFirst
      Quarter 2006
              
              $
              0.15
              
              
              $
              0.10Second
      Quarter 2006
              
              $
              0.12
              
              
              $
              0.06Third
      Quarter 2006
              
              $
              0.13
              
              
              $
              0.07Fourth
      Quarter 2006
              
              $
              0.17
              
              
              $
              0.08First
      Quarter 2007
              
              $
              0.16
              
              
              $
              0.09Second
      Quarter 2007
              
              $
              0.14
              
              
              $
              0.09Third
      Quarter 2007
              
              $
              0.11
              
              
              $
              0.07Fourth
      Quarter 2007
              
              $
              0.11
              
              
              $
              0.07
  At
December 31, 2007, there were approximately 362 holders of record of our common
stock.
  We have
not paid any cash dividends since inception, and we do not anticipate paying any
in the foreseeable future.  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
and will depend upon our earnings, our financial condition, and opportunities
for growth and expansion.
  27
  Equity
Compensation Plan Information
  Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights (a)
              
              
              Weighted-average
      exercise price of outstanding options, warrants and rights
    (b)
              
              
              Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column (a))
      (c)Equity
      compensation plans approved by security holders
              
              
              0
              
              
              
              0
              
              
              
              0Equity
      compensation plans not approved by security holders
              
              
              9,800,000
              
              
              $
              0.105
              
              
              
              0Total
              
              
              9,800,000
              
              
              $
              0.105
              
              
              
              0
 
  Private
Placements
  On March
9, 2005, we completed the private sale of 30,703,125 shares of restricted common
stock to certain institutional investors and individual accredited investors at
an offering price of $0.16 per share for a total of $4,912,500.  For
every share of common stock purchased, each investor received warrants to
purchase one share of the Company’s common stock at $0.24 per share, exercisable
until December 31, 2008. This could result in the issuance of up to 30,703,125
additional restricted common shares upon exercise.  We entered into
purchase agreements with each of the investors.  Under each agreement,
the Company agreed to use its best efforts to file a registration statement to
register the shares of common stock and the shares underlying the warrants
issued and sold to the investors by May 9, 2005, and to use its best efforts to
cause the registration statement to be declared effective July 6,
2005.  Shares totaling 540,000 were issued in 2005 under the penalty
provisions of the agreement.  The securities issued in the private
placement were not registered under the Securities Act of 1933, as amended, and
until they were registered the securities could not be offered or sold in the
United States absent registration or the availability of an applicable exemption
from registration.  The shares and the warrants were offered and sold
in reliance upon exemptions from registration pursuant to Section 4(2) under the
Securities Act of 1933, as amended, and Regulation D promulgated
thereunder.  Based on the information provided by each of the
investors, all investors qualify as accredited investors (as defined by
Rule 501 under the Securities Act of 1933, as amended).  On March 10,
2005, we filed registration statement No. 333-124750 for 18,609,375 shares of
restricted common stock and the equivalent number of warrants.  On
December 14, 2005, the Company filed registration statement 333-124750 wherein
31,622,749 shares of stock and 32,638,436 warrants were registered with the
Securities and Exchange Commission.  On July 12, 2007, we filed a
Post-Effective Amendment to Form SB-2 to deregister the shares registered on
registration statement No. 333-124750.
  Effective
September 7, 2007, the Company issued 31,937,500 shares of restricted common
stock in return for $2.55 million in cash.  Each purchaser of common
stock also received one warrant to acquire an equal number of shares at $0.14
(the “Tranche 1 Warrants”) and one warrant to acquire an equal number of shares
at $0.19 (the “Tranche 2 Warrants”).  The holders must 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.  The
holders must exercise fifty percent of the Tranche 2 Warrants if the
market price for the Company’s common stock is $0.24 for a period of thirty
consecutive calendar days.  The common shares were valued at $0.07
each, and the warrants were valued at $0.005 each for a total of
$0.08.  The securities issued in the private placement were not
registered under the Securities Act of 1933, as amended, and until they are
registered the securities could not be offered or sold in the United States
absent registration or the availability of an applicable exemption from
registration.
  28
  The
Company also issued 19,601,322 shares of common stock and 7,437,184 shares of
Series A Preferred Stock in a conversion of secured debt to
equity.  The amount of debt converted to common stock and warrants was
approximately $1.6 million and the amount of debt converted to Series A
Preferred Stock was $594,975.  Each share of common stock issued in
the conversion was accompanied by one warrant to acquire an equal number of
shares of common stock at $0.14 and one warrant to acquire an equal number of
shares of common stock at $0.19.  The holders must 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.  The
holders must exercise fifty percent of the Tranche 2 Warrants if the market
price for the Company’s common stock is $0.24 for a period of thirty consecutive
calendar days.
  The
shares of Series A Preferred Stock may be converted into common stock of the
Company at any time without the payment of additional
consideration.  The Series A Preferred Stock must be converted into
common stock of the Company when the trading value of the common stock of the
Company exceeds $0.12 per share for a period of 30 consecutive calendar
days.  The holder of the Series A Preferred Stock has 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, which is the amount of debt converted, plus any declared but
unpaid dividends.  The Company has 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.
  Additional Issuance of
Securities
  During
the first quarter of 2006, Mr. David Cooper was issued 600,000 shares of the
Company’s common stock in exchange for exercising his options, which had an
exercise price of $0.01.  On March 31, 2006, Mr. William F. Quirk, Jr.
purchased 1,000,000 shares of the Company’s common stock with accompanying
warrants to acquire an equal number of shares.  The purchase price for
the common shares was $0.10 per share, and the exercise price of the warrants is
$0.15 per share.
  During
the second quarter of 2006, the Company issued 500,000 warrants to two members
of its Scientific Advisory Board.  These warrants vest over a one-year
period and have an exercise price of $0.11.  The Company also issued
200,000 warrants to a service provider in exchange for professional
services.  These warrants vest over a two-year period and have an
exercise price of $0.10. During the second quarter of 2006, the Company issued
200,000 shares of stock for warrants exercised at $0.01
each.  Proceeds of $2,000 were recorded in capital stock.
  During
the third quarter of 2006, the Company issued 10,000,000 warrants to purchase an
equal number of shares of the Company’s common stock to Mr. Quirk in connection
with the loan Mr. Quirk made to the Company.  These warrants vest over
a period of nine months and have an exercise price of $0.16 per
share.  During the third quarter of 2006, the Company also issued
300,000 warrants to purchase an equal number of shares of the Company’s common
stock in exchange for legal services provided to the Company.  These
warrants vest immediately and have an exercise price of $0.10 per
share.
  29
  In
addition, during the third quarter of 2006, the Company issued a warrant to
purchase 500,000 shares of the Company’s common stock to a member of the
Company’s Scientific Advisory Board for providing advisory services to the
Company beyond which was expected in his capacity as a Scientific Advisory Board
member.  These warrants vest immediately and have an exercise price of
$0.10 per share.
  During
the third quarter of 2006, the Company issued 230,000 shares of stock for
warrants exercised at $0.08 each.  Proceeds of $18,400 were recorded
in capital stock.
  In
January 2007, the Company issued 100,000 shares of stock for warrants exercised
at $0.01 each.  Proceeds of $1,000 were recorded in capital
stock.  In February 2007, the Company granted warrants to purchase
15,235,000 restricted shares of Company stock at a fixed price of $0.35 per
share, exercisable until November 1, 2007.  These warrants expired in
November 2007.  Also in February 2007, the Company issued warrants to
purchase up to 500,000 shares of Company common stock to consultants, which
vested immediately, and have an exercise price of
$0.14.  Additionally, the Company issued a warrant to purchase up to
100,000 shares of Company common stock to a consultant, which vests over ten
months, and has an exercise price of $0.14.
  During
the second quarter of 2007, the Company issued warrants to purchase up to
500,000 shares of Company common stock to consultants, which vested immediately
and had an exercise price of $0.11.
 
 In July
2007, the Company issued 575,000 shares of common stock valued at $46,000 to a
former employee as part of a termination agreement.  In connection
with that termination agreement, the Company also issued to the former employee
a warrant to purchase 300,000 shares of Company common stock with an exercise
price of $0.08.  These warrants vested immediately and expire in three
years.  The Company also issued 400,000 shares of common stock valued
at $32,000 as part of a litigation settlement in July 2007.
  During
the third quarter of 2007, the Company issued warrants to purchase 60,750 shares
of Company common stock to a vendor as payment for professional
services.  These warrants expire on December 31, 2008, vested
immediately, and have an exercise price of $0.10.
  Two new
directors were each awarded warrants to purchase 1,500,000 shares of Company
common stock, which vest over three years and expire in six
year.  These warrants have an exercise price of $0.08, and will be
charged as directors’ fees over the vesting period.  One director
subsequently forfeited his warrant upon his resignation as a
director.
  All of
these issuances of equity securities in 2006 and 2007 were made in reliance upon
exemptions from registration pursuant to Section 4(2) under the Securities Act
of 1933, as amended.
  ITEM
6.  Management’s Discussion and Analysis or Plan of
Operation
  Corporate
Overview
  Our
Company is a pattern recognition 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 molecular diagnostics 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 biomarkers and
pathways that include human genes and genetic variations, as well as gene,
protein, and metabolite expression differences.  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.
  30
  We intend
to provide pharmaceutical and diagnostic companies with all aspects of
diagnostic and drug discovery, from expert assessment of the clinical dilemma
through proper selection and procurement of high quality
specimens.  We will then apply our proprietary analytical evaluation
methods and state-of-the-art computational analysis to derive relevant and
accurate clinical data, producing accurate biomarker and pathway discoveries,
resulting in patent protection of our biomarker discoveries for future
development.
  Our
business is based on the belief that in order 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 produce 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
several 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.
  On July
31, 2007, we announced our alliance and licensing agreement with Clarient, Inc.
for development of a new molecular diagnostic test for prostate cancer based on
our discovered prostate cancer biomarker signature.  Under the terms
of that agreement, Clarient, Inc. obtained an exclusive license to the biomarker
signature in exchange for HDC’s 30% royalty interest from all reimbursements of
the test once commercialized.  The commercialization efforts have
progressed since the time of the announcement, including the completed
implementation of necessary assays and specimen transfer from an internationally
known cancer center required to validate the PCR based tests prior to commercial
launch as a CLIA diagnostic test for prostate cancer.
  In
December 2007, we received our first royalty proceeds related to our licensing
agreement with Bruker Daltonics, which was originally announced in August,
2006.  The royalties relate to Bruker Daltonics’ sales of its
ClinProToolsTM
clinical proteomics product line for its mass spectrometers, which contains
HDC’s SVM technology.  Bruker launched its ClinProToolsTM at
approximately the same time as the license with HDC.  While the
initial royalty was relatively small, it represents HDC’s first royalty check
from this relationship and offers the opportunity of future royalties for the
life of the patents related to future sales of the Bruker product.
  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 a
particular medical condition has resulted in a successful proof of
concept.  These findings were presented during the first quarter of
2008 and the due diligence process has accelerated to confirm our findings for
that particular condition and determine other applications within flow
cytometry.
  We have
advanced discussions with two large international healthcare companies with
respect to diagnostic imaging opportunities.  Our objective is
licensing and product development using SVMs and FGMs in diagnostic radiology,
including mammography, PET scans, CT scans, MRI and other radiological
images.  In addition, given the scope of these two prospects, we
believe we can demonstrate the computational power of our SVM technology
analyzing combined data from imaging, proteomics, and genomics.  We
own a number of SVM and FGM patents in this field that we believe are very
important.
  Negotiations
with a large European pharmaceutical company to develop a companion diagnostic
test using our discovered biomarkers as surrogates in the last phase of a
clinical trial for its new drug to treat BPH (enlarged prostate) remain delayed
due to the prospect’s post-acquisition integration issues.  Based on
the prospect’s representations, we believe that discussions regarding this
prospective opportunity will resume sometime in 2008.
  31
  We have
advanced our dialogue with several other important industry players in the
healthcare field and, in certain situations, related to the field of anatomic
pathology imaging, including a proposed project with one of the world’s largest
pharmaceutical companies, a marketing arrangement with one of the world’s
largest generic drug manufacturers, and other prospective partnership
opportunities with additional companies and research institutions.  We
also continue to pursue development opportunities with our existing licensing
customers.
  We have
also advanced discussions with a company regarding the use of the SVM patents,
patent applications and all other technology that the Company has or has rights
to, which can be used for breast cancer diagnosis and treatment.  We
remain engaged in discussions related to this development effort with one of our
directors.  If we reach an agreement, we anticipate that research and
development will result in the creation and commercialization of tests that will
be used in the diagnosis and treatment of breast cancer.
 
 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 has over thirty years of
experience in commodity and futures trading.  SVM Capital has made
significant progress since the formation of the joint venture.  The
SVM technology is now working well with dynamic time series for S&P data
accumulated over the past fifty-eight years.  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.  Once the stability of
these models is confirmed, SVM Capital intends to apply the models to a wide
range of financial asset classes such as interest rates, currencies, metals and
petroleum products.  The joint venture partners plan to apply the
investment model either in a single fund or a fund of funds.  SVM
Capital will charge a management fee and a performance fee for managing client
assets.  Depending on the level of its success, this venture can be
profitable given its reliance on cost effective use of computer technology and
ready access to efficient trading platforms.
  Since
December 2005, the total value of licenses and development contracts signed is
approximately $1,250,000.
  While we
have a number of negotiations in process with potential licensing partners,
there is a possibility that we will be unable to reach agreement with any party,
that the negotiations continue but are not finalized, or that those that may be
finalized do not provide the economic returns that we expect.
  Year
Ended December 31, 2007 Compared with Year Ended December 31, 2006
  Revenue
  For the
year ended December 31, 2007, revenue was $57,905 compared with $203,889 in
revenue for the year ended December 31, 2006.  Revenue is recognized
for licensing and development fees over the period earned.  The
decrease of revenue in 2007 was due largely to the fact that the contracts
finalized in 2007 required recognition of the revenue generated be deferred and
recognized over the contractual period rather than immediately
recorded.  As of December 31, 2007, the Company had deferred revenue
of $516,424.  This deferred revenue includes $291,424 of cash received
but not yet recognized as revenue and $225,000 in accounts
receivable.  Deferred revenue was $101,111 at December 31,
2006.
  Cost
of Revenue and Gross Margin
  Cost of
revenues for 2007 was $21,300.  Cost of revenues includes all direct
costs associated with the acquisition and development of patents and processes
sold.  All direct costs, primarily professional fees associated with
licensing negotiations, are also included in cost of revenues.  Cost
of revenues was $28,671 in 2006.
  32
  Operating
and Other Expenses
  Amortization
expense was $262,719 for the twelve months ended December 31, 2007 and
2006.
  Professional
and consulting fees totaled $980,833 for 2007 compared with $1,123,498 for
2006.  These fees, related to legal, accounting and scientific
activities, were reduced because of fewer warrants issued to service providers
and continued cost containment efforts.
  Compensation
of $783,721 for the twelve months ended December 31, 2007 was slightly higher
than the $770,000 reported for the comparable period of 2006.
  Other
general and administrative expenses decreased from $542,710 in 2006 to $459,064
in 2007.  This decrease was largely due to expense reduction efforts
throughout the fiscal year.
  Loss
from Operations
  The loss
from operations for the twelve months ended December 31, 2007 was $2,449,737
compared to $2,523,709 for the prior year.  The decreased loss was due
to the factors enumerated above.
  Other
Income and Expense
  Interest
income was $39,614 for the twelve months ended December 31, 2007 compared to
$21,008 in 2006.  Increased interest income was due to the higher
average cash available to invest throughout 2007.
  A gain on
the restructuring of accounts payable of $44,594 was recorded in 2007 to reflect
common stock warrants issued in payment of liabilities compared to $97,864 in
2006.
  The
Company also recognized a $5,000 loss related to its investment in SVM Capital
LLC.
  The
Company recorded an expense of approximately $42,000, which was associated with
the settlement of litigation.
  Interest
expense was $286,398 in 2007 compared with $190,922 in 2006.  This
increase was due to the higher interest rate associated with the renegotiated
promissory notes, and interest related to the promissory note executed in the
third quarter of 2006.
  Net
Loss
  The net
loss for the twelve months ended December 31, 2007 was $2,698,927 compared to
$2,595,759 for the twelve months ended December 31, 2006.  The
increased loss was due to increased net other expense, which unfavorably offset
the reduced 2007 loss from operations
 
 Net loss
per share was $0.02 for the twelve months ended December 31, 2007 and
2006.  A larger net loss in 2007 was favorably offset by increased
number of average shares outstanding.
 
 Liquidity
and Capital Resources
 
 At
December 31, 2007, the Company had $1,648,439 in available cash.  Cash
used by operating activities was $1,467,118.  This was due primarily
to the net loss of $2,698,927; however, net non-cash charges and adjustments of
$1,231,809 favorably impacted the computation of the net cash
used.  Cash used by investment activities was $998 due to the
acquisition of assets.  Net cash provided by financing activities was
$2,442,189 due to the cash received from the
sale of common stock and the exercise of warrants offset by the repayment of
debt totaling $49,351.
  33
  The
following table summarizes the due dates of our contractual
obligations.
  Total
              
              
              Less
      than
                1 Year
              
              
              1-3
                YearsDeferred
      Compensation
              
              
              66,500
              
              
              
              66,500
              
              
              
              -Corporate
      Office Lease
              
              
              50,340
              
              
              
              20,136
              
              
              
              30,204Total
              
              $
              116,840
              
              
              $
              86,636
              
              
              $
              30,204
 
  The
Company continues to expend capital to maintain its patent
portfolio.
  In
January 2007, the Company issued 100,000 shares of stock for warrants exercised
at $0.01 each.  Proceeds of $1,000 were recorded in capital
stock.  In February 2007, the Company granted warrants to purchase
15,235,000 restricted shares of Company stock at a fixed price of $0.35 per
share, exercisable until November 1, 2007.  These warrants expired in
November 2007.  Also in February 2007, the Company issued warrants to
purchase up to 500,000 shares of Company common stock to consultants, which
vested immediately, and have an exercise price of
$0.14.  Additionally, the Company issued a warrant to purchase up to
100,000 shares of Company common stock to a consultant, which vests over ten
months, and has an exercise price of $0.14.
  During
the second quarter of 2007, the Company issued warrants to purchase up to
500,000 shares of Company common stock to consultants, which vested immediately
and had an exercise price of $0.11.
  In July
2007, the Company issued 575,000 shares of common stock valued at $46,000 to a
former employee as part of a termination agreement.  In connection
with that termination agreement, the Company also issued to the former employee
a warrant to purchase 300,000 shares of Company common stock with an exercise
price of $0.08.  These warrants vested immediately and expire in three
years.  The Company also issued 400,000 shares of common stock valued
at $32,000 as part of a litigation settlement in July 2007.
  During
the third quarter of 2007, the Company issued warrants to purchase 60,750 shares
of Company common stock to a vendor as payment for professional
services.  These warrants expire on December 31, 2008, vested
immediately, and have an exercise price of $0.10.
  Two new
directors were each awarded warrants to purchase 1,500,000 shares of Company
common stock, which vest over three years and expire in six
year.  These warrants have an exercise price of $0.08, and will be
charged as directors’ fees over the vesting period.  One director
subsequently forfeited his warrant upon his resignation as a
director.
  Effective
September 7, 2007, the Company issued 31,937,500 shares of restricted common
stock in return for $2.55 million in cash.  The stock is restricted
from resale as the stock has not been registered.  Each purchaser of
common stock also received one warrant to acquire an equal number of shares at
$0.14 and one warrant to acquire an equal number of shares at
$0.19.  The common shares were valued at $0.07 each and the warrants
were valued at $0.005 each for a total of $0.08.
  The
Company also issued 19,601,323 shares of common stock and 7,437,184 shares of
Series A Preferred Stock in a conversion of secured debt to
equity.  The amount of debt converted to common stock and warrants was
$1.6 million and the amount of debt converted to Series A Preferred Stock was
$594,975.  Each share of common stock issued in the conversion was
accompanied by one warrant to acquire an equal number of shares of common stock
at $0.14 and one warrant to acquire an equal number of shares of common stock at
$0.19.
  34
  The
shares of Series A Preferred Stock may be converted into common stock of the
Company at any time without the payment of additional
consideration.  The Series A Preferred Stock must be converted into
common stock of the Company when the trading value of the common stock of the
Company exceeds $0.12 per share for a period of 30 consecutive calendar
days.  The holder of the Series A Preferred Stock has 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, which is the amount of debt converted, plus any declared but
unpaid dividends.  The Company has 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.
  The
Company has relied primarily on equity funding plus debt financing for liquidity
during its developmental phase that ended in 2004.  The Company
produced sales, licensing, and developmental revenue since 2005 and must
continue to do so 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.  The Company has
implemented a cash conservation plan that includes a reduction in consulting
payments, negotiated settlements with creditors whereby the Company substituted
equity instruments for amounts owed, and a heightened scrutiny of all potential
expenditures.
  Should it
prove necessary, the Company may also consider such alternatives as raising
additional equity through private placements and/or debt
offerings.  Although this raises doubt with respect to our ability to
operate as a going concern, the Company believes that it has sufficient
capability to operate through the next twelve months.
  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 the following 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.
  35
  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) collectibility is
reasonably assured, and (v) both title and the risks and rewards of ownership
are transferred to the buyer. We are required to make more significant estimates
involving our recognition of revenue from license and royalty fees. Our license
and royalty fees revenue estimates depend upon on 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.
  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 under SFAS No. 123R. 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 the
application of SFAS No. 123R in future periods, the compensation expense
that we record under SFAS No. 123R will differ significantly from what we
have recorded in the current period.
  For
share-based awards issued during the year ended December 31, 2007, 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 start-up nature 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.
  Off-Balance
Sheet Arrangements
  We have
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.
  36
  ITEM
7. FINANCIAL STATEMENTS.
  Financial
statements appear beginning on page F1 of this Report.
  ITEM
8. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
   We have
had no disagreements with our former certifying accountants on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure.
  ITEM
8A(T).  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 and President and 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 and
our Principal Financial 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 and Principal Financial
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.
  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, 2007. 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.
  37
  Based on
this evaluation, management has concluded that our internal control over
financial reporting was not effective as of December 31, 2007.  Our Chief
Executive Officer and 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 temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this annual report.  As of the Evaluation Date,
no changes in the Company’s internal control over financial reporting occurred,
that have materially affected, or are reasonably likely to materially affect,
the Company’s internal control over financial reporting.
  ITEM
8B.  OTHER INFORMATION
  None.
  38
  PART
III
   ITEM
9. DIRECTORS, EXECUTIVE OFFICERS, CORPORATE GOVERNANCE, COMPLIANCE WITH SECTION
16(a) OF THE EXCHANGE ACT.
  Our
executive officers, directors and significant employees are:
  Name
              
              Age
              
              PositionStephen
      D. Barnhill, M.D.
              
              49
              
              Chief
      Executive Officer and Chairman of the BoardDaniel
      R. Furth
              
              44
              
              Principal
      Financial Officer, Executive Vice PresidentHong
      Zhang, Ph.D.
              
              46
              
              Senior
      Vice PresidentRichard
      E. Caruso
              
              64
              
              DirectorWilliam
      M. Goldstein
              
              72
              
              DirectorWilliam
      F. Quirk, Jr.
              
              65
              
              Director
  Stephen D.
Barnhill, M.D.,is currently our Chief
Executive Officer and Chairman of the Board.  He has been a member of
the Board of Directors since November 2003.  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.  This
clinical laboratory, now owned by Quest Diagnostics, continues to be the largest
and busiest clinical laboratory in the Savannah, Georgia area.
  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 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.
  In 1999,
Dr. Barnhill founded and served as Chairman, President and CEO of Barnhill
BioInformatics, Inc. Barnhill BioInformatics, Inc. 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.
  39
  Daniel R.
Furthis our
Principal Financial Officer, Executive Vice President, Secretary and
Treasurer.  Mr. Furth is an experienced executive with a proven track
record in diverse industries for both private and public
corporations.  Since October 2000, he served as a corporate
communications consultant for several private clients.  During that
same period, he also served as a managing member and equity partner of Purple
Shamrock LLC, a privately held investment group.  From 1994 to 2000,
he served as Senior Director of Marketing & Communications for Quality
Distribution, Inc., North America’s largest bulk transportation services
company, where he managed corporate communications, marketing communications,
investor relations, and public affairs.  During that time, he was
chief of staff to QD’s Chairman/CEO and played an instrumental role in the QD’s
initial public offering in 1994 and its subsequent leveraged buyout in
1998.  From 1986 to 1994, Mr. Furth held varied executive positions in
both the public and private sectors including particular experience with early
stage ventures.  He earned his BA degree in government from Georgetown
University in Washington, DC.
  Hong Zhang, Ph.D.is ourSenior
Vice President, Computational Medicine.  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.
  Richard E.
Caruso, Ph.D.is a member of the Board of Directors and has been a
director since August 27, 2007.  Dr. Caruso founded Integra
LifeSciences Corporation in 1989 and he has served as the company’s Chairman
since 1992.  Prior to December 1997, Dr. Caruso served as Integra’s
Chief Executive Officer from March 1992 to December 1997 and as President from
September 1995 to December 1997.  Integra is credited with the
creation of a new branch of medicine now known as Regenerative Medicine where
the body is enabled to re-create its own parts.  In 1978, he founded
The Provco Group, a Villanova-based venture company that organizes and provides
funding for a variety of entrepreneurs and complex business
activities.  A widely-recognized and successful entrepreneur, Dr.
Caruso holds more than 35 years of experience in entrepreneurial and finance
type ventures including founding and leading several private and publicly-traded
companies.  He currently serves on the board of
Susquehanna University, The Baum School of Art and The Uncommon Individual
Foundation (founder).  Dr. Caruso received his B.S. degree from
Susquehanna University, M.S.B.A. degree from Bucknell University, and
a Ph.D. degree from the London School of Economics, University of London
(U.K.).  In 2006, Dr. Caruso was named the Ernst & Young
Entrepreneur of the Year.
  40
  William M.
Goldstein, Esq.is a member of the Board of Directors and has been a
director since January 28, 2006.  Since 1982, Mr. Goldstein has been a
senior partner with Drinker Biddle & Reath LLP and has served the firm as a
managing partner, chairman of the firm’s managing partners, and the chair of the
Tax Practice Group.  In the mid-70’s, Mr. Goldstein served as Deputy
Assistant Secretary for Tax Policy at the U.S. Treasury Department where he
worked directly with Secretary William E. Simon in determining the Treasury’s
position on various tax and economic issues.  He was also a finalist
candidate for Commissioner of the Internal Revenue Service.  Mr.
Goldstein earned his A.B. from Princeton University and his J.D. from Harvard
Law School.
  William F. Quirk,
Jr.is a member of the Board of Directors and has been a director since
October 25, 2005.  Mr. Quirk is a private investor who purchased a
significant equity stake in the company in its successful private placement in
July 2005. Prior to his retirement in 1996, he held a variety of senior
executive positions in finance and management including: Fidelity Management
& Research in the mutual fund industry; the investment banking firm
Peterson, Diehl, Quirk & Company; leveraged buyout firm Kelso & Company;
and auto parts supplier Inline Brake Manufacturing. Mr. Quirk earned his B.S.
from the U.S. Naval Academy and an MBA from the Harvard Business
School.
  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
  We do not
have a separately designated standing audit committee.  The entire
board of directors is acting as our audit committee, and no individual on our
Board of Directors possesses all of the attributes of an “audit committee
expert.”Given the
development stage and size of the Company and the difficulty in attracting
additional directors, the Board does not have an audit committee financial
expert.  In forming our Board of Directors, we sought out
individualswho
would 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 Section 3.8 of 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 Secretary 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 provisions of Section 3.8 of
the Company’s Bylaws.
  41
 
 Code of
Ethics
  The
Company has adopted a Code of Ethics applicable to its Chief Executive Officer
and Executive Vice President.  This Code of Ethics is posted on our
website at www.HealthDiscoveryCorp.com.  These codes are also
available without charge upon request directed to Investor Relations, Health
Discovery Corporation, 2 East Bryan Street, Suite #601, Savannah,
GA  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.
  ITEM
10. EXECUTIVE COMPENSATION.
  Summary
Compensation Table
  The
following table sets forth various elements of compensation for our Named
Executive Officers for each of the last three calendar years:
   Name
      and Principal
                Position
              Year
              
              Salary
      ($)
              
              
              Bonus
      ($)
              
              Option
                Awards
                ($)
              
              All
      Other Compensation
                ($)
              
              
              TotalStephen
      D. Barnhill, M.D.
              2007
              
              $
              196,875
              
              
              $
              50,000
              
              –
              
              $
              3,719
              (1)
              
              $
              250,594Chief
      Executive Officer
              2006
              
              $
              125,000
              
              
              
              
              
              –
              
              $
              6,000
              
              
              $
              131,000Daniel
      R. Furth
              2007
              
              $
              91,500
              
              
              
              
              
              –
              
              $
              5,969
              (1)
              
              $
              97,469Executive
      Vice President
              2006
              
              $
              71,000
              
              
              
              
              
              –
              
              $
              5,069
              (1)
              
              $
              76,069
  (1)
represents health insurance premiums.
  42
  Outstanding
Equity Awards at Fiscal Year-end
  Option
      AwardsName
              
              Number
      of Securities Underlying Unexercised Options (#)
    Exercisable
              
              
              Number
      of Securities Underlying Unexercised Options (#)
    Unexercisable
              
              
              Option
                Exercise
      Price
              
              Option
      Expiration DateDaniel
      R. Furth
              
              
              1,000,000
              
              
              
              500,000
              (1)
              
              $
              0.10
              
              December
      5, 2015
 
 (1)
250,000 of these warrants will vest on May 14, 2008; 250,000 of these warrants
will vest on November 14, 2008
 
 Director
Compensation
 
 Outside
directors are paid $1.00 each year.  Each outside director is awarded
a warrant to purchase 1,500,000 shares of Company common stock, which vest over
three years and expire in six year.
 
 Name
              
              Fees
      Earned or Paid in Cash
                ($)
              
              
              Option
      Awards
                ($)
              
              
              Total
                ($)Stephen
      D. Barnhill, M.D.
              
              $
              0.00
              
              
              $
              0.00
              
              
              $
              0.00William
      F. Quirk, Jr.
              
              $
              1.00
              
              
              $
              59,250
              
              
              $
              59,251William
      M. Goldstein
              
              $
              1.00
              
              
              $
              59,250
              
              
              $
              59,251Richard
      E. Caruso
              
              $
              1.00
              
              
              $
              10,967
              
              
              $
              10,968
   Richard
Caruso was awarded warrants to purchase 1,500,000 shares of Company common
stock, which vest over three years and expire in six years.  These
warrants have an exercise price of $0.08, and will be charged as directors’ fees
over the vesting period.
  Employment
Agreements
  We
entered into a five-year employment agreement with Dr. Stephen Barnhill on
September 15, 2003, regarding Dr. Barnhill’s employment as President and Medical
Director. The agreement will automatically renew for successive one-year terms
unless either party gives notice to the other party of its intent not to renew
within a thirty-day period prior to the end of the then current
term.  Under the terms of the agreement, as amended, Dr. Barnhill
receives an annual base salary of $300,000.  Dr. Barnhill is eligible
to be reimbursed monthly for reasonable and necessary business expenses, to
participate in an Incentive Stock Option Plan (as defined in the agreement) and
for other benefits maintained by us.  Dr. Barnhill will be entitled to
ten paid vacation days during the calendar year.  Dr. Barnhill’s
employment may be terminated without prior written notice for cause, in which
case we will make a lump sum payment equal to the sum of (i) accrued unpaid
wages, (ii) unreimbursed expenses properly incurred prior to the date of
termination and (iii) the value of all accrued unpaid vacation pay, less any
amounts he owes to us.  If Dr. Barnhill terminates the Barnhill
Agreement, then he will receive the same benefits as if he was terminated for
cause.  If Dr. Barnhill terminates the Barnhill Agreement, other than
for cause, then we will give two (2) weeks notice of termination, or in our sole
discretion, two (2) weeks wages in lieu of notice.  The 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.  Effective December 30, 2005, we entered into an amendment
to the employment agreement with Dr. Barnhill, under which Dr. Barnhill agreed
to defer 60% of his gross annual pay until January 1, 2008, representing total
deferred payments of $360,000.  The agreement with Dr. Barnhill was
further amended on September 1, 2006, whereby Dr. Barnhill’s salary was changed
to $10,000 per month, and he agreed to waive the receipt of his deferred
compensation for a one-time payment of $6,000 plus the reimbursement for any
negative tax consequences related to the amendment.
  43
  The
Company also awarded Dr. Barnhill a bonus in the gross amount of $50,000 in
recognition of his extraordinary efforts on behalf of the Company.
  We
entered into an employment agreement with Mr. Daniel R. Furth effective November
18, 2005 regarding Mr. Furth’s employment as Executive Vice
President.  The term of the employment is for three years, with
compensation of $60,000, reviewed each year for potential
increase.  Effective as of September 10, 2007, Mr. Furth’s annual
salary was increased to $108,000.  Mr. Furth received options to
acquire 1,500,000 shares of our common stock.  Mr. Furth is eligible
to be reimbursed monthly for reasonable and necessary business expenses and for
other benefits maintained by us.  If the Company terminates the
employment agreement for cause or if the agreement is terminated by Mr. Furth
without cause, Mr. Furth will be entitled to receive his salary only through the
date such termination is effective.  If Mr. Furth terminates the
employment agreement for cause or, if the employment agreement is terminated
without cause, he will be entitled to receive his salary for a period of three
months from the date such termination is effective.  The agreement
also generally provides that Mr. Furth 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.
  Scientific
Advisory Board
  The
Company continues to perform under an oral agreement with two members of its
Scientific Advisory Board wherein they are entitled to receive 100,000 shares
each of the Company’s common stock upon satisfactory completion of one year of
service.  The arrangement with the Scientific Advisory Board members
can be terminated at any time by either party.
  44
  ITEM
11. 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 24, 2008 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 24, 2008,
there were 169,007,206 shares outstanding.
  Title of
      Class
              Name and Address of
      Beneficial Owner
              Amount
      and Nature of
                Beneficial
      Owner
              Percent
      of
                Class(1)Common
      Stock
              Dr.
      Stephen D. Barnhill
                Chairman
      of the Board, Chief Executive Officer
                and
      Chief Medical Officer, Director
                2
      East Bryan Street, Suite #601
                Savannah,
      GA 31401
              22,181,522 (2)
              13.12%Common
      Stock
              Daniel
      R. Furth
                Executive
      Vice President
                2
      East Bryan Street, Suite #601
                Savannah,
      GA 31401
              1,250,000 (3)
              0.736%Common
      Stock
              William
      Quirk
                Director
                2
      East Bryan Street, Suite #601
                Savannah,
      GA 31401
              69,611,664 (4)
              32.58%Common
      Stock
              William
      Goldstein
                Director
                One
      Logan Square
                18th
      and Cherry Streets
                Philadelphia,
      PA 19103-6996
              1,500,000
      (5)
              0.88%Common
      Stock
              Dr.
      Richard Caruso
                Director
                795
      East Lancaster Avenue, Suite #200
                Villanova,
      PA 19085
              9,625,000 (6)
              5.48%Common
      Stock
              Micro
      Capital Fund, LP
                623
      Fifth Avenue
                Suite
      2502
                New
      York, NY 10022
              13,687,500
      (7)
              7.68%Common
      Stock
              Prime
      Mover Capital Partners
                767
      Third Avenue
                New
      York, NY 10007
              20,625,000
      (8)
              11.29%Common
      Stock
              Curtis
      G. Anderson
                44
      Delegal Road
                Savannah,
      GA 31411
              14,201,577
      (9)
              7.96%Common
      Stock
              Stephen
      M. Grosberg
                201
      East 20th
      Street, #8C
                New
      York, NY 10010
              12,000,000
      (10)
              6.78%Common
      Stock
              Frank
      T. Nickell
                320
      Park Ave.
                24th
      Floor
                New
      York, NY 10027
              9,375,000
      (11)
              5.35%Common
      Stock
              All
      executive officers and directors as a group
                (five
      persons)
              104,168,186
              46.80%
 
 45
  (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
      29, 2008.(2)
              These
      shares are held by The Barnhill Group LLC, which is wholly owned by Dr.
      Barnhill.(3)
              Consists
      of vested options.(4)
              Includes
      44,677,776 vested warrants.(5)
              Includes
      1,125,000 vested warrants.(6)
              Consists
      of 3,125,000 shares and 6,250,000 vested warrants held by Athena Venture
      Partners LP, a limited partnership in which Dr. Caruso's children are
      limited partners, and 250,000 vested warrants held
      individually.(7)
              Includes
      9,125,000 vested warrants.(8)
              Includes
      13,750,000 vested warrants.(9)
              Includes
      9,467,718 vested warrants.(10)
              Includes
      8,000,000 vested warrants.(11)
              Includes
      6,250,000 vested warrants.
 ITEM
12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
  We
previously sub-leased our principle executive office space from a company owned
by the wife of Dr. Stephen D. Barnhill.  Our rent was $1,036.00 per
month.  This lease was terminated June 30, 2007.
  On
September 1, 2006, we issued a note (the “Promissory Note”) to William F. Quirk,
Jr., a director of the Company, for $1,000,000.  The Promissory Note
contains a 5% annual interest rate and is due on September 1,
2008.  The proceeds of the Promissory Note will be used for general
working capital purposes.  The Promissory Note is completely repayable
by the Company at any time without any related fees or penalties. In connection
with the issuance of the Promissory Note, Mr. Quirk was granted warrants to
purchase 10,000,000 shares of Company common stock at $0.16 per
share.  The promissory note was converted to common stock on September
7, 2007 in connection with the Private Placement.
  The
Company has adopted the independence standards promulgated by the New York Stock
Exchange and has made a determination that, as of March 27, 2008, the following
directors are independent according to those standards:  Richard
Caruso, William M. Goldstein and William F. Quirk, Jr.
  46
  ITEM
13.  EXHIBITS.
  The
following exhibits are attached hereto or incorporated by reference herein
(numbered to correspond to Item 601(a) of Regulation S-B, as promulgated by the
Securities and Exchange Commission) and are filed as part of this Form
10-KSB:
  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,
      2007.3.2
              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.  Filed herewith.10.1
              Employment
      Agreement with Stephen Barnhill. Filed herewith.10.1(a)
              First
      Amendment to Employment Agreement with Stephen
      Barnhill.  Registrant incorporates by reference Exhibit 99.2 to
      Form 8-K, filed January 3, 2006.10.1(b)
              Second
      Amendment to Employment Agreement with Stephen
      Barnhill.  Registrant incorporates by reference Exhibit 99.3 to
      Form 8-K, filed September 1, 2006.10.1(c)
              Third
      Amendment to Employment Agreement with Stephen
      Barnhill.  Registrant incorporates by reference Exhibit 10.1(c)
      to Form 10-QSB filed August 16, 2007.10.1(d)
              Fourth
      Amendment to Employment Agreement with Stephen
      Barnhill.  Registrant incorporates by reference Exhibit 99.1 to
      Form 8-K filed September 10, 2007.10.1(e)
              Fifth
      Amendment to Employment Agreement with Stephen
      Barnhill.  Registrant incorporates by reference Exhibit 99.1 to
      Form 8-K filed November 6, 2007.10.2
              Employment
      Agreement with David Cooper. Registrant incorporates by reference Exhibit
      10.4 to Form 10-KSB, filed April 19, 2005.10.3
              Form
      of Securities Purchase Agreement. Registrant incorporates by reference
      Exhibit 10.6 to Form 10-KSB, filed April 19, 2005.10.4
              Form
      of Warrant.  Registrant incorporates by reference Exhibit 10.7
      to Form 10-KSB, filed April 19, 2005.10.5
              Form
      of Securities Purchase Agreement.  Registrant incorporates by
      reference Exhibit 10.8 to Form 10-KSB, filed April 19,
    2005.10.6
              Form
      of Warrant.  Registrant incorporates by reference Exhibit 10.9
      to Form 10-KSB, filed April 19, 2005.10.7
              Form
      of Amendment to Securities Purchase Agreement. Registrant incorporates by
      reference Exhibit 10.10 to Form SB-2/A, filed December 14,
      2005.10.8
              Employment
      Agreement with Daniel R. Furth, dated as of December 5,
      2005.  Registrant incorporates by reference Exhibit 10.11 to
      Form SB-2/A, filed December 14,
2005.
  47
  10.8(a)
              First
      Amendment to Employment Agreement with Daniel R.
      Furth.  Registrant incorporates by reference Exhibit 10.4(a) to
      Form 10-QSB filed August 16, 2007.10.8(b)
              Second
      Amendment to Employment Agreement with Daniel R.
      Furth.  Registrant incorporates by reference Exhibit 99.2 to
      Form 8-K filed September 10, 2007.10.9
              Employment
      Agreement with Robert S. Braswell IV, dated as of January 1,
      2006.  Registrant incorporates by reference Exhibit 99.1 to Form
      8-K, filed February 2, 2006.10.10
              Warrant
      Agreement by and between Registrant and William F. Quirk, Jr., dated as of
      September 1, 2006.  Registrant incorporates by reference Exhibit
      99.2 to Form 8-K, filed September 5, 2006.10.11
              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, 2007.10.12
              Patent
      License and Settlement Agreement with Ciphergen Biosystems,
      Inc.  Registrant incorporates by reference Exhibit 10.10 to Form
      10-QSB filed August 16, 2007.10.13
              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, 2007.10.14
              Form
      of Warrant to Cash and Lender Purchasers.  Filed
      herewith.16.1
              Letter
      from Porter Keadle Moore LLP regarding change in certifying
      accountant.  Registrant incorporates by reference Exhibit 16.1
      to Form 8-K, filed September 27, 2006.21.1
              Subsidiaries
      of the Registrant.  Filed herewith.31.1
              Rule
      13a-14(a)/15(d)-14(a) Certifications of Chief Executive
      Officer.31.2
              Rule
      13a-14(a)/15(d)-14(a) Certifications of Principal Financial
      Officer.32.1
              Section
      1350 Certification of Chief Executive Officer.32.2
              Section
      1350 Certification of Principal Financial
  Officer.
  48
  ITEM
14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES.
  The
Company changed its independent auditors from Porter Keadle Moore LLP to Hancock
Askew & Co., LLP during 2006.  The following table sets forth the
fees billed by Hancock Askew & Co. LLP for 2007 and 2006, along with
fees billed by Porter Keadle Moore LLP for 2006.
  2007
              
              
              2006Audit
      Fees
              
              $
              77,970
              
              
              $
              67,810Audit-Related
      Fees
              
              
              ---
              
              
              
              ---Tax
      Fees
              
              
              ---
              
              
              
              ---Sub-Total
              
              $
              77,970
              
              
              $
              67,810All
      Other Fees
              
              
              ---
              
              
              
              ---Total Fees
              
              $
              77,970
              
              
              $
              67,810
  Audit Fees.  This
category includes aggregate fees billed for professional services rendered by
for the audit of the Company’s annual financial statements for the year ended
December 31, 2007 and 2006, review for the annual report on Form 10-KSB and for
the limited reviews of quarterly condensed financial statements (Forms 10-QSB)
included in periodic reports filed with the SEC during 2007 and 2006, including
out of pocket expenses.  Porter Keadle Moore LLP billed $29,153 for
2006.  Hancock Askew & Co. LLP billed $38,657 for
2006.
  Audit-Related
Fees.  This category includes fees billed for professional
services associated with consultation concerning financial accounting and
reporting standards.  No such fees were billed in 2007 or
2006.
  Tax Fees.  This
category includes the aggregate fees billed or to be billed for tax services for
the years ended December 31, 2007 and 2006.  No such fees were billed
in 2007 or 2006.
  All Other
Fees.  This category includes the aggregate fees billed for all
other services, exclusive of the fees disclosed above, rendered to the
Company.  No such services were provided.
  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.
  49
  SIGNATURES
  In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
   HEALTH
      DISCOVERY CORPORATIONBy: /s/
      Stephen D. Barnhill, M.D., Chief Executive
      OfficerDate:  March
      31, 2008
 
  In
accordance with the 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.
                
                Stephen
      D. Barnhill M.D.
              Chief
      Executive Officer, Chairman
              March
      31, 2008/S/Daniel R.
      Furth
                
                Daniel
      R. Furth
              Principal
      Financial Officer
                Executive
      Vice President
              March
      31, 2008/S/William F. Quirk,
      Jr.
                
                William
      F. Quirk, Jr.
              Director
              March
      31, 2008/S/William M.
      Goldstein
                
                William
      M. Goldstein
              Director
              March
      31, 2008/S/Richard E.
      Caruso
                
                Richard
      E. Caruso
              Director
              March
      31, 2008






50




Hancock
Askew & Co LLP
 100
Riverview Drive
 Savannah,
GA 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, 2007 and 2006, the related statements of operations, changes in
stockholders' equity, and cash flows for each of the two years in the period
ended December 31, 2007.  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 expressed 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, 2007 and 2006 and the results of its operations and its cash flows
for each of the two years in the period ended December 31, 2007 in conformity
with accounting principles generally accepted in the United States of
America.
 
 The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern.  As discussed in Note N, 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.  These factors, among others, raise substantial
doubt about the Company’s ability to continue as a going concern.
 Management’s plans in regard to these matters are also described in Note
N.  The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
 
 /s/
Hancock Askew & Co., LLP
 
 Savannah,
Georgia
 March 20,
2008
 
 F-1
  HEALTH
DISCOVERY CORPORATION
   Balance
Sheets
   December
31, 2007 and 2006
  
 Assets2007
              
              
              2006Current
      AssetsCash
              
              $
              1,648,439
              
              
              $
              674,366Accounts
      Receivable
              
              
              112,500
              
              
              
              20,000Prepaid
      Expense and Other Current Assets
              
              
              33,829
              
              
              
              55,188Total
      Current Assets
              
              
              1,794,768
              
              
              
              749,554Equipment,
      Less Accumulated Depreciation of $22,402 and $14,257
              
              
              7,596
              
              
              
              14,743Other
      AssetsAccounts
      Receivable – Long Term
              
              
              112,500
              
              
              
              -Patents,
      Less Accumulated Amortization of $942,974 and $680,255
              
              
              3,042,820
              
              
              
              3,305,540Total
      Assets
              
              $
              4,957,684
              
              
              $
              4,069,837
 
 Liabilities and
      Stockholders’ Equity
 
 Current
      LiabilitiesAccounts
      Payable – Trade
              
              $
              61,173
              
              
              $
              237,928Accrued
      Liabilities
              
              
              239,589
              
              
              
              150,520Deferred
      Revenue
              
              
              62,708
              
              
              
              101,111Total
      Current Liabilities
              
              
              363,470
              
              
              
              489,559Accrued
      Interest Payable
              
              
              -
              
              
              
              140,875Convertible
      Notes Payable
              
              
              -
              
              
              
              665,643Long-Term
      Debt, Less Current Portion
              
              
              -
              
              
              
              321,911Notes
      Payable (net of unamortized discount of $461,667 in 2006)
              
              
              -
              
              
              
              538,333Deferred
      Revenue – Long Term
              
              
              453,715
              
              
              
              -Total
      Liabilities
              
              
              817,185
              
              
              
              2,156,321Commitments
      and ContingenciesStockholders’
      EquitySeries
      A Preferred Stock, Convertible, Stated Value of $0.08 per
      Share7,437,184
      Shares Authorized, Issued and Outstanding
              
              
              594,975
              
              
              
              -Common
      Stock, No Par Value, 300,000,000 Shares Authorized,Issued
      and Outstanding 169,007,206 and 116,393,384 Shares,
      respectively
              
              
              15,390,609
              
              
              
              11,059,674Accumulated
      Deficit
              
              
              (11,845,085
              )
              
              
              (9,146,158
              )Total
      Stockholders' Equity
              
              
              4,140,499
              
              
              
              1,913,516Total
      Liabilities and Stockholders' Equity
              
              $
              4,957,684
              
              
              $
              4,069,837
  See
accompanying notes to financial statements.
 F-2
  HEALTH
DISCOVERY CORPORATION
  Statements
of Operations
  For the
Years Ended December 31, 2007 and 2006
  
 2007
              
              
              2006RevenuesLicensing
      and Development
              
              $
              57,905
              
              
              $
              203,889Cost
      of RevenuesLicensing
      and Development
              
              
              21,300
              
              
              
              28,671Gross
      Profit
              
              
              36,605
              
              
              
              175,218Expenses:Amortization
              
              
              262,719
              
              
              
              262,719Professional
      and Consulting Fees
              
              
              980,833
              
              
              
              1,123,498Compensation
              
              
              783,726
              
              
              
              770,000Other
      General and Administrative Expenses
              
              
              459,064
              
              
              
              542,710Total
      Expenses
              
              
              2,486,342
              
              
              
              2,698,927Net
      Loss from Operations
              
              
              (2,449,737
              )
              
              
              (2,523,709
              )Other
      Income (Expense):Interest
      Income
              
              
              39,614
              
              
              
              21,008Gains
      on Restructuring of Accounts Payable
              
              
              44,594
              
              
              
              97,864Loss
      from Unconsolidated Joint Venture
              
              
              (5,000
              )
              
              
              -Litigation
      Settlement
              
              
              (42,000
              )
              
              
              -Interest
      Expense
              
              
              (286,398
              )
              
              
              (190,922
              )Total
      Other (Expense) Income
              
              
              (249,190
              )
              
              
              (72,050
              )Net
      Loss
              
              $
              (2,698,927
              )
              
              $
              (2,595,759
              )Weighted
      Average Outstanding Shares
              
              
              132,718,789
              
              
              
              115,895,692Loss
      Per Share
              
              $
              (.02
              )
              
              $
              (.02
              )
 
 
 See
accompanying notes to financial statements.
 F-3
 
 HEALTH
DISCOVERY CORPORATION
  Statements
of Changes in Stockholders’ Equity
  
 For the
Year Ended December 31, 2007 and 2006
 
 Issued
      and Outstanding
              
              
              
              
              
              TotalPreferred
              
              
              Common
              
              
              Preferred
              
              
              Common
              
              
              Accumulated
              
              
              Stockholders'Shares
              
              
              Shares
              
              
              Amount
              
              
              Amount
              
              
              Deficit
              
              
              EquityBalance
      – January 1, 2006
              
              
              -
              
              
              
              114,363,384
              
              
              $
              -
              
              
              $
              9,522,961
              
              
              $
              (6,550,399
              )
              
              $
              2,972,562Stock
      Issued for Cash
              
              
              -
              
              
              
              1,000,000
              
              
              
              -
              
              
              
              100,000
              
              
              
              .
              
              
              
              100,000Stock
      Issued upon Exercise of Options and Warrants
              
              
              -
              
              
              
              1,030,000
              
              
              
              -
              
              
              
              26,400
              
              
              
              -
              
              
              
              26,400Warrants
      Issued in Connection with Debt Agreement
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              554,000
              
              
              
              -
              
              
              
              554,000Warrants
      Issued for Settlement of Liability
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              72,326
              
              
              
              -
              
              
              
              72,326Warrants
      Issued for Services
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              504,091
              
              
              
              -
              
              
              
              504,091Stock
      Compensation Expense for Compensatory Options and Warrants
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              279,896
              
              
              
              -
              
              
              
              279,896Net
      Loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (2,595,759
              )
              
              
              (2,595,759
              )Balance
      - December 31, 2006
              
              
              -
              
              
              
              116,393,384
              
              
              $
              -
              
              
              $
              11,059,674
              
              
              $
              (9,146,158
              )
              
              $
              1,913,516Stock
      Issued for Cash
              
              
              -
              
              
              
              31,937,500
              
              
              
              -
              
              
              
              2,490,540
              
              
              
              -
              
              
              
              2,490,540Stock
      Issued upon Exercise of Options and Warrants
              
              
              -
              
              
              
              100,000
              
              
              
              -
              
              
              
              1,000
              
              
              
              -
              
              
              
              1,000Stock
      Issued in Connection with Debt Conversion
              
              
              7,437,184
              
              
              
              19,601,322
              
              
              
              594,975
              
              
              
              1,298,800
              
              
              
              -
              
              
              
              1,893,775Stock
      Issued for Settlement of Litigation
              
              
              -
              
              
              
              400,000
              
              
              
              -
              
              
              
              32,000
              
              
              
              -
              
              
              
              32,000Stock
      Issued in Severance Agreement
              
              
              -
              
              
              
              575,000
              
              
              
              -
              
              
              
              46,000
              
              
              
              -
              
              
              
              46,000Warrants
      Issued for Services
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              320,570
              
              
              
              -
              
              
              
              320,570Stock
      Compensation Expense for Compensatory Options and Warrants
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              142,025
              
              
              
              -
              
              
              
              142,025Net
      Loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (2,698,927
              )
              
              
              (2,698,927
              )Balance
      - December 31, 2007
              
              
              7,437,184
              
              
              
              169,007,206
              
              
              $
              594,975
              
              
              $
              15,390,609
              
              
              $
              (11,845,085
              )
              
              $
              4,140,499
 
 
 See
accompanying notes to financial statements.
 F-4
 HEALTH
DISCOVERY CORPORATION
  Statements
of Cash Flows
  
 For the
Years Ended December 31, 2007 and 2006
     2007
              
              
              2006Cash
      Flows From Operating Activities:Net
      Loss
              
              $
              (2,698,927
              )
              
              $
              (2,595,759
              )Adjustments
      to Reconcile Net Loss to Net CashUsed
      by Operating Activities:Stock
      Issued in Settlement of Litigation
              
              
              32,000
              
              
              
              -Non-cash
      Compensation
              
              
              188,025
              
              
              
              279,896Accretion
      of Debt Discount
              
              
              192,361
              
              
              
              92,333Services
      Exchanged for Common Stock or Warrants
              
              
              286,814
              
              
              
              504,091Issuance
      of Warrants
              
              
              33,756
              
              
              
              -Gain
      on Restructuring Accounts Payable
              
              
              (44,594
              )
              
              
              (97,864
              )Depreciation
      and Amortization
              
              
              270,865
              
              
              
              270,316Changes
      in Assets and Liabilities:Increase
      in Accounts Receivable
              
              
              (205,000
              )
              
              
              (20,000
              )(Increase)
      Decrease in Prepaid Expense & Other Assets
              
              
              21,358
              
              
              
              (37,480
              )(Decrease)
      Increase in Accounts Payable – Trade
              
              
              (132,161
              )
              
              
              140,145Increase
      in Deferred Revenue
              
              
              415,312
              
              
              
              101,111Increase
      in Accrued Liabilities
              
              
              173,073
              
              
              
              228,077Net
      Cash Used by Operating Activities
              
              
              (1,467,118
              )
              
              
              (1,135,134
              )Cash
      Flows From Investing Activities:Purchase
      of Equipment
              
              
              (998
              )
              
              
              (9,287
              )Net
      Cash Used by Investing Activities
              
              
              (998
              )
              
              
              (9,287
              )Cash
      Flows From Financing Activities:Repayment
      of Notes Payable
              
              
              (49,351
              )
              
              
              (26,780
              )Proceeds
      from Issuance of Common Stock
              
              
              2,491,540
              
              
              
              126,400Proceeds
      from Borrowing
              
              
              -
              
              
              
              1,000,000Net
      Cash Provided by Financing Activities
              
              
              2,442,189
              
              
              
              1,099,620Net
      Increase (Decrease) in Cash
              
              
              974,073
              
              
              
              (44,801
              )Cash,
      at Beginning of Period
              
              
              674,366
              
              
              
              719,167Cash,
      at End of Period
              
              $
              1,648,439
              
              
              $
              674,366Stock-Based
      Investing and Financing Transactions:Debt
      Discount in exchange for Warrants
              
              $
              -
              
              
              $
              554,000Common
      Stock, Series A Preferred Stock, and WarrantsIssued
      in Settlement of Promissory Notes
              
              $
              1,893,775
              
              
              $
              -Supplemental
      Disclosures of cash Flow Information:Cash
      Paid for Interest
              
              $
              10,084
              
              
              $
              3,242
 
 See
accompanying notes to financial statements.
 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 or may develop specific learning tools 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 suspectible to
change in the near-term include the valuation of non-cash 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.  Revenue is
recognized under development agreements in the period the services are
performed.
  COST
OF REVENUE
 
 Cost of
revenue includes the acquisition cost less accumulated amortization of patents
sold, plus internal development costs and fees directly associated with sales
contracts.
 
 Cost of
revenue for licensing and development revenue includes fees directly asssociated
with the contracts and salary expense based upon the estimated amount of time
worked on the licensing or development contract.
  CASH
AND CASH EQUIVALENTS
  Cash and
cash equivalents include cash and monies invested in overnight funds with our
bank.
  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 our
customers based upon those customers estimated sales of the products or
diagnostic tests containing our 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, 2007 and 2006, all amounts receivable were considered fully
collectable.
  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 license period. The Company capitalizes the
external and in-house legal 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.  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.  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, 2007, the Company does not believe there has been any impairment of
its intangible assets.
 
 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
realizabilty of the deferred tax assets, management considers the scheduled
reversals of deferred tax liabilities, projected future taxable income and tax
planning strategies.
 
 STOCK-BASED
COMPENSATION
 
 Effective
January 1, 2006, we adopted the provisions of Statement of Financial Accounting
Standards (“SFAS”) No. 123(R), Share-Based Payment (“SFAS
No. 123(R)”) using the modified prospective transition method provided for under
the standard.  Under the Standard, stock-based compensation cost is
measured at grant date, based on the fair value of the award, and is recognized
as expense over the employee’s requisite service period.
 
 Stock-based
expense included in the 2007 net loss consisted of $540,595 in compensatory
warrants, options, and stock for professional consulting services, and
compensation.  Stock-based expense included in the net loss for 2006
consisted of $783,987 for the issuance of common stock, warrants, and
options.
 
 DETERMINING
FAIR VALUE UNDER SFAS 123R:
  Valuation and Amortization
Method – The Company estimates the fair value of stock options and
warrants granted using the Black-Scholes option-pricing formula and a single
option award approach. This fair value is then amortized on a straight-line
basis over the requisite service periods of the awards, which is generally the
vesting period.
  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 start-up 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 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.
  Estimated Forfeitures – When
estimating forfeitures, the Company considers voluntary termination behavior as
well as analysis of actual option forfeitures.
  Estimated Dividend yield –
The Company has not paid any dividends and has no current plans to do so
therefore dividend rate is assumed to be zero.
  The
adoption of SFAS 123R also requires additional accounting related to income
taxes.  Due to the full valuation allowance provided on its net
deferred tax assets, the Company has not recorded any tax benefit attributable
to stock-based compensation expense.
  RESEARCH
AND DEVELOPMENT EXPENSE
  The
Company’s past research and development costs have been minimal due to the
unique relationships we have maintained with the members of our scientific team
and their institutions.  Our total R&D costs have consisted solely
of the consultant fees paid to members of our scientific advisory
board.  These fees consisted of $46,432 in cash for 2007 and $70,734
in cash for 2006.
  FAIR
VALUE OF FINANCIAL INSTRUMENTS
 
 The
Company’s financial instruments consist of cash, accounts receivable, accounts
payable and accrued expenses.  Pursuant to SFAS No. 107, Disclosures about Fair Value of
Financial Instruments, the Company is required to estimate the fair value
of all financial instruments at the balance sheet date.  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, 2007 and 2006 include
the following:
 
 2007
              
              
              2006Stock
      options
              
              
              3,500,000
              
              
              
              3,500,000Warrants
              
              
              159,099,644
              
              
              
              68,796,250Convertible
      notes
              
              
              -
              
              
              
              3,915,547162,599,644
              
              
              
              76,211,797
  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
$100,000.  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
  In June
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income
Taxes – An Interpretation of FASB Statement No. 109, (“FIN
48”).  FIN 48 clarifies the accounting for uncertainty in income taxes
by prescribing a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return.  This pronouncement is effective
for fiscal years beginning after December 15, 2006.  We adopted FIN 48
effective January 1, 2007.  This adoption has not had a material
impact on our financial statements.
  F-8
  HEALTH
DISCOVERY CORPORATION
 
 Notes
to Financial Statements, continued
 
 Note A - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES, continued
 
 In
September 2006, the FASB issued Statement No. 157, Fair Value Measurements,
(“Statement No. 157”).  This statement provides a single definition of
fair value, a framework for measuring fair value, and expanded disclosures
concerning fair value.  Previously, different definitions of fair
value were contained in various accounting pronouncements creating
inconsistencies in measurement and disclosures.  This pronouncement is
effective for fiscal years beginning after November 15, 2007.  We do
not expect the adoption of Statement No. 157 to have a material impact on our
financial position, results of operations, or cash flows.
  Note B – DEFERRED
REVENUE
  Deferred
revenue represents the unearned portion of payments received in advance for
licensing or service agreements.
  The
Company had total unearned revenue of $516,423 as of December 31, 2007. 
Unearned revenue of $62,708 is recorded as current and $453,715 is classified as
long-term.  The long term portion of unearned revenue is being amortized
over the remaining term of the agreements or the remaining lives of the
underlying patents, as appropriate, and ranges from one to sixteen
years.
  Deferred
revenue was $101,111 as of December 31, 2006.  Of this amount, $40,000
was recognized as income in 2007.
  The
expected future annual recognition of revenue is as follows (in
thousands):
  For the Year Ending December 31,
 
 2008
              
              $
              62,7082009
              
              
              57,1532010
              
              
              29,3752011
              
              
              29,3752012
              
              
              29,375Thereafter
              
              
              308,437Total
      expected future annual amortization
              
              $
              516,423
 
  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. Additionally,
legal costs associated with patent acquisitions and the application process are
also capitalized as patent costs.  The Company has recorded $3,042,820
and $3,305,540 in patents and patent related costs, net of accumulated
amortization, at December 31, 2007 and 2006.
 
 Amortization
charged to operations for the years ended December 31, 2007 and 2006 was
$262,719.  The weighted average amortization period for patents is 14
years.  Estimated amortization expense for the next five years is
$262,719 per year.
 
 Note D –
INVESTMENTS
  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 is not
considered the primary beneficiary.  Accordingly, the investment is
presented using the equity method of accounting.  The Company’s
initial investment was $5,000.  Equity in the loss of SVM Capital LLC
for 2007 was $5,000.  The resultant net value was of December 31, 2007
is zero.  The Company has no contractual obligation to fund this
venture.
  F-9
  HEALTH
DISCOVERY CORPORATION
 
 Notes
to Financial Statements, continued
 
 NoteE–LITIGATION
SETTLEMENT
  Effective
July 1, 2007, the Company entered into a patent license and settlement agreement
with Ciphergen Biosystems, Inc. (“Ciphergen”) in connection with the pending
litigation styled Health
Discovery Corporation v. Ciphergen Biosystems, Inc. Case No. 07-00285-CRB
before the United States District Court for the Northern District of California
(“The Agreement”).  The Agreement provides Ciphergen a license to use
certain patents.  In consideration for entering into the Agreement,
Ciphergen agreed to pay the Company $600,000 over a two-year
period.  The revenue associated with this settlement was recorded net
of $130,000 in contingently payable attorney fees as deferred revenue in the
amount of $470,000 and will be recognized over the sixteen year remaining life
of the subject patents.
  On June
19, 2007, the Company entered into a settlement agreement (the “Settlement
Agreement”) among Bill G. Williams, Shirley K. Williams, and Automated Shrimp
Corporation (collectively, the “Defendants”), Stephen Barnhill as Third-Party
Defendant, and Baptist Community Services, Tim Holloway, Guadalupe Family
Limited Partnership, and Gerald Easterling as Intervenors in connection with the
pending litigation styled Health Discovery Corporation v.
Williams et al., filed in the District Court of McLennan County, State of
Texas, Civil Action File No. 10-04-00012-CV.  Pursuant to the terms of
the Settlement Agreement, each party agreed to voluntarily dismiss with
prejudice any and all claims it has against each and every other
party.  In consideration for entering into the Settlement Agreement,
the Company agreed to issue in the aggregate 400,000 shares of Company common
stock valued at $32,000 to the Defendants and pay the defendants an aggregate
$10,000.
  Note F – LICENSE FEES
EXPENSE - LICENSE 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 2007 and 2006, the
Company paid approximately $10,000 in royalty fees to Lucent.
 
 Note G – INCOME
TAXES
 
 The
Company has incurred net losses since inception and, consequently, we have not
recorded any U.S. federal or state income taxes.  We have no recorded
income tax provision or benefit for the fiscal years ending December 31, 2007 or
2006.
  The
following items comprise the Company’s net deferred tax assets (liabilities) as
of December 31, 2007.
 
 
 2007
              
              
              2006Deferred
      tax assets:Net
      operating loss carry-forward
              
              $
              2,975,861
              
              
              $
              2,487,117Deferred
      revenue
              
              
              175,584
              
              
              
              34,378Contributions
              
              
              2,474
              
              
              
              1,794Depreciation
      and amortization
              
              
              1,724
              
              
              
              901Warrants
      and options granted
              
              
              783,341
              
              
              
              605,536.Total
              
              
              3,938,984
              
              
              
              3,129,726Less
      valuation allowance
              
              
              (3,938,984
              )
              
              
              (3,129,726
              )Net
      deferred asset
              
              
              -
              
              
              
              -
 
 As of
December 31, 2007, a valuation increase of $809,258 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.
  F-10
  HEALTH
DISCOVERY CORPORATION
 
 Notes
to Financial Statements, continued
 
 Note G – INCOME TAXES,
continued
  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, 2007 and 2006 as follows:
    2007
              
              
              2006Total
      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-forward of approximately $8.8
million that are available to offset future income taxes.  The net
operating loss will expire beginning in 2021.
 
 Note H – NOTES PAYABLE AND
CONVERTIBLE NOTES PAYABLE
 
 Notes
      payable consist of the following:
              
              2007
              
              
              2006Term
      promissory notes payable to individuals and institutions. Principal and
      interest at 18% is payable in common stock on September 1,
      2008.
              
              $
              -
              
              
              $
              321,911Note
      payable to shareholder/director net of $461,667 unamortized discount due
      September 1, 2008 with interest payable at 5% due at
    maturity.
              
              $
              -
              
              
              $
              538,333$
              -
              
              
              $
              860,244Less
      current maturities
              
              -
              
              
              -$
              -
              
              
              $
              860,244
 
 The
Company eliminated all notes payable and convertible debt in 2007 through the
conversion of debt to equity.
 
 The
Company issued 19,601,323 shares of common stock and 7,437,184 shares of Series
A Preferred Stock in a conversion of secured debt to equity.  The
amount of debt converted to common stock and warrants was $1.6 million and the
amount of debt converted to Series A Preferred Stock was
$594,975.  Each share of common stock issued in the conversion was
accompanied by one warrant to acquire an equal number of shares of common stock
at $0.14 and one warrant to acquire an equal number of shares of common stock at
$0.19.
  Common
              
              
              CommonConverted
              
              
              Common
                Stock
                19,601,323
              
              
              Stock
                Warrants
                @0.14
              
              
              Stock
                Warrants
                @$0.19
              
              
              Common
                Stock
              
              
              Preferred
                Stock
                7,437,184Debt
              
              
              Shares
              
              
              
              19,601,323
              
              
              
              19,601,323
              
              
              Total
              
              
              SharesTerm
      Debt
              
              $
              321,911
              
              
              $
              157,167
              
              
              
              11,226
              
              
              
              11,226
              
              
              
              179,619
              
              
              
              142,292Convertible
      Debt
              
              $
              616,292
              
              
              $
              220,068
              
              
              
              15,719
              
              
              
              15,719
              
              
              
              251,506
              
              
              
              364,786Promissory
      Note Payable
              
              $
              1,000,000
              
              
              $
              875,000
              
              
              
              62,500
              
              
              
              62,500
              
              
              
              1,000,000
              
              
              
              -Accrued
      Interest
              
              $
              224,878
              
              
              
              119,859
              
              
              
              8,561
              
              
              
              8,561
              
              
              
              136,981
              
              
              
              87,896Total
      Debt
              
              $
              2,163,081
              
              
              $
              1,372,094
              
              
              
              98,006
              
              
              
              98,006
              
              
              
              1,568,106
              
              
              
              594,974Promissory
      Note Payable
                Discount
      Unaccreted
              
              $
              (269,307
              )
              
              $
              (235,644
              )
              
              
              (16,832
              )
              
              
              (16,832
              )
              
              
              (269,308
              )
              
              
              -Increase
      in Equity
              
              $
              1,893,774
              
              
              $
              1,136,450
              
              
              
              81,174
              
              
              
              81,174
              
              
              
              1,298,798
              
              
              
              594,974
  The
$49,351 debt remaining after the conversion was paid in cash along with interest
accrued of $6,374.
  On
September 1, 2006, the Company obtained a $1,000,000 loan from a
director.  The loan had interest at 5%, all interest and principal was
due at maturity on September 1, 2008.  The outstanding balance of this
loan was converted to common stock in September 2007.  The Company
also issued 10,000,000 warrants to this director with an exercise price of $0.16
in connection with the promissory note dated September 1, 2006.
  F-11
  HEALTH
DISCOVERY CORPORATION
 
 Notes
to Financial Statements, continued
 
 Note H – NOTES PAYABLE AND
CONVERTIBLE NOTES PAYABLE,
continued
  The
warrants vested over ten months because the note remained unpaid during that
period.  The warrants were assigned a value of $554,000 and recorded
as additional paid-in capital.  A discount of the loan was recorded in
the amount of $554,000 and was accreted through interest expense over the period
the loan was outstanding.
  Note I –
COMMITMENTS
 
 The
Company has entered into agreements with certain members of its Scientific
Advisory Board wherein they are each entitled to receive 100,000 shares of the
Company’s common stock annually upon satisfactory completion of one year of
service.  The Company is accruing an expense for the anticipated
issuance over the service period.  At December 31, 2007, the Company
has recorded $38,500 of consultant expense for anticipated issuances of the
shares.
  The
Company signed a three year lease on July 1, 2007 at $1,678 per month for the
corporate office.  Future lease payments will be $20,136, $20,136, and
$10,068 in 2008, 2009, and 2010 respectively.
  Note J – STOCK
OPTIONS
 
 The
Company approved 8,000,000 shares of common stock to be reserved solely for
issuance and delivery upon the exercise of option grants.  At December
31, 2007 and 2006, options to purchase shares of common stock outstanding were
as follows:
 
 Number
      of
              
              
              ExerciseGrant Date
              
              Shares
              
              
              Price
              
              VestingJanuary
      2006
              
              
              1,500,000
              
              
              $
              0.11
              
              ImmediateJanuary
      2006
              
              
              500,000
              
              
              $
              0.11
              
              125,000
      shares every six monthsDecember
      2005
              
              
              1,500,000
              
              
              $
              0.10
              
              250,000
      shares every six months
 
 The 2006
options were awarded to employees and expire January 2016.  The 2005
options were awarded to an employee and expire in December 2015.
 
 The
following schedule summarizes stock option activity for 2007 and
2006:
 
 2007
              
              
              2006Option
              
              
              Weighted
      Avg.
              
              
              Option
              
              
              Weighted
      Avg.Shares
              
              
              Exercise
      Price
              
              
              Shares
              
              
              Exercise
      PriceOutstanding,
      Beginning of Year
              
              
              3,500,000
              
              
              $
              0.11
              
              
              
              2,500,000
              
              
              $
              0.08Granted,
      During the Year
              
              
              -
              
              
              
              -
              
              
              
              2,000,000
              
              
              
              0.11Exercised
      During the Year
              
              
              -
              
              
              
              -
              
              
              
              (600,000
              )
              
              
              0.01Forfeited,
      During the Year
              
              
              -
              
              
              
              -
              
              
              
              (400,000
              )
              
              
              0.10Outstanding,
      End of the Year
              
              
              3,500,000
              
              
              $
              0.11
              
              
              
              3,500,000
              
              
              $
              0.11
 
 There
were 2,875,000 and 2,125,000 options exercisable at December 31, 2007 and 2006,
respectively.  The weighted average exercise prices of those options
are $0.11 at December 31, 2007 and 2006.  The weighted average
remaining life of all exercisable and non-vested options at December 31, 2007 is
8 years.
 
 As of
December 31, 2007, there was approximately $88,924 of unrecognized cost related
to stock option grants.  The cost is to be recognized over the
remaining vesting periods that average approximately 1 year.  There
were no options exercised during 2007, so there is no intrinsic value for
options exercised.  The aggregate intrinsic value of options
outstanding and exercisable as of December 31, 2007 was zero.
  F-12
 HEALTH
DISCOVERY CORPORATION
 
 Notes
to Financial Statements, continued
 
 Note J – STOCK OPTIONS,
continued
 
 The
Company granted 2,000,000 options during the first quarter of
2006.  The fair value of each option granted in 2006 was $0.11 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 5.00%,
an expected life of 10 years, and volatility of 133%.
 
 Note K –
WARRANTS
  Information
about warrants outstanding at December 31, 2007 and 2006 is summarized
below:
 
   Number
      of warrants issued
              
              2007
              
              
              2006Outstanding
      beginning of year
              
              
              68,796,250
              
              
              
              50,931,250Issued
              
              
              122,773,394
              
              
              
              18,865,000Exercised
              
              
              (100,000
              )
              
              
              (430,000
              )Expired
      un-exercised
              
              
              (32,370,000
              )
              
              
              (570,000
              )Outstanding
      end of the year
              
              
              159,099,644
              
              
              
              68,796,250
  December
      31, 2007
  Exercise Prices
              
              
              Number
                Outstanding
              
              
              Weighted-
                Average
                Remaining
                Contractual
                Life (years)
              
              
              Number
                Exercisable
              
              
              Weighted
                Average
                Remaining
                ContractualLife
                (years)
      of
                Exercisable
                Warrants$0.01
              
              
              
              500,000
              
              
              0.5
              
              
              
              500,000
              
              
              0.5$0.08
              
              
              
              1,800,000
              
              
              4.2
              
              
              
              300,000
              
              
              4.2$0.10
              
              
              
              1,425,750
              
              
              1.3
              
              
              
              1,375,750
              
              
              1.3$0.11
              
              
              
              1,500,000
              
              
              1.5
              
              
              
              1,500,000
              
              
              1.5$0.12
              
              
              
              150,000
              
              
              1.0
              
              
              
              150,000
              
              
              1.0$0.13
              
              
              
              5,500,000
              
              
              2.3
              
              
              
              4,000,000
              
              
              2.3$0.14
              
              
              
              52,138,822
              
              
              2.6
              
              
              
              52,138,822
              
              
              2.6$0.15
              
              
              
              1,000,000
              
              
              1.0
              
              
              
              1,000,000
              
              
              1.0$0.16
              
              
              
              10,000,000
              
              
              1.4
              
              
              
              10,000,000
              
              
              1.4$0.19
              
              
              
              51,538,822
              
              
              2.8
              
              
              
              51,538,822
              
              
              2.8$0.20
              
              
              
              500,000
              
              
              1.0
              
              
              
              500,000
              
              
              1.0$0.22
              
              
              
              500,000
              
              
              0.7
              
              
              
              500,000
              
              
              0.7$0.24
              
              
              
              32,546,250
              
              
              1.0
              
              
              
              32,546,250
              
              
              1.0Total
              
              
              
              159,099,644
              
              
              
              
              
              
              156,049,644
  F-13
  HEALTH
DISCOVERY CORPORATION
 
 Notes
to Financial Statements, continued
 
 Note K – WARRANTS,
continued
 
 During
January 2006, the Company issued 3,400,000 warrants to consultants and other
service providers with a weighted-average exercise price of $0.12 per
share.  A total of $290,000 was charged to expense for Compensatory
Warrants.  The warrants became exercisable upon issuance.
  The
Company also issued 3,000,000 warrants to two directors in January 2006 with an
exercise price of $0.13 per share.  The grant date fair value of these
warrants was $355,500.  The warrants vest at a rate of 500,000
warrants (250,000 warrants for each director) after satisfactory completion of
each 6 months of service until 3 years of service has been
completed.  The expense is being recorded over the service
period.
  In
January 2006, the Company issued 1,000,000 warrants to a director with an
exercise price of $0.15 per share in connection with a common stock
sale.  The Company has ascribed no value to the warrants associated
with the common stock sale.
  During
the second quarter of 2006, the Company issued 500,000 warrants to two members
of its Scientific Advisory Board.  The grant date fair value of these
warrants was $35,000.  These warrants vest over a one-year period and
have an exercise price of $0.11.  The Company also issued 200,000
warrants to a service provider in exchange for professional
services.  The grant date fair value of these warrants was
$14,000.  These warrants vest over a two-year period and have an
exercise price of $0.10.
  On
September 1, 2006, the Company issued 10,000,000 warrants with an exercise price
of $0.16 to a director in connection with a $1,000,000 promissory
note.  The warrants expire September 1, 2008.  The fair
value of these warrants was recorded as additional paid-in capital and a debt
discount that was amortized as interest expense over the term of the
debt.
  During
the third quarter of 2006, the Company issued 300,000 warrants to service
providers.  The grant date fair value of these warrants was
$16,872.  These warrants vested immediately and have an exercise price
of $0.10.  The Company also issued 500,000 warrants to a member of the
Scientific Advisory Board for providing advisory services to the Company beyond
which was expected in his capacity as a Scientific Advisory Board
member.  The grant date fair value of these warrants was
$15,115.  These warrants vested immediately and have an exercise price
of $0.10.
  On
February 1, 2007, the Company issued in the aggregate 15,235,000 warrants to
purchase common stock of the Company (the “Warrants”) to certain institutional
investors and individual accredited investors.  The Warrants vested
immediately and had an exercise price of $0.35 per share.  The
Warrants expired on November 1, 2007.  On February 1, 2007, an equal
number of warrants issued to the same institutional and individual investors and
with substantially similar terms expired.  The fair value of the
warrants issued was approximately $33,755 and they were recorded as expense on
the issue date.
  Also on
February 1, 2007, the Company issued 500,000 warrants to consultants, which
vested immediately, and have an exercise price of
$0.14.  Additionally, the Company issued 100,000 warrants to a
consultant, which vest over a period of ten months, and have an exercise price
of $0.14.  Together, these warrants were valued at $49,068 and expire
on December 31, 2009.
  During
the second quarter of 2007, the Company issued 500,000 immediately vesting
warrants to consultants with an exercise price of $0.11.  These
warrants expire on December 31, 2009, and were valued at
$19,815.  They were charged to expense upon issuance.
  During
the third quarter of 2007, the Company issued 60,750 warrants, which expire on
December 31, 2008, to a vendor as payment for professional services
rendered.  These warrants had an exercise price of $0.10 and were
fully vested upon issuance.  The fair value of $1,719 was recorded as
expense.  The Company also issued 300,000 warrants with an exercise
price of $0.08 to a former employee as part of a termination
agreement.  These warrants, which expire after three years, vested
immediately and had a fair value of $13,869.  This amount was recorded
as compensation expense.  Two new directors were each awarded
1,500,000 warrants which vest over three years and expire in six
years.  These warrants have an exercise price of $0.08 and had an
aggregate fair market value of $197,374.  These warrants will be
charged as directors’ fees over the vesting period.  One director
subsequently forfeited his 1,500,000 warrants upon his resignation as a
director.
  F-14
 
 HEALTH
DISCOVERY CORPORATION
 
 Notes
to Financial Statements, continued
 
  Note K – WARRANTS,
continued
  The
Company also issued warrants in connection with the sale of common stock
effective September 7, 2007.  Each purchaser of common stock received
one warrant exercisable at $0.14 (the “Tranche 1 Warrants”) and one warrant
exercisable at $0.19 (the “Tranche 2 Warrants”) for each share of common stock
purchased or converted from debt.  All these warrants vested
immediately, expire three years from the date of issuance, and are subject to
call rights based upon the trading value of the Company’s stock.  With
respect to the Tranche 1 Warrants, if the Company’s stock trades for an amount
in excess of $0.17 for thirty (30) consecutive days, then 50% of the warrants
may be called by the Company.
  With
respect to the Tranche 2 Warrants, if the Company’s stock trades for an amount
in excess of $0.24 for thirty (30) consecutive days, then 50% of the warrants
may be called by the Company.  The Tranche 1 warrants, if exercised,
may result in the issuance of up to 51,538,832 shares of the Company’s common
stock, at an exercise price of $0.14 per share, and the Tranche 2 warrants, if
exercised, may result in the issuance of up to 51,538,832 shares of Company
common stock at an exercise price of $0.19 per share.  These warrants
were valued at $0.005 each resulting in $515,388 of common stock proceeds being
allocated to the fair value of the warrants.  As of December 31, 2007
there was approximately $210,200 in unrecognized cost related to warrants
granted.
  Note L - STOCKHOLDERS’
EQUITY
 
 In the
first quarter of 2006, the Company sold 1,000,000 shares of its common stock to
one of its directors for $100,000.  The shares were sold for $0.10 per
share which was the closing price of the stock on the date of the
sale.  As part of the purchase, the director also received warrants to
purchase an additional 1,000,000 shares of the Company’s common stock at a fixed
price of $0.15 per share until December 2008.  No portion of the
proceeds was assigned to the value of the warrants because the exercise price of
the warrants exceeded the market value of the underlying common stock on the
date of purchase.
  In July
2007, the Company issued 575,000 shares of common stock valued at $46,000 to a
former employee as part of a termination agreement.  The Company also
issued 400,000 shares of common stock valued at $32,000 as part of a litigation
settlement in July 2007.
  Effective
September 7, 2007, the Company issued 31,937,500 shares of restricted common
stock in return for $2.55 million.  The stock is restricted from
resale as the stock has not been registered.  Each purchaser of common
stock also received one warrant to acquire an equal number of shares at $0.14
and one warrant to acquire an equal number of shares at $0.19.  The
common shares were valued at $0.07 each and the warrants were valued at $0.005
each for a total of $0.08.
  The
Company also issued 19,601,323 shares of common stock and 7,437,184 shares of
Series A Preferred Stock in a conversion of secured debt to
equity.  The amount of debt converted to common stock and warrants was
$1.6 million and the amount of debt converted to Series A Preferred Stock was
$594,975.  Each share of common stock issued in the conversion was
accompanied by one warrant to acquire an equal number of shares of common stock
at $0.14 and one warrant to acquire an equal number of shares of common stock at
$0.19.
  Series
A Preferred Stock
  The
shares of Series A Preferred Stock may be converted into common stock of the
Company at any time without the payment of additional
consideration.  The Series A Preferred Stock must be converted into
common stock of the Company when the trading value of the common stock of the
Company exceeds $0.12 per share for a period of 30 consecutive calendar
days.  The holder of the Series A Preferred Stock has 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, which is the amount of debt converted, plus any declared but
unpaid dividends.  The Company has 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.
  F-15
  HEALTH
DISCOVERY CORPORATION
 
 Notes
to Financial Statements, continued
 
 Note M - RELATED PARTY
TRANSACTIONS
  The
Company previously leased the location used as the principle executive office
from a company owned by the wife of the Company’s Chief Executive
Officer.  The term of the principle executive office lease was
month-to-month and the rent expense associated with this lease was $1,036 per
month.  This arrangement terminated in June 2007.  Rent
expense under this lease arrangement amounted to approximately $6,644 and
$12,432 in 2007 and 2006, respectively.
  Note N – GOING
CONCERN
 
 The
accompanying financial statements have been prepared in conformity with
principles of accounting applicable to a going concern, which contemplates the
realization of assets and the liquidation of liabilities in the normal course of
business.  Limited revenue has been derived since inception, and the
Company has not yet generated sufficient working capital to support its
operations.  The Company’s ability to continue as a going concern is
dependent, among other things, on its ability to reduce certain costs and obtain
additional revenues to eventually attain a profitable level of
operations.
 
 The
Company initiated licensing the technology underlying several of its patents and
is providing supporting services related to the application of such technology
that is resulting in ongoing revenue.  In addition, management has
successfully raised additional equity investment and negotiated agreements with
its debt holders, which resulted in the conversion of this debt to
equity.  Based on these developments, management believes revenue
generation will continue, additional licensing agreements will be obtained in
the near-term, and non-revenue generating costs will be
controlled.  There are no assurances that management will be able to
successfully generate revenue or reduce expenses, attain profitability, or
continue to attract the capital necessary to support the business.