UNITED
      STATESSECURITIES
      AND EXCHANGE COMMISSIONWashington,
      D.C. 20549FORM
      10-K





(Mark
      One)x
                                                  ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OFTHE
      SECURITIES EXCHANGE ACT OF 1934For
      the fiscal year ended December 31, 2008ORo
                                                  TRANSITION
      REPORT UNDER TO SECTION 13 OR 15(d) OFTHE
      SECURITIES EXCHANGE ACT OF 1934For
      the transition period
      from          toCommission
      File No.
333-62216
 HEALTH
      DISCOVERY CORPORATION(Name
      of Registrant as Specified in its
charter)




Georgia
            
            74-3002154(State
      or other jurisdiction of incorporation or organization)
            
            (I.R.S.
      Employer Identification No.)2
      East Bryan Street, Suite #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:NoneSecurities
      Registered Pursuant to Section 12 (g) of the Act:None




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No x




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act. Yes o No x




Indicate
by check mark whether the registrant: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes
x No o




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained in this form, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x




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


Large
      Accelerated Filer
              o
              
              Accelerated
      Filer oNon-accelerated
      Filer
              o
              
              Smaller
      Reporting Company x




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




The
aggregate market value of the voting common stock held by non-affiliates as of
March 27, 2009 was approximately $10,313,875. There were 169,522,590 shares of
common stock outstanding as of March 27, 2009. There were 7,437,184 shares of
Series A Preferred Stock outstanding as of March 27, 2009. There
were 2,500,000 shares of Series B Preferred Stock outstanding as of March
31, 2009.







PART
I


ITEM
      1.
              BUSINESS




Our
History




We were
organized under the name Direct Wireless Communications, Inc. in April 2001 by
Direct Wireless Corporation, which licensed to us its technology for a wireless
telephone. In October 2001, Direct Wireless Corporation, then our sole
stockholder, pursuant to an effective registration statement under the
Securities Act of 1933, distributed its entire holdings of our common stock as a
stock dividend to its stockholders. As a result of the dividend, Direct Wireless
Corporation ceased to own any of our equity securities. The negative events that
occurred over the next several years in the communications industry made it
difficult for us to fund the advancement of our communication platform. As a
result, we made the decision to strategically change the overall direction of
our intended business activities.




On August
26, 2003, we acquired all of the assets of The Barnhill Group, LLC, which was
owned by Stephen D. Barnhill, M.D. Dr. Barnhill is a physician trained in
laboratory medicine and clinical pathology. He developed artificial intelligence
and pattern recognition computational techniques used 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 sellers 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.







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 30, 2009, we filed Articles of Amendment (the “Second Amendment”)
with the Secretary of State of the State of Georgia to amend our Articles of
Incorporation. The Second Amendment sets forth the rights and preferences of the
Series B Preferred Stock, including the right to receive dividends, including
special dividends, the right to vote on matters presented to holders of common
stock, a preference right in the event of liquidation, and the right to convert
the Series B Preferred Stock into Common Stock. The Second Amendment was
authorized by the Board of Directors on March 20, 2009. A copy of the Second
Amendment is attached to this Annual Report on Form 10-K as Exhibit
3.1(b).




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 69 patents
that have been issued or are currently pending around the world.


2




Our
business model has evolved over time to respond to business trends that
intersect with our technological expertise and our capacity to professionally
manage these opportunities. In the beginning, we sought only to use our SVMs
internally in order to discover and license our biomarker signatures to various
diagnostic and pharmaceutical companies. Today, our commercialization efforts
include: utilization of our discoveries and knowledge to help develop biomarkers
for use as companion diagnostics, surrogate biomarkers, and diagnostic and
prognostic predictive tests; licensure of the SVM and FGM technologies directly
to diagnostic and pharmaceutical companies; and, the formation of new ventures
with domain experts in other fields where our pattern recognition technology
holds commercial promise.




Our
Principal Market




The
principal healthcare market for our pattern recognition technology and biomarker
discoveries is medical diagnostics, particularly the rapidly growing field of
molecular diagnostics. The market consists of two basic types of diagnostic
procedures: in vitro
tests performed on a patient’s fluid or tissue samples and in vivo tests performed
directly on the body, including blood pressure monitoring and imaging analysis
such as x-rays. In
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 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 $8.6 billion, $2.8 billion,
and $23.1 billion in revenue in 2008, 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.


3




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.




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.


4




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.




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.


5




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.




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 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.


6




The
Company’s SVM technology is commonly considered within the context of artificial intelligence. This
is a branch of computer science concerned with giving computers the ability to
perform functions normally associated with human intelligence, such as reasoning
and optimization through experience. Machine learning is a type of artificial
intelligence that enables the development of algorithms and techniques that
allow computers to learn. Pattern recognition is machine learning with a wide
spectrum of applications including medical diagnosis, bioinformatics,
classifying DNA sequences, detecting credit card fraud, stock market analysis,
object recognition in computer vision, and robot locomotion.




SVM
Overview




SVMs are
mathematical algorithms that allow computers to sift through large, complex
datasets to identify patterns. SVMs are widely acknowledged for their ability to
discover hidden relationships in these complex datasets. With the ability to
handle what is known as infinite dimensional space,
SVMs are broadly considered to be superior to neural networks and other
mathematical techniques. SVM is a core machine learning technology with strong
theoretical foundations and excellent empirical successes.




Since
their introduction in 1992, SVMs marked the beginning of a new era in the learning from examples
paradigm in artificial intelligence. Rooted in the Statistical Learning Theory
developed by Professor Vladimir Vapnik, a member of HDC’s Scientific Advisory
Board, SVMs quickly gained attention from the math and science communities due
to a number of theoretical and computational merits. This development advanced a
new framework for modeling learning algorithms. Within this framework, the
fields of machine learning and statistics were merged introducing powerful
algorithms designed to handle the difficulties of prior computational
techniques.




The new
generation of learning algorithms that were developed based on this theory has
proved to be remarkably resistant to the problems imposed by noisy data and high
dimensionality. They are computationally efficient, have an inherent modular
design that simplifies their implementation and analysis and allows the
insertion of domain knowledge, and, more importantly, they have theoretical
guarantees about their generalization ability. SVMs have been validated in
hundreds of independent academic publications and presentations. In recognition
for his work, Professor Vapnik received the prestigious Alexander von Humboldt
Prize from the German government honoring foreign scientists and scholars for
lifetime achievement.




SVMs have
become widely established as one of the leading approaches to pattern
recognition and machine learning worldwide and are replacing neural networks in
a variety of fields, including engineering, information retrieval and
bioinformatics. This technology has been incorporated into product and research
applications by many biomedical, pharmaceutical, software, computer and
financial companies. Educational and research institutions throughout the world
have successfully applied SVMs to a wide array of applications, including gene
and protein expression analysis, medical image analysis, flow cytometry, and
mass spectrometry.




Recursive
Feature Elimination - Support Vector Machine Overview




Recursive
Feature Elimination (RFE-SVM) is an application of SVM that was created by
members of HDC’s science team to find discriminate relationships within clinical
datasets, as well as within gene expression and proteomic datasets created from
micro-arrays of tumor versus normal tissues. In general, SVMs identify patterns
– for instance, a biomarker/genetic expression signature of a disease. The
RFE-SVM utilizes this pattern recognition capability to identify and rank order
the data points that contribute most to the desired results. The Company
believes that its four RFE-SVM patents are currently the only RFE patents issued
in the world.


7




Using
RFE-SVM, we have been able to access information in micro-array datasets that
the most advanced bioinformatics techniques missed. In one micro-array
experiment, RFE-SVMs were able to filter irrelevant tissue-specific genes from
those related to the malignancy. RFE-SVM has also been used to determine gene
expression patterns that correlate to the severity of a disease, not just its
existence. It has been shown to improve both diagnosis and prognosis by
providing physicians with an enhanced decision tool. HDC scientists believe that
these analytic methods are effective for finding genes and proteins implicated
in several cancers, as well as in assisting with the pharmacogenetic and
toxicological profiling of patients. The RFE-SVM method is also capable of
finding those specific genes and proteins that are unhindered by ever-increasing
patent protection.




Fractal
Genomic Modeling Overview




On
September 30, 2003, we acquired the assets of Fractal Genomics, LLC, a company
with patented FGM software. The fractal technology is used to find discriminate
relationships within clinical datasets as well as within gene expression
datasets created from micro-arrays of disease versus normal
tissues.




The
Fractal Genomic Modeling (“FGM”) data analysis technique has been shown to
improve the mapping of genetic pathways involved in the diagnosis and prevention
of certain diseases. HDC scientists feel that these analytic methods are
effective for finding genes implicated in several cancers, HIV infection,
lymphedema, Down’s syndrome, and a host of other diseases, as well as the
pharmacogenetic profiling of patients.




FGM
technology is designed to study complex networks. A complex network can be made
up of genes inside a living organism, web pages on the Internet, stocks within a
financial market, or any group of objects or processes that appear to be
connected together in some intricate way. FGM uses a new approach toward
modeling network behavior to rapidly generate diagrams and software simulations
that facilitate prediction and analysis of whatever process is your particular
object of study. Two important concepts behind FGM technology are the notions of
scale-free networks and self-similarity.




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, AIDS and
breast cancer.




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.


8




Prostate
Cancer




HDC has identified, patent-protected
and 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 or abnormal rectal exams, with negative biopsy results to determine
if there is genomic evidence of grade three or higher cancer cells present in
biopsy tissue, indicating the presence of a cancer missed by the biopsy. We and
Clarient, Inc. have successfully completed all phases of the clinical trial
process with the hope of achieving the statistical significance necessary to
validate the ability to commercialize a test. Results from both the Phase I,
Phase II and Phase III double-blinded clinical validation studies now
completed at Clarient demonstrated a very high success rate for identifying the
presence of Grade 3 or higher prostate cancer cells (clinically significant
cancer), as well as normal BPH (benign prostatic hyperplasia) cells. With the
completion of the clinical trial, HDC’s new gene-based molecular diagnostic test
is now being commercialized to be used by physicians on their patients at risk
of having prostate cancer.




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 a prominent cancer research hospital 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.


9




Breast
Cancer




HDC
licensed its two breast cancer diagnostic technologies (MammoSIGHT, for detecting
malignancy in mammograms and MetastaSIGHT, for identifying
circulating tumor cells in the blood) to Smart Personalized Medicine, LLC in
exchange for a 15% ownership position in Smart Personalized Medicine, LLC and a
per test royalty up to 7.5% based on net proceeds received from the sale of the
new breast cancer prognostic test. 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.




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.


10




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.




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 blood before 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, 2008, we had 3 full time employees.




Website
Address




Our
corporate website address is www.HealthDiscoveryCorp.com. To view our public
filings from the home page, select the “Display SEC Filings” tab followed by
“SEC Filings.” This is a direct link to our filings with the Securities and
Exchange Commission (“SEC”), including but not limited to our Annual Report of
Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and
any amendments to these reports. These reports are accessible soon after we file
them with the SEC.




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 thirty-three
patents which were or have since issued as well as thirty-four 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
                
                05/07/2022U.S.
      Patent No. 7,383,237
                
                Computer-Aided
      Image Analysis
                
                11/04/2019U.S.
      Patent No. 7,444,308
                
                Data
      Mining Platform for Bioinformatics
                
                08/07/2020U.S.
      Patent No. 7,475,048
                
                Pre-Processed
      Feature Ranking for a Support Vector Machine
                
                08/07/2020Australian
      Patent No. 764897
                
                Pre-processing
      and Post-processing for Enhancing Knowledge Discovery Using Support Vector
      Machines.
                
                05/01/2019Indian
      Patent No. 212978
                
                Pre-Processing
      and Post-Processing for Enhancing Knowledge Discovery Using Support Vector
      Machines
                
                05/01/2019


12





Patent/Application
      No.
                
                Title
                
                Expiration
      DateSouth
      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.
                
                05/24/2020German
      Patent No. DE60024452.0-08
                
                Enhancing
      Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector
      Machines.
                
                05/24/2020Indian
      Patent No. 223409
                
                Enhancing
      Knowledge Discovery for Multiple Data Sets Using Multiple Support Vector
      Machines
                
                05/24/2020Israeli
      Patent No. 146705
                
                Enhancing
      Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector
      Machines
                
                05/24/2020Norwegian
      Patent No. 319,838
                
                Enhancing
      Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector
      Machines.
                
                05/24/2020South
      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
                
                01/24/2022Japanese
      Patent No. 4138486
                
                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
                
                05/01/2019Canadian
      Application No. 2,371,240
                
                Enhancing
      Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector
      Machines
                
                05/24/2020Japanese
      Application No. 2000-620577
                
                Enhancing
      Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector
      Machines
                
                05/24/2020Canadian
      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
                
                08/07/2020


13





Patent/Application
      No.
                
                Title
                
                Expiration
      DateU.S.
      Patent Publication No. 2005/0165556
                
                Colon
      Cancer-Specific Markers
                
                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
                
                11/14/2025Canadian
      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
                
                01/24/2022U.S.
      Application No. 11/929,354
                
                Kernels
      and Methods for Selecting Kernels for Use in a Learning
      Machine
                
                05/07/2022Canadian
      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.
      Patent Publication No. 2008/0097938
                
                Data
      Mining Platform for Knowledge Discovery from Heterogeneous Data Types
      and/or Heterogeneous Data Sources
                
                08/07/2020U.S.
      Patent Publication No. 2005/0228591
                
                Kernels
      and Kernel Methods for Spectral Data
                
                08/07/2020U.S.
      Patent Publication No. 2008/0097940
                
                Kernels
      and Kernel Methods for Spectral Data
                
                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.
      Patent Publication No. 2008/0050836
                
                Biomarkers
      for Screening, Predicting, and Monitoring Benign Prostate
      Hyperplasia
                
                01/24/2022U.S.
      Application No. 12/025,724
                
                Biomarkers
      Upregulated in Prostate Cancer
                
                01/24/2022U.S.
      Application No. 12/242,264
                
                Biomarkers
      Overexpressed in Prostate Cancer
                
                01/24/2022


14





Patent/Application
      No.
                
                Title
                
                Expiration
      DateU.S.
      Application No. 12/242,912
                
                Biomarkers
      Downregulated in Prostate Cancer
                
                01/24/2022U.S.
      Application No. 12/327,823
                
                Methods
      for Screening, Predicting and Monitoring Prostate Cancer
                
                01/24/2022U.S.
      Application No. 12/349,437
                
                Methods
      for Screening, Predicting and Monitoring Prostate Cancer
                
                01/24/2022U.S.
      Application No. 12/367,541
                
                Method
      and System for Analysis of Flow Cytometry Data Using Support Vector
      Machines
                
                02/08/2029WIPO
      Application No. PCT/US09/33504
                
                Method
      and System for Analysis of Flow Cytometry Data Using Support Vector
      Machines
                
                02/08/2029




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.
              
              01/19/2021U.S.
      Patent No. 7,366,719
              
              Method
      for the Manipulation, Storage, Modeling, Visualization and Quantification
      of Datasets
              
              01/19/2021European
      Patent No.: 1252588
              
              Method
      for the Manipulation, Storage, Modeling, Visualization and Quantification
      of Datasets.
              
              01/19/2021U.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.
              
              01/19/2021




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, as amended, Clarient, Inc.
obtained a non-exclusive license to the prostate cancer test in exchange for our
10% royalty interest from all reimbursements of the test once commercialized. We
and Clarient have successfully completed all phases of the clinical trial
process with the hope of achieving the statistical significance necessary to
validate the ability to commercialize a test. Results from both the
Phase I, Phase II and Phase III double-blinded clinical validation
studies now completed at Clarient demonstrated a very high success rate for
identifying the presence of Grade 3 or higher prostate cancer cells
(clinically significant cancer), as well as normal BPH (benign prostatic
hyperplasia) cells. With the completion of the clinical trial, HDC’s new
gene-based molecular diagnostic test is now being commercialized to be used by
physicians on their patients at risk of having prostate cancer. The new prostate
cancer test will be performed at Clarient’s Clinical Laboratory in Aliso Viejo,
CA. HDC will receive 10% royalty on each test performed.


15




In July
2008, we entered into a development and license agreement with DCL Medical
Laboratories LLC, a full-service clinical laboratory focused on women’s health,
for the collaborative development and commercialization of SVM-based computer
assisted diagnostic tests for the independent detection of ovarian, cervical and
endometrial cancers. Pursuant to the development and license agreement, we will
own any developed intellectual property and DCL will have a sole use
license relating to applications and new mathematical tools developed during the
course of the development and license agreement. Images and interpretative data
from this new SVM-based system may now be transmitted electronically, thus
allowing remote review and collaborative interpretation. Dr. Hanbury, one of our
directors, is currently President, CEO and a shareholder of DCL.




In August
2008, we entered into a licensing agreement with Smart Personalized Medicine,
LLC, a company founded by our former director, Dr. Richard Caruso. Under the
terms of this agreement, we will work to develop a superior breast cancer
prognostic test using our SVM technology in collaboration with a prominent
cancer research hospital. In exchange for a license to use our SVM technology,
we received a 15% equity position in Smart Personalized Medicine, LLC (which
will remain undiluted until there is at least $5 million in investment from
investors in Smart Personalized Medicine, LLC) and a per test royalty up to 7.5%
based on net proceeds received from the sale of the new breast cancer prognostic
test.




In
September 2008, we received 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 our Company. While this royalty
was relatively small, it represents additional royalty payments from this
relationship and offers the opportunity of future royalties for the life of the
patents related to future sales of the Bruker product.




See
Subsequent Events for additional licensing agreements that the Company has
executed since December 31, 2008.




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
$14,160 for 2008 and $46,432 for 2007.


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 statements regarding the successful
implementation of our services, business strategies and measures to implement
such strategies, competitive strengths, expansion and growth of our business and
operations, references to future success and other such matters. All such
statements are forward-looking statements and are based on the beliefs of,
assumptions made by and information currently available to our management. The
words “expect,” “estimate,” “anticipate,” “believe,” “intend,” “plan” and
similar expressions and variations thereof are intended to identify
forward-looking statements. Such forward-looking statements may involve
uncertainties and other factors that may cause the actual results and
performance of our company to be materially different from future results or
performance expressed or implied by such statements.


16




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. Our expenses are expected to
exceed our income until we successfully complete transactions resulting in
significant 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
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.




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 a short 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
may need additional financing.




During
the first quarter of 2009, we raised additional capital in the amount of
$200,000 through the issuance of Series B Preferred Stock. If we are unable to
generate sufficient revenue, additional proceeds may be required to finance our
activities. We cannot assure prospective investors that we will not need to
raise additional capital or that we would be able to raise sufficient additional
capital on favorable terms, if at all. There can be no assurance that additional
financing will be available, if required, on terms acceptable to us. If we fail
to raise sufficient funds, 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.


17




Demand
for additional shares of Company common stock from private placement investor
could cause substantial dilution to existing shareholders.




The
Company recently received letters from an investor in the Company’s 2007 private
placement (“2007 Private Placement”), claiming (a) that its anti-dilution
rights received on the 2007 Private Placement had been triggered by various
amendments to the vesting provisions of outstanding warrants and that, as a
result, it is entitled to receive additional shares of Company common stock for
no additional consideration, (b) breaches of its contractual rights to
approve certain issuances of derivative securities, (c) breaches of other
covenants made by the Company in the 2007 Private Placement, (d) the
Company had violated its SEC disclosure obligations, and (e) various
breaches by the members of the Board of Directors of their fiduciary duties.
While the Company denies the allegations and believes they are without merit, if
the investor’s position is correct, the Company may be required, among other
things, to issue approximately 98,500,000 shares to such investor, and, if all
of the other investors in the 2007 Private Placement sought the same remedy, the
Company may be required to issue approximately 739,000,000 shares in the
aggregate. Issuing such shares of common stock would cause substantial dilution
to existing shareholders and would exceed the number of the Company’s authorized
shares of common stock.




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.




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.


18




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.
  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.
 19
  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.
  We
are currently marketing our SVM Portfolio for sale.
  In August
2008, we entered into an agreement with Patent Profit International (“PPI”), a
Silicon Valley-based patent brokerage firm, with the goal of marketing our
patent portfolio and exclusive rights to SVM techniques and applications beyond
biomarker discovery and the healthcare field, to prospective buyers/licensees in
a wide range of technologies, including, but not limited to, information
technology such as Internet browsers and search engines, digital photography,
spam mail detection, oil exploration, homeland security, and the automotive
industry. As a requirement of any potential sale of the patent portfolio, HDC
expects to retain a royalty-free, worldwide, exclusive license, with the right
to grant sublicenses, in the entire field of healthcare to enable our continued
research, development, licensing and commercialization activities in diagnostic
and prognostic areas such as prostate cancer, ovarian cancer, breast cancer,
endometrial cancer, colon cancer, leukemia and other healthcare arenas. While we
intend to enter into a definitive agreement to effect the sale of the SVM
Portfolio, we cannot offer assurances that any strategic sale of the SVM
Portfolio will be available to us on a timely basis or on acceptable terms, if
at all.
  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.
 20
  Some of
our competitors, especially academic and research institutions and government
and other publicly funded agencies, may provide for free services or data
similar to the services and data that we provide for a fee. Moreover, our
competitors may obtain patent and other intellectual property protection that
would limit our rights or our customers’ and partners’ ability to use or
commercialize our discoveries, products and services. If we are unable to
compete successfully against existing or potential competitors, we may never
achieve profitability.
  Our
management may be unable to address future growth.
  We
anticipate that if we experience a period of growth in 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.
 21
  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.
  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.
 22
  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.
  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.
 23
  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.
  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.
 24
  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.
  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.
 25
  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.
  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.
 26
  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.
  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.
                PROPERTIES
  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 with an initial cost
of $1,678 per month. We currently pay $1,741 per month due to subsequent
contractual increases. 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.
 27
 
 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,
2008 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 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 YahooFinance.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.
 High
                    
                    
                    LowFirst
      Quarter 2007
                    
                    $
                    0.16
                    
                    
                    $
                    0.09Second
      Quarter 2007
                    
                    $
                    0.14
                    
                    
                    $
                    0.09Third
      Quarter 2007
                    
                    $
                    0.11
                    
                    
                    $
                    0.07Fourth
      Quarter 2007
                    
                    $
                    0.11
                    
                    
                    $
                    0.07First
      Quarter 2008
                    
                    $
                    0.08
                    
                    
                    $
                    0.03Second
      Quarter 2008
                    
                    $
                    0.08
                    
                    
                    $
                    0.03Third
      Quarter 2008
                    
                    $
                    0.09
                    
                    
                    $
                    0.03Fourth
      Quarter 2008
                    
                    $
                    0.07
                    
                    
                    $
                    0.04
  At March
27, 2009, there were approximately 355 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 after taking into
account various factors, including our financial condition, operating results,
current and anticipated cash needs and plans for expansion. Under the Georgia
Business Corporation Act, a company is prohibited from paying a dividend if,
after giving effect to that dividend, either the company would not be able to
pay its debts as they become due in the usual course of business or the
company’s total assets would be less than the sum of its total liabilities plus
the amount that would be needed if the company were to be dissolved at the time
of the dividend to satisfy the preferential rights upon dissolution of
shareholders whose preferential rights are superior to those receiving the
dividends. 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. The Company’s auditors have
concluded that these factors, among others, raise substantial doubt about the
Company’s ability to continue as a going concern. As a result, the Company may
be unable to pay any dividend until the Company achieves a level of revenue that
provides sufficient resources to pay its debts as they become due and to
continue as a going concern. If the Company were to pay dividends, the holders
of the shares of Series A Preferred Stock and the Series B Preferred Stock have
a right to first receive, or simultaneously receive, a dividend on each
outstanding share of Series A Preferred Stock on an as if converted to Common
Stock basis. The holders of the shares of Series B Preferred Stock also accrue a
10% annual dividend and have a special dividend right to receive a portion of
the Company’s net revenues, subject to certain limitations.
 28
  Equity
Compensation Plan Information
 Number
      of securitiesto
      be issued uponexercise
      of outstandingoptions,
      warrants andrights
      (a)
                              
                              Weighted-averageexercise
      price ofoutstanding
      options,warrants
      and rights(b)Equity
      compensation plans approved by security holders
                              
                              
                              0
                              
                              
                              0Equity
      compensation plans not approved by security holders
                              
                              
                              11,900,000
                              1
                              $
                              0.09Total
                              
                              
                              11,900,000
                              
                              $
                              0.09
  
 1
      Includes options and warrants previously granted to service providers,
      consultants, directors and
employees.
  Private
Placements
  Effective
September 7, 2007, the Company issued 31,937,500 shares of restricted common
stock in return for $2.55 million in cash. Proceeds from the private placement
were used for general working capital purposes. 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. Under the terms of the securities purchase agreement,
the Company agreed to use its best efforts to file a registration statement to
register the shares underlying the warrants issued and sold to the investors by
May 15, 2008, and to use its best efforts to cause the registration statement to
be declared effective by August 28, 2008. Shares totaling 515,384 were issued in
2008 under the terms of the agreement. 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. On September 19, 2008, the Company filed registration
statement 333-150878 wherein 352,746 shares of stock and 70,549,868 shares of
stock issuable upon the exercise of warrants were registered with the Securities
and Exchange Commission.
  Also in
2007, 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.
 29
  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
shares and warrants offered and sold in each of the Company’s private placements
were offered and sold in reliance upon exemptions from registration pursuant to
Section 4(2) of the Securities Act of 1933, as amended, and Regulation D
promulgated thereunder. Based on 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). There were no underwriters in connection
with either of these transactions, and there were no underwriting discounts or
commissions.
  The
Company recently received letters from an investor in the Company’s 2007 private
placement, (“2007 Private Placement”), claiming, among other things further
described in Item 1A Risk Factors to this Form 10-K, that its anti-dilution
rights received in the 2007 Private Placement had been triggered by various
amendments to the vesting provisions of outstanding warrants and that, as a
result, it is entitled to receive additional shares of Company common stock for
no additional consideration. Pursuant to the terms of the securities purchase
agreement in the 2007 Private Placement, the investors are entitled to receive
shares of Company common stock in certain dilutive events, including extending
the exercise period of warrants. The investor claims that its anti-dilution
protections were triggered as a result of the amendment to the vesting
provisions of two outstanding warrants because the amendments were an extension
of the exercise period of the warrant. The Company believes that the amendment
was not an extension of the exercise period but rather a change to the condition
on vesting, which would not trigger anti-dilution protections under the
securities purchase agreement. Notwithstanding the Company’s belief that the
investor’s claim is without merit, the Company rescinded one of the amendments
(another warrant was held by Mr. Goldstein, who has since deceased). If the
investor’s position is correct, the Company may be required under the terms of
the securities purchase agreement to issue approximately 98,500,000 shares to
the investor, and, if all of the other investors sought the same remedy as a
result of the amendment to the warrant, the Company may be required to issue
approximately 739,000,000 shares in the aggregate, which would exceed the number
of shares the Company is authorized to issue. Issuing shares of common stock to
satisfy the Company’s obligations under the anti-dilution provisions of the
securities purchase agreement, if triggered, could cause substantial dilution to
existing shareholders and would exceed the number of the Company’s authorized
shares of common stock.
  On
March 31, 2009, pursuant to a Securities Purchase Agreement (the “Purchase
Agreement”), we completed the sale to individual investors to acquire of Series
B Preferred Stock for $200,000 in cash. In connection with the Purchase
Agreement, the Company may issue up to 6,250,000 shares of Series B Preferred
Stock. The Series B Preferred Stock may be converted into Common Stock of the
Company at the option of the holder, at a price of $0.08 per share (subject to
adjustment) so long as the Company has a sufficient number of authorized shares
to allow for the exercise of all of its outstanding derivative securities, and
without the payment of additional consideration by the holder. The Shares of
Series B Preferred Stock must be converted into Common Stock of the Company upon
the demand by the Company after the fifth anniversary of the date of issuance.
The Series B Preferred Stock will not be immediately registered under either
federal or state securities laws and must be held for at least six months from
the time they are issued or until a registration statement covering such
securities is declared effective by the Securities and Exchange Commission or
other applicable exemption applies.
 30
  Additional Issuance of
Securities
  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. 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. These warrants expire December 31,
2009.
  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 expired on December 31, 2008.
  During
the third quarter of 2007, 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 years. 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.
  In the
first quarter of 2008, the Company fully vested a 1,500,000 warrant grant for a
retiring director by accelerating the vesting of 375,000 warrants exercisable at
$0.13. A charge of $44,438 was recorded as directors’ fees.
  In June
2008, a warrant to purchase 1,500,000 shares of Company common stock at an
exercise price of $0.08, vesting over three years and expiring in six years, was
issued by the Company to a new director. The value of $85,200 will be charged as
directors’ fees over the vesting period.
  During
the third quarter of 2008, a director forfeited 1,250,000 warrants as a result
of his resignation. The Company granted 1,250,000 options to an advisor to the
Company during the third quarter of 2008. The aggregate computed value of these
options was $74,693 and this amount will be charged as expense over the two year
vesting period.
  The
Company granted 6,000,000 options to its Chief Executive Officer on August 15,
2008. The aggregate computed value of these options was $172,485 and this amount
will be charged as expense over the 1.4 year vesting period.
  All of
these issuances of equity securities in 2007, 2008 and 2009 were made in
reliance upon exemptions from registration pursuant to Section 4(2) under the
Securities Act of 1933, as amended.
 31
 
 ITEM
      7.
                  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.
  We
partnered and intend to continue partnering with clinical laboratories to
commercialize our clinical diagnostic tests and 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.
  The U.S.
Patent and Trademark Office issued one new patent to the Company in April 2008,
which covers the use of FGM technology for visualization of data patterns. In
May 2008, the U.S. Patent and Trademark Office issued two new patents to the
Company, one of which claims a method for analysis of any type of data that has
a structure. The second patent covers additional feature selection techniques
that can be used to successfully identify the most important pieces of
information needed to solve complex pattern-recognition problems. The U.S.
Patent and Trademark Office issued one new patent to the Company in June 2008,
which covers the use of SVMs for computer-aided analysis of medical images, with
particular applications in cytology and pathology. Also in June 2008, the
Company was issued a patent in Japan, which covers recursive feature elimination
(RFE) using SVMs for selection and ranking of the most important features within
large datasets. In October 2008, an Indian patent was issued to the Company
covering the use of SVMs for knowledge discovery from multiple data sets. Also
that month, the U.S. Patent and Trademark Office issued a new patent to the
Company covering a data mining platform with multiple SVM modules for use in
analyzing bioinformatics data. With the issuance of these patents, the Company
now holds the exclusive rights to 34 issued U.S. and foreign patents covering
uses of SVM and FGM technology for discovery of knowledge from large data
sets.
 32
  In July
2008, the Company and DCL Medical Laboratories LLC, a full-service clinical
laboratory focused on women’s health, entered into a development and license
agreement for the collaborative development and commercialization of SVM-based
computer assisted diagnostic tests for the independent detection of ovarian,
cervical and endometrial cancers. Through the application of the advanced
technology of pattern recognition, this new SVM-based system is intended to
further improve the sensitivity of the Pap test and augment the recent
improvements of computer guided screening that have already significantly
improved detection rates. In addition, images and interpretative data from this
new SVM-based system may now be transmitted electronically, thus allowing remote
review and collaborative interpretation. Pursuant to the development and license
agreement, HDC will own any developed intellectual property and DCL will
have a sole use license relating to applications and new mathematical tools
developed during the course of the development and license agreement. Dr.
Hanbury, one of our directors, is currently President, CEO and a shareholder of
DCL.
  As we
disclosed in our Form 10-K for the fiscal year ended December 31, 2007, we were
in discussions regarding the licensing of and product development using SVMs and
FGMs in diagnostic radiology, including mammography, PET scans, CT scans, MRI
and other radiological images. In August 2008, we entered into a licensing
agreement with Smart Personalized Medicine, LLC, a company founded by our former
director, Dr. Richard Caruso. Under the terms of this agreement, we will work to
develop a superior breast cancer prognostic test using our SVM technology in
collaboration with a prominent cancer research hospital. In exchange for a
license to use our SVM technology, we received a 15% equity position in Smart
Personalized Medicine, LLC (which will remain undiluted until there is at least
$5 million in investment from investors in Smart Personalized Medicine,
LLC) and a per test royalty up to 7.5% based on net proceeds received from the
sale of the new breast cancer prognostic test.
  In August
2008, we entered into an agreement with Patent Profit International (“PPI”), a
Silicon Valley-based patent brokerage firm, with the goal of marketing our
patent portfolio and exclusive rights to SVM techniques and applications beyond
biomarker discovery and the healthcare field, to prospective buyers/licensees in
a wide range of technologies, including, but not limited to, information
technology such as Internet browsers and search engines, digital photography,
spam mail detection, oil exploration, homeland security, and the automotive
industry. As a requirement of any potential sale of the patent portfolio, HDC
expects to retain a royalty-free, worldwide, exclusive license, with the right
to grant sublicenses, in the entire field of healthcare to enable our continued
research, development, licensing and commercialization activities in diagnostic
and prognostic areas such as prostate cancer, ovarian cancer, breast cancer,
endometrial cancer, colon cancer, leukemia and other healthcare arenas and to
retain ownership of patents relating solely to biomarker discovery and
healthcare. PPI’s marketing of our patent portfolio is ongoing.
  In August
2008, the U.S. Patent and Trademark Office granted a patent to us covering the
use of SVMs in computer-aided image analysis of digitized microscopic images of
medical specimens. This patent focuses on a method and computer system for
analyzing medical images generated during microscopic evaluation of cytology
specimens and tissue samples. SVM-aided image analysis using this patented
method could permit automated and rapid analysis of a series of sample images
that are typically examined visually by a technologist or pathologist, greatly
increasing the sensitivity and accuracy of tests.
  On
September 24, 2008, our previously-filed registration statement on Form S-1,
which was required by the terms of the private placement we completed
in September, 2007 (the “Private Placement”) and first disclosed on Form
8-K, dated September 10, 2007, was declared effective. The registration
statement covers 35,274,934 shares of our common stock if warrants
with an exercise price of $0.14 per share are exercised and 35,274,934 shares of
our common stock if warrants with an exercise price of $0.19 per share
are exercised. The registration statement also covers 352,746 shares of our
common stock that were issued to the investors in September pursuant to the
terms of the Private Placement. All of the Private Placement warrants are
currently outstanding. We will not receive any proceeds from any shares
ultimately sold pursuant to the registration statement. However, we will receive
cash upon the exercise of the warrants of $11,640,728.22 if all of the warrants
are exercised. The exercise price of the warrants is fixed, subject to
adjustments for stock splits or combinations.
 33
  On
December 31, 2008, the U.S. Patent and Trademark Office issued a notice of
allowance for the Company’s pending patent application entitled “Data Mining
Platform for Bioinformatics and Other Knowledge Discovery.” This application
includes claims covering a web-based data mining system that utilizes multiple
support vector machine models to analyze combinations of biological data of many
different types, for example, genomic, proteomic, and clinical data, from many
different sources, including measurement instruments, clinical databases,
on-line databases and on-line journals to produce ranked lists of genes or
proteins that may be used as biomarkers. Once the above identified application
and those applications described in Subsequent Events below issue as patents,
which is expected to occur in mid-2009, the Company will own exclusive rights in
37 issued U.S. and foreign patents covering SVM and FGM technologies and their
uses.
  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, as amended, Clarient obtained a non-exclusive license to make, use
and sell any Licensed Product in the Field of Use within the Licensed
Territory with respect to both the commercial reference laboratory field and the
academic and research fields. In exchange for the non-exclusive license,
Clarient will pay the Company 10% of Clarient’s net proceeds with respect to all
licensed laboratory tests performed during the term of the license. During 2008,
we and Clarient successfully completed all phases of the clinical trial process
with the hope of achieving the statistical significance necessary to validate
the ability to commercialize a test. Results from both the Phase I,
Phase II and Phase III double-blinded clinical validation studies now
completed at Clarient demonstrated a very high success rate for identifying the
presence of Grade 3 or higher prostate cancer cells (clinically significant
cancer), as well as normal BPH (benign prostatic hyperplasia) cells. On November
6, 2008, we announced that the RT-PCR assay for the four genes comprising the
Company’s recently commercialized gene-based molecular diagnostic test for
prostate cancer, which is currently available at Clarient’s Clinical Laboratory,
can be successfully used in urine samples for gene testing. The study, completed
in collaboration with a prominent cancer research hospital, demonstrated that
the gene expression of all four genes comprising the molecular signature for
clinically significant prostate cancer could be detected in urine samples spiked
with as few as 50 prostate cancer cells. On January 13, 2009, we announced the
commercial launch of the new gene expression test for prostate cancer, which
will be available through Clarient’s PATHSiTETM virtual reporting tool and
accessible to the Company’s entire pathology network. The new prostate cancer
test will be performed at Clarient’s Clinical Laboratory in Aliso Viejo, CA. HDC
will receive 10% royalty on each test performed.
  In
September 2008 and December 2007, we received 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 these royalty
payments were relatively small, it 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 are in
discussions with a large international pharmaceutical company to develop a
diagnostic test using our discovered biomarkers during a clinical trial for its
new drug to treat BPH (enlarged prostate).
  We have
advanced our dialogue with several other important industry players in the
healthcare field and, in certain situations, related to the field of molecular
diagnostics, including a proposed project with one of the world’s largest
pharmaceutical companies, and other prospective partnership opportunities with
additional companies and research institutions. We also continue to pursue
development opportunities with our existing licensing customers.
 34
  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
as well as a limited pilot program of real-time trading activity. 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 series of related funds. SVM Capital expects to charge a
management fee and a performance fee related to its investment activities.
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.
  The
Company has recorded revenue of $555,000 through December 31, 2008 and has
deferred revenue yet to be recognized of $450,000 at December 31, 2008. In
addition, the Company has received $150,000 in additional cash payments in 2009.
The Company believes that the aggregate value created by its patent portfolio to
date is therefore $1,055,000.
  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.
  Subsequent
Events
  On
March 31, 2009, we entered into the Purchase Agreement with certain
individual investors for the private issuance of shares of our Series B
Preferred Stock at an offering price of $ 0.08 per share (the “Private
Placement”) . We anticipate that, in connection with the Private Placement,
we will receive up to $500,000 in cash in exchange for the issuance of up to
6,250,000 shares of Series B Preferred Stock. A copy of the form of
Purchase Agreement is attached to this Annual Report on Form 10-K as Exhibit
10.15. The shares will be 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.
  On
January 30, 2009, we entered into a license agreement with Abbott Molecular Inc.
(“Abbott”), pursuant to which the Company granted Abbott a worldwide, exclusive,
royalty-bearing license for in-vitro diagnostic rights to develop and
commercialize reagent test kits for the Company’s prostate cancer molecular
diagnostic tests in both biopsy tissue and urine. Upon regulatory approval,
these individual test kits could be sold to national, regional and local
clinical laboratories, as well as hospital, academic and physician laboratories
around the world.
  We also
granted Abbott a worldwide, royalty bearing, co-exclusive license (co-exclusive
with Quest) for developing and commercializing a “laboratory developed” urine
based molecular diagnostic test for clinically significant prostate cancer which
could be commercialized and sold directly to physicians for their patients in a
clinical laboratory.
  We also
granted Abbott a worldwide, royalty bearing, co-exclusive license (co-exclusive
with Clarient, Inc.) for developing and commercializing a “laboratory developed”
biopsy tissue based molecular diagnostic test for clinically significant
prostate cancer which could be commercialized and sold directly to physicians
for their patients in a clinical laboratory.
 35
  In
February 2009, Abbott paid to us a one-time initial signing fee of $100,000. In
addition, with respect to the products subject to the license (the “Products”),
Abbott will pay milestone payments to us upon achievement of the following
events: $250,000 upon completion of Phase 1 and 2 as described in the FDA
Submission Plan; $250,000 upon completion of Phase 3 and 4 as described in the
FDA Submission Plan; $500,000 upon submission of either a 510(k) or Pre Market
Approval (“PMA”) submission to the FDA; and $500,000 upon the receipt of a
written notification by the FDA of the approval of the applicable 510(k) or PMA
submission. We will also receive royalty payments of 10% of Abbott’s Net Sales
for the Products with medical utility claims for use on prostate biopsy tissue
samples, and 5% of Abbott’s Net Sales for the Products with medical utility
claims for use on urine samples. We will also receive royalty payments on the
“Laboratory Developed Tests” equal to 10% of Abbott’s Net Sales for the tests
performed on prostate biopsy tissue and 5% of Abbott’s Net Sales for tests
performed on urine samples. In addition to the royalty payments, with respect to
the urine based Products, Abbott will also pay us certain amounts upon the
achievement of certain milestones as follows: after the sale of 50,000 tests in
a calendar year, a milestone payment of $200,000; after a sale of 200,000 tests
in a calendar year, a milestone payment of $750,000; and after a sale of 500,000
tests in a calendar year, a milestone payment of $1,500,000. “Net Sales” is
equal to Abbott’s gross revenue less 5% subject to adjustments as described in
the license.
  On
January 30, 2009, we entered into a license agreement with Quest Diagnostics
Incorporated (“Quest”), pursuant to which the Company granted to Quest a
non-exclusive, royalty bearing license for developing and commercializing a
“laboratory developed” urine based molecular diagnostic test for clinically
significant prostate cancer which could be commercialized and sold by Quest’s
clinical laboratories directly to physicians for their patients. In
consideration of granting the license to Quest, Quest paid a license fee to the
Company and will pay running royalty payments, certain milestone payments, and
development fees.
  On
February 20, 2009, the U.S. Patent and Trademark Office issued a notice of
allowance of the claims of the Company’s patent application for “Feature
Selection Using Support Vector Machine Classifier.” The claims of this
application are directed to the Company’s innovative SVM-based Recursive Feature
Elimination (RFE) technique. Although the Company has already been granted a
U.S. patent covering this important method, because of its widespread use in
industry and research, alternative claims were submitted to expand the scope of
coverage. The newest set of allowed claims is directed to both biological and
non-biological applications of RFE- SVM.
  On
February 26, 2009, the U.S. Patent and Trademark Office issued a notice of
allowance for the Company’s pending patent application entitled “Kernels and
Kernel Methods for Spectral Data.” The allowed claims in the application are
directed to a method for identification of patterns in mass spectrographic data
for protein analysis using support vector machines. The method includes
pre-processing steps that involve alignment of the spectra and feature selection
to utilize only the most determinative peaks of the spectra for separation of
the data. The claimed technique identifies protein biomarkers that may be useful
for diagnosis, prognosis or monitoring of diseases, including cancer,
psychiatric conditions and others. Once the above identified applications and
the application identified in “Operational Activities” above issue as patents,
which is expected to occur in mid-2009, the Company will own exclusive rights in
37 issued U.S. and foreign patents covering SVM and FGM technologies and their
uses.
  Year
Ended December 31, 2008 Compared with Year Ended December 31, 2007
  Revenue
  For the
year ended December 31, 2008, revenue was $65,731 compared with $57,905 in
revenue for the year ended December 31, 2007. Revenue is recognized for
licensing and development fees over the period earned and the revenue recognized
in 2008 was primarily the amortization and recognition of prior deferred revenue
items during the year. As of December 31, 2008, the Company had deferred revenue
of $453,715. This deferred revenue includes $341,215 of cash received but not
yet recognized as revenue and $112,500 in accounts receivable. Deferred revenue
was $516,424 at December 31, 2007.
 36
  Cost
of Revenue and Gross Margin
  Cost of
revenues for 2008 was $9,000. 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
$21,300 in 2007.
  Operating
and Other Expenses
  Amortization
expense, which is the amortization of patents over their estimated useful lives,
was $262,719 for the twelve months ended December 31, 2008 and
2007.
  Professional
and consulting fees totaled $748,748 for 2008 compared with $980,833 for 2007.
These fees, related to legal, accounting, scientific and sundry activities, were
reduced because of fewer outside services being required in the current
year.
  Compensation
of $745,918 for the twelve months ended December 31, 2008 was slightly lower
than the $783,721 reported for the comparable period of 2007 as compensation was
held constant in an effort by the Company to control costs. The decrease was due
to a smaller charge for employee stock, options and warrants.
  Other
general and administrative expenses increased from $459,064 in 2007 to $484,806
in 2008. This increase was due to additional costs related to the issuance of
common stock.
  Loss
from Operations
  The loss
from operations for the twelve months ended December 31, 2008 was $2,185,460
compared to $2,449,737 for the prior year. The decreased loss was due to reduced
expenses as previously discussed.
  Other
Income and Expense
  Interest
income was $39,160 for the twelve months ended December 31, 2008 compared to
$39,614 in 2007. Decreased interest income was due to the higher average cash
available to invest throughout 2008, offset by generally lower rates
available.
  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. No corresponding event
occurred in 2008.
  The
Company recognized a $5,000 loss related to its investment in SVM Capital LLC in
2007. No gain or loss relating to SVM Capital LLC was recorded in
2008.
  The
Company recorded an expense of approximately $42,000, which was associated with
the settlement of litigation in 2007. No such charge applied to
2008.
  Interest
expense was $1,161 in 2008 compared with $286,398 in 2007. This decrease was due
to the elimination of indebtedness during the third quarter of
2007.
  Net
Loss
  The net
loss for the twelve months ended December 31, 2008 was $2,147,461 compared to
$2,698,927 for the twelve months ended December 31, 2007. The reduced loss was
due to the overall reduction in expenses as previously discussed.
 37
  Net loss
per share was $0.01 for the twelve months ended December 31, 2008 compared to a
net loss per share of $0.02 for the prior year. The smaller net loss in 2008 and
the increased number of average shares outstanding in 2008 favorably impacted
the net loss per share.
  Liquidity
and Capital Resources
  At
December 31, 2008, the Company had $325,887 in available cash. Cash used by
operating activities was $1,309,832. This was due primarily to the net loss of
$2,147,461; however, net non-cash charges and adjustments of $837,629 favorably
impacted the computation of the net cash used. Cash used by investment
activities was $12,720 due to the acquisition of assets. Net cash provided by
financing activities was zero because no such activities occurred.
  On July
15, 2008, the Company received $112,500 due from Ciphergen Biosystems, Inc. in
accordance with a patent license and settlement agreement.
  The
following table summarizes the due dates of our contractual
obligations.
 Total
                
                Less
      than
                  1
      Year
                
                1-3
                  YearsDeferred
      Compensation
                
                
                54,500
                
                
                54,500
                
                
                —Corporate
      Office Lease
                
                
                31,338
                
                
                20,892
                
                
                10,446Total
                
                $
                85,838
                
                $
                75,392
                
                $
                10,446
  The
Company continues to incur maintenance fees for its patent portfolio and expects
those fees to be approximately $29,500 during 2009.
  In the
first quarter of 2008, the Company fully vested a 1,500,000 warrant grant for a
retiring director by accelerating the vesting of 375,000 warrants exercisable at
$0.13. A charge of $44,438 was recorded as directors’ fees.
  In June
2008, a warrant to purchase 1,500,000 shares of Company common stock at an
exercise price of $0.08, vesting over three years and expiring in six years, was
granted by the Company to a new director. The value of $85,200 will be charged
as directors’ fees over the vesting period.
  The
Company granted 1,250,000 options to an advisor to the Company during the third
quarter of 2008, at an exercise price of $0.08, vesting over two years and
expiring in five years. The value of these options was $74,693 and this amount
will be charged as expense over the two year vesting period.
  Also
during the third quarter of 2008, the Company granted 6,000,000 options to its
Chief Executive Officer. The options have an exercise price of $0.08, with an
aggregate value of $172,485 that will be charged to expense over the 1.4 year
vesting period. The vesting period of the options is conditioned upon the
achievement of certain service and performance goals.
  In August
2008, the Company issued 515,384 shares of common stock to certain investors
pursuant to the terms of the Securities Purchase Agreement dated August 15,
2007. A charge of $0.07 per share or $36,076 was recorded. The Company did not
issue any other shares during the twelve months ended December 31,
2008.
  The
Company has relied primarily on equity funding plus debt financing for
liquidity. 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, and a heightened scrutiny
of all potential expenditures.
 38
  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, if the Company is able to achieve milestones contained in the
Abbott and Quest license agreement and we complete the sale of our patent
portfolio.
  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.
  If the
assets are considered to be impaired, the impairment we recognize is the amount
by which the carrying value of the assets exceeds the fair value of the assets.
In addition, we base the useful lives and related amortization or depreciation
expense on our estimate of the period that the assets will generate revenues or
otherwise be used by us. We also periodically review the lives assigned to our
intangible assets to ensure that our initial estimates do not exceed any revised
estimated periods from which we expect to realize cash flows from the
technologies. If a change were to occur in any of the above-mentioned factors or
estimates, the likelihood of a material change in our reported results would
increase.
  Revenue
Recognition
  We
recognize revenue principally from license and royalty fees for intellectual
property and from development agreements with research partners. Each element of
revenue recognition requires a certain amount of judgment to determine if the
following criteria have been met: (i) persuasive evidence of an arrangement
exists; (ii) delivery has occurred or services have been rendered; (iii) the
seller’s price to the buyer is fixed or determinable; (iv) collectability is
reasonably assured, and (v) both title and the risks and rewards of ownership
are transferred to the buyer. We are required to make more significant estimates
involving our recognition of revenue from license and royalty fees. Our license
and royalty fees revenue estimates depend upon our interpretation of the
specific terms of each individual arrangement and our judgment to determine if
the arrangement has more than one deliverable and how each of these deliverables
should be measured and allocated to revenue. In addition, we have to make
significant estimates about the useful life of the technology transferred to
determine when the risk and rewards of ownership have transferred to the buyer
to decide the period of time to recognize revenue. In certain circumstances we
are required to make judgments about the reliability of third party sales
information and recognition of royalty revenue before actual cash payments for
these royalties have been received.
 39
  Share-Based
Compensation
  Share-based
compensation expense is significant to our financial position and results of
operations, even though no cash is used for such expense. In determining the
period expense associated with unvested options, we estimate the fair value of
each option at the date of grant. We believe it is important for investors to be
aware of the high degree of subjectivity involved when using option pricing
models to estimate share-based compensation 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, 2008, 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.
 ITEM
      8.
                FINANCIAL
      STATEMENTS.
  Financial
statements appear beginning on page F1 of this Report.
 ITEM
      9.
                CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE.
  We have
had no disagreements with our certifying accountants on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure.
 40
 
 ITEM
      9A(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, who is also serving as our
Principal Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures pursuant to Rule 13a-15 under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon
this evaluation, our Chief Executive Officer concluded that, as of the
Evaluation Date, our disclosure controls and procedures were effective to
provide reasonable assurance that information required to be disclosed in the
reports that are filed or submitted under the Exchange Act is recorded,
processed, summarized, and reported within the time periods specified by the
Securities and Exchange Commission’s rules and forms and that our disclosure
controls and procedures are designed to ensure that information required to be
disclosed in the reports that we file or submit under the Exchange Act is
accumulated and communicated to our management including our Chief Executive
Officer, as appropriate to allow timely decisions regarding required
disclosure.
  Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that the Company’s disclosure controls and
procedures will detect or uncover every situation involving the failure of
persons within the company to disclose material information otherwise required
to be set forth in the Company’s periodic reports.
  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, 2008. Management’s assessment included an
evaluation of the design of our internal control over financial reporting and
testing of the operational effectiveness of those controls.
  Based on
this evaluation, management has concluded that our internal control over
financial reporting was not effective as of December 31, 2008. Our Chief
Executive Officer, who is also serving as our Principal Financial Officer,
concluded that we have material weaknesses in our internal control over
financial reporting because we do not have an adequate segregation of duties due
to a limited number of employees among whom duties can be allocated. The lack of
segregation of duties is due to the limited nature and resources of the
Company.
  This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal controls over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this annual report.
 41
 
 ITEM
      9B.
                  OTHER
      INFORMATION
  None.
 42




PART
III
 ITEM
      10.
                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.
              
              50
              
              Chief
      Executive Officer and Chairman of the BoardHong
      Zhang, Ph.D.
              
              47
              
              Senior
      Vice PresidentMichael
      Hanbury
              
              45
              
              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 Medical Society, 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.
  43
  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
  Michael
Hanburyis a member of the Board of Directors and has been a
director since June 27, 2008. Dr. Hanbury has over 25 years professional and
associated corporate management experience in medical diagnostic and clinical
laboratory sectors with a diverse experience base including successful tenures
in research and direct patient care in nationally renowned academic medical
centers; operations management in public and private clinical laboratories; and
concept-to-market design, development, customer support, engineering, compliance
and regulatory management in in-vitro
diagnostic manufacturing companies. In addition to substantial academic research
experience, he has directed all US operations for an international in-vitro
diagnostics company and managed regulatory affairs for Roche Molecular Systems,
where his efforts were instrumental in obtaining the first FDA clearances for
some of the most widely used commercial molecular diagnostic products on the
market. Before its acquisition by Quest Diagnostics, he was Chief Operating
Officer of Unilab Corporation, formerly the third largest reference laboratory
in the country operating 51 laboratories with revenue exceeding $600 million
annually. He also remains operating Principal at HCC Consulting providing
operating and regulatory services to a number of recognized clinical
laboratories and IVD clients and he continues to serve on the Board of Alexeter
Technologies. Dr. Hanbury is currently President, CEO and a shareholder of DCL
Medical Laboratories in Indianapolis, Indiana. Dr. Hanbury completed his
undergraduate studies at the University of Virginia in Biochemistry and
Economics and graduate studies at the Medical College of Virginia where he also
completed his clinical training. He also holds Masters Degrees in Clinical
Chemistry and a MBA from ODU/Eastern Virginia Medical School and the University
of Michigan, respectively.
  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 financial
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 individuals
who would be able to guide our operations based on their business experience,
both past and present, or their education. Responsibility for our operations is
centralized within management.
  44
  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.
  Code
of Ethics
  The
Company has adopted a Code of Ethics applicable to its Chief Executive Officer
and Principal Financial Officer. 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.
  45
  ITEM
      11.
              EXECUTIVE
      COMPENSATION.
  Summary
Compensation Table
  The
following table sets forth various elements of compensation for our Named
Executive Officers for each of the last two calendar years:
 Name
      and Principal
                                                      Position
                                                    
                                                    Year
                                                    
                                                    Salary
      ($)
                                                    
                                                    Bonus
      ($)
                                                    
                                                    OptionAwards($)
                                                    
                                                    
                                                    All
      OtherCompensation($)
                                                    
                                                    
                                                    TotalStephen
      D. Barnhill, M.D.
                                                    
                                                    
                                                    2008
                                                    
                                                    $
                                                    300,000
                                                    
                                                    $
                                                    50,000
                                                    
                                                    $
                                                    52,587
                                                    (1)
                                                    
                                                    $
                                                    38,291
                                                    (2)
                                                    
                                                    $
                                                    440,878Chief
      Executive Officer
                                                    
                                                    
                                                    2007
                                                    
                                                    $
                                                    196,875
                                                    
                                                    $
                                                    50,000
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    $
                                                    3,719
                                                    (2)
                                                    
                                                    $
                                                    250,594Daniel
      R. Furth
                                                    
                                                    
                                                    2008
                                                    
                                                    $
                                                    54,000
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    38,615
                                                    
                                                    
                                                    $
                                                    7,443
                                                    (3)
                                                    
                                                    $
                                                    100,058Executive
      Vice President
                                                    
                                                    
                                                    2007
                                                    
                                                    $
                                                    91,500
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    92,676
                                                    
                                                    
                                                    $
                                                    5,969
                                                    (2)
                                                    
                                                    $
                                                    190,145
  (1)
                The
      options vest according to the following vesting schedule: 1,000,000 vest
      on August 15, 2008 and upon the Company’s common stock’s closing price for
      any 20 consecutive trading days achieving a minimum share price of $0.10;
      2,000,000 vest on January 1, 2009 and upon the Company’s common stock’s
      closing price for any 20 consecutive trading days achieving a minimum
      share price of $0.15; 2,000,000 vest on January 1, 2010 and upon the
      Company’s common stock’s closing price for any 20 consecutive trading days
      achieving a minimum share price of $0.20; and 1,000,000 vest on January 1,
      2010 and upon the Company’s common stock’s closing price for any 20
      consecutive trading days achieving a minimum share price of $0.25. The
      fair value of each option granted was $0.03 and was estimated on the date
      of grant using a probability weighted fair value model, similar to a
      lattice valuation model, with the following assumptions: dividend yield at
      0%, risk-free interest rate of 3.50%, an expected life of 6 years, and
      volatility of 106.52%. The aggregate computed value of these options was
      $172,485, and this amount will be charged as expense over the 1.4 year
      vesting period.(2)
                Represents
      health insurance premiums and reimbursed healthcare
  costs.(3)
                Includes
      health insurance premiums and consulting
  payments.
  46
  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 DateStephen
      Barnhill M.D.
              
              
              0
              
              
              6,000,000
      (1)
              
              $
              0.08
              
              
              August
      15, 2018
  (1) The
options vest according to the following vesting schedule: 1,000,000 vest on
August 15, 2008 and upon the Company’s common stock’s closing price for any 20
consecutive trading days achieving a minimum share price of $0.10; 2,000,000
vest on January 1, 2009 and upon the Company’s common stock’s closing price for
any 20 consecutive trading days achieving a minimum share price of $0.15;
2,000,000 vest on January 1, 2010 and upon the Company’s common stock’s closing
price for any 20 consecutive trading days achieving a minimum share price of
$0.20; and 1,000,000 vest on January 1, 2010 and upon the Company’s common
stock’s closing price for any 20 consecutive trading days achieving a minimum
share price of $0.25.
  Director
Compensation
  Outside
directors are paid $1.00 each year. Each outside director is awarded options to
purchase 1,500,000 shares of Company common stock, which vest over three years
and expire in six years.
 Name
                                                          
                                                          Fees
      Earned or Paid in Cash
                                                            ($)
                                                          
                                                          Option
      Awards
                                                            ($)
                                                          
                                                          Total
                                                            ($)Stephen
      D. Barnhill, M.D.
                                                          
                                                          $
                                                          0.00
                                                          
                                                          $
                                                          0.00
                                                          
                                                          $
                                                          0.00Michael
      Hanbury (1)
                                                          
                                                          $
                                                          1.00
                                                          
                                                          $
                                                          14,200
                                                          
                                                          $
                                                          14,201William
      F. Quirk, Jr. (2)
                                                          
                                                          $
                                                          1.00
                                                          
                                                          $
                                                          29,625
                                                          
                                                          $
                                                          29,626William
      M. Goldstein (3)
                                                          
                                                          $
                                                          1.00
                                                          
                                                          $
                                                          59,250
                                                          
                                                          $
                                                          59,251Richard
      E. Caruso (4)
                                                          
                                                          $
                                                          1.00
                                                          
                                                          $
                                                          31,981
                                                          
                                                          $
                                                          31,982
  (1)
                1,500,000
      warrants remain outstanding as of December 31, 2008.(2)
                1,000,000
      warrants remain outstanding as of December 31, 2008.(3)
                1,500,000
      warrants remain outstanding as of December 31, 2008.(4)
                250,000
      warrants and 1,250,000 options remain outstanding as of December 31,
      2008.
  Michael
Hanbury was awarded warrants to purchase 1,500,000 shares of Company common
stock in 2008, 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. In August 2008, the Company awarded 1,250,000 options
to Dr. Richard Caruso which vest over 2 years and expire in 4 years. The vesting
of the options is conditioned upon Dr. Caruso’s continued service as an advisor
to the Company.
  47
  Employment
Agreements
  On August
15, 2008, the Company entered into a new employment agreement with Dr. Stephen
Barnhill for his employment as Chief Executive Officer. Dr. Barnhill’s existing
employment agreement was scheduled to expire by its terms on September 15, 2008.
The employment agreement has a term of two years. Under the terms of the
employment agreement, Dr. Barnhill received a one-time retention signing bonus
of $50,000 and his annual base salary is $300,000. Dr. Barnhill will also be
eligible to receive a cash bonus equal to 10% of the Company’s revenue received
during the term of the employment agreement; but such cash bonus cannot exceed
300% of his annual base salary. Dr. Barnhill was also granted an option to
purchase an aggregate of 6,000,000 shares of the Company’s common stock at an
exercise price of $0.08; the options vest over a two year period, assuming a
minimum share price. Dr. Barnhill is eligible to be reimbursed monthly for
reasonable and necessary business expenses and to receive health insurance
benefits and other benefits maintained by us for our executives. Dr. Barnhill
will be entitled to twenty paid vacation days during the calendar year. If Dr.
Barnhill’s employment is terminated for Cause, as that term is defined in the
employment agreement, or if Dr. Barnhill terminates the employment agreement for
Good Reason, as that term is defined in the employment agreement, then Dr.
Barnhill will receive as severance the amount of his base salary for the
remainder of the term and an amount equal to the actual cost of ninety days of
his COBRA premium payments. If the employment agreement is terminated for any
other reason than for Cause or for Good Reason, Dr. Barnhill is not eligible to
receive severance. The employment agreement also generally provides that Dr.
Barnhill will keep confidential information confidential and that he will not
compete with us in our business nor solicit our customers or employees for a
period of 12 months following termination of employment.
  In 2007,
the Company 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. On June 30, 2008, Mr. Furth
notified the Company of his resignation. As a result of his resignation, his
employment agreement was terminated.
  48
  ITEM
      12.
                  SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER
MATTERS.
  The
following table sets forth information concerning the beneficial ownership of
our common stock as of March 24, 2009 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, 2009, there were
169,522,590 shares of common stock outstanding and 7,437,184 shares of Series A
Preferred Stock outstanding. At March 31, 2009, there were 2,500,000 shares of
Series B Preferred Stock outstanding.
 Name
      and Address of Beneficial Owner
                                    
                                    Amount
      and Nature
                                      of
      Beneficial Owner
                                    
                                    Percent
      of
                                      Class (1)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)
                                    
                                    
                                    
                                    13.08
                                    %Michael
      Hanbury
                                      Director
                                      Suite
      200
                                      9550
      Zionville Road
                                      Indianapolis
      IN 46268
                                    
                                    
                                    
                                    250,000
                                    (3)
                                    
                                    
                                    
                                    0.15
                                    %William
      Quirk
                                      2
      East Bryan Street, Suite #601
                                      Savannah,
      GA 31401
                                    
                                    
                                    
                                    68,624,302
                                    (4)
                                    
                                    
                                    
                                    32.21
                                    %Dr.
      Richard Caruso
                                      795
      East Lancaster Avenue, Suite #200
                                      Villanova,
      PA 19085
                                    
                                    
                                    
                                    10,156,250
                                    (5)
                                    
                                    
                                    
                                    5.75
                                    %Micro
      Capital Fund, LP
                                      623
      Fifth Avenue
                                      Suite
      2502
                                      New
      York, NY 10022
                                    
                                    
                                    
                                    13,733,124
                                    (6)
                                    
                                    
                                    
                                    7.69
                                    %Prime
      Mover Capital Partners
                                      767
      Third Avenue
                                      New
      York, NY 10007
                                    
                                    
                                    
                                    20,693,750
                                    (7)
                                    
                                    
                                    
                                    11.29
                                    %Curtis
      G. Anderson
                                      44
      Delegal Road
                                      Savannah,
      GA 31411
                                    
                                    
                                    
                                    14,248,915
                                    (8)
                                    
                                    
                                    
                                    7.96
                                    %Stephen
      M. Grosberg
                                      201
      East 20th
      Street, #8C
                                      New
      York, NY 10010
                                    
                                    
                                    
                                    12,040,000
                                    (9)
                                    
                                    
                                    
                                    6.78
                                    %Frank
      T. Nickell
                                      320
      Park Ave.
                                      24th
      Floor
                                      New
      York, NY 10027
                                    
                                    
                                    
                                    9,406,250
                                    (10)
                                    
                                    
                                    
                                    5.35
                                    %All
      executive officers and directors as a group (2 persons)
                                    
                                    
                                    
                                    22,431,522
                                    
                                    
                                    
                                    
                                    13.21
                                    %
  (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
      24, 2009.(2)
                These
      shares are held by The Barnhill Group LLC, which is wholly owned by Dr.
      Barnhill.(3)
                Consists
      of warrants vesting within 60
days.
   49
  (4)
                Includes
      43,527,776 vested warrants.(5)
                Consists
      of 3,156,250 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, 250,000 vested warrants and 500,000 vested options held
      individually.(6)
                Includes
      9,125,000 vested warrants. Includes beneficial ownership of MicroCapital
      Fund Ltd., which includes 2,281,250 vested warrants.(7)
                Includes
      13,750,000 vested warrants.(8)
                Includes
      9,467,718 vested warrants.(9)
                Includes
      8,000,000 vested warrants.(10)
                Includes
      6,250,000 vested warrants.
  For
Equity Compensation Plan Information Table, see Item 5.
 ITEM
      13.
                CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE.
  In May
2008, we entered into a letter of intent with DCL Medical Laboratories LLC, a
full-service clinical reference laboratory focused on women’s health, for the
joint development of an SVM-based computer assisted diagnostic test for the
analysis of cervical cells. Through the application of the advancing technology
of pattern recognition, this new SVM-based system is intended to further improve
the sensitivity of the Pap test and augment the recent improvements in computer
guided screening that have already significantly improved detection rates. In
addition, images and interpretative data from this new SVM-based system may now
be transmitted electronically, thus allowing remote review and collaborative
interpretation. In July 2008, the Company and DCL Medical Laboratories, LLC
entered into a Development and License Agreement for the collaborative
development and commercialization of SVM-based computer assisted diagnostic
tests for the independent detection of ovarian, cervical and endometrial
cancers, which expands the scope of the joint development efforts. Pursuant to
the Development and License Agreement, HDC will own any developed intellectual
property and DCL Medical Laboratories will have a sole use license relating to
applications and new mathematical tools developed during the course of the
Development and License Agreement. In connection with the Development and
License Agreement, HDC will receive 50% of the profits from screening services
performed by DCL Medical Laboratories. If HDC commercializes an application and
offers services as permitted by the Development and License Agreement, HDC will
pay DCL Medical Laboratories 25% of HDC’s profits. Dr. Hanbury, one of the
Company’s directors, is currently President, CEO and a shareholder of DCL
Medical Laboratories.
  In August
2008, we entered into a licensing agreement with Smart Personalized Medicine,
LLC, a company founded by our former director, Dr. Richard Caruso. Under the
terms of this agreement, we will work to develop a superior breast cancer
prognostic test using our SVM technology in collaboration with a prominent
cancer research hospital. In exchange for a license to use our SVM technology,
we will receive a 15% equity position in Smart Personalized Medicine, LLC (which
will remain undiluted until there is at least $5 million in investment from
investors in Smart Personalized Medicine, LLC) and a per test royalty up to 7.5%
based on net proceeds received from the sale of the new breast cancer prognostic
test.
  On August
14, 2008, the Company and Dr. Richard Caruso entered into an Amendment to Stock
Purchase Warrant. The Amendment permits Dr. Caruso’s warrants, which were
previously granted to Dr. Caruso in 2007 for his services as a director, to
continue to vest so long as he serves the Company as an advisor. The amendment
was subsequently rescinded by the Company and Dr. Caruso. The Company granted
1,250,000 options to Dr. Caruso during the third quarter of 2008. These options
will continue to vest so long as Dr. Caruso is an advisor to the
Company.
  50
  The
Company has adopted the independence standards promulgated by the New York Stock
Exchange and has made a determination that, as of March 27, 2009, the following
directors are independent according to those standards: Michael
Hanbury.
 ITEM
      14.
                PRINCIPAL
      ACCOUNTANT FEES AND
SERVICES.
  The
following table sets forth the fees billed by Hancock Askew & Co. LLP for
2008 and 2007.
 2008
                      
                      
                      2007Audit
      Fees
                      
                      $
                      86,000
                      
                      
                      $
                      88,570Audit-Related
      Fees
                      
                      
                      —
                      
                      
                      
                      —Tax
      Fees
                      
                      
                      —
                      
                      
                      
                      —Sub-Total
                      
                      $
                      86,000
                      
                      
                      $
                      88,570All
      Other Fees
                      
                      $
                      4,083
                      
                      
                      
                      —Total
      Fees
                      
                      $
                      90,083
                      
                      
                      $
                      88,570
  Audit
Fees. This category includes aggregate fees billed for professional
services rendered for the audit of the Company’s annual financial statements for
the year ended December 31, 2008 and 2007, review for the annual report on Form
10-K and for the limited reviews of quarterly condensed financial statements
(Forms 10-Q) included in periodic reports filed with the SEC during 2008 and
2007, including out of pocket expenses.
  Audit-Related
Fees. This category includes fees billed for professional services
associated with consultation concerning financial accounting and reporting
standards. No such fees were billed in 2008 or 2007.
  Tax
Fees. This category includes the aggregate fees billed or to be billed
for tax services for the years ended December 31, 2008 and 2007. No such fees
were billed in 2008 or 2007.
  All
Other Fees. This category includes the aggregate fees billed for all
other services, exclusive of the fees disclosed above, rendered to the
Company.
  The
services provided by the independent auditors were pre-approved by the Board of
Directors of the Company to the extent required under applicable law. The Board
of Directors of the Company requires pre-approval of all audit and allowable
non-audit services.
  51
  ITEM
      15.
              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-K:
 3.1
                    Articles
      of Incorporation. Registrant incorporates by reference Exhibit 3.1 to Form
      8-K filed July 18, 2007.3.1(a)
                    Articles
      of Amendment to Articles of Incorporation. Registrant incorporates by
      reference Exhibit 99.1 to Form 8-K filed October 10,
  2007.3.1(b)
                    Articles
      of Amendment to Articles of Incorporation. Filed
  herewith.3.2
                    By-Laws.
      Registrant incorporates by reference Exhibit 3.2 to Form 8-K filed July
      18, 2007.4.1
                    Copy
      of Specimen Certificate for shares of common stock. Registrant
      incorporates by reference Exhibit 4.1 to Registration Statement on Form
      SB-2, filed June 4, 2001.4.1(a)
                    Copy
      of Specimen Certificate for shares of common stock. Registrant
      incorporates by reference Exhibit 4.1 (b) to Form 10-KSB, filed March 30,
      2004.4.1(b)
                    Copy
      of Specimen Certificate for shares of Series A Preferred Stock. Registrant
      incorporates by reference Exhibit 4.1(b) to Form 10-K filed March 31,
      2008.4.1(c)
                    Copy
      of Specimen Certificate for shares of Series B Preferred Stock. Filed
      herewith.10.1
                    Employment
      Agreement between the Company and Stephen Barnhill dated August 15, 2008.
      Registrant incorporates by reference Exhibit 10.2 to Form 8-K filed August
      18, 2008. *10.2
                    Form
      of Warrant. Registrant incorporates by reference Exhibit 10.7 to Form
      10-KSB, filed April 19, 2005.10.3
                    Form
      of Warrant. Registrant incorporates by reference Exhibit 10.9 to Form
      10-KSB, filed April 19, 2005.10.4
                    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. *10.4(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. *10.4(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. *10.5
                    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, 2006.10.6
                    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, 2007.10.6(a)
                    Amendment
      to License Agreement between Health Discovery Corporation and Clarient,
      Inc., dated January 13, 2009. Registrant incorporates by reference Exhibit
      10.2 to Form 8-K filed February 5, 2009.10.7
                    Patent
      License and Settlement Agreement with Ciphergen Biosystems, Inc.
      Registrant incorporates by reference Exhibit 10.10 to Form 10-QSB filed
      August 16,
2007.
  52
  10.8
                  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, 2007.10.9
                  Form
      of Warrant to Cash and Lender Purchasers. Registrant incorporates by
      reference Exhibit 10.14 to Form 10-K filed March 31,
  2008.10.10
                  Amendment
      to Stock Purchase Warrant with Dr. Richard Caruso. Registrant incorporates
      by reference Exhibit 10.1 to Form 8-K filed August 18, 2008.
    *10.11
                  Option
      Award to Stephen D. Barnhill, M.D. dated August 15, 2008. Registrant
      incorporates by reference Exhibit 10.3 to Form 8-K filed August 18, 2008.
      *10.12
                  License
      and Development Agreement by and between the Company and DCL Medical
      Laboratories, LLC dated July 14, 2008. Registrant incorporates by
      reference Exhibit 10.17 to Registration Statement on Form S-1 filed
      September 19, 2008.10.13
                  License
      Agreement between Health Discovery Corporation and Abbott Molecular Inc.,
      dated January 30, 2009. Filed herewith. **10.14
                  License
      Agreement between Health Discovery Corporation and Quest Diagnostics
      Incorporated, dated January 30, 2009. Registrant incorporates by reference
      Exhibit 10.3 to Form 8-K filed February 5, 2009. **10.15
                  Form
      of Securities Purchase Agreement. 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 and
      Principal Financial Officer.32.1
                  Section
      1350 Certification of Chief Executive Officer and Principal Financial
      Officer.
  *
management contract or compensatory plan or arrangement
  **
portions of exhibit have been omitted pursuant to a request for confidential
treatment
  53
  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 Officer andPrincipal
      Financial OfficerDate:  March
      31, 2009
  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.
                    
                    
                    Chief
      Executive Officer, Principal Financial Officer, and
    Chairman
                    
                    March
      31, 2009Stephen
      D. Barnhill M.D./S/Michael
      Hanbury
                    
                    
                    Director
                    
                    March
      31, 2009Michael
      Hanbury
  54


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, 2008 and 2007, the related statements of operations, changes in
stockholders’ equity, and cash flows for each of the two years in the period
ended December 31, 2008. 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, 2008 and 2007 and the results of its operations and its cash flows
for each of the two years in the period ended December 31, 2008 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 M, 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 M. 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,
2009
 F-1
  HEALTH
DISCOVERY CORPORATION
  Balance
Sheets
  December
31, 2008 and 2007
 2008
                                      
                                      
                                      2007AssetsCurrent
      AssetsCash
                                      
                                      $
                                      325,887
                                      
                                      
                                      
                                      1,648,439Accounts
      Receivable
                                      
                                      
                                      112,500
                                      
                                      
                                      
                                      112,500Prepaid
      Expense and Other Current Assets
                                      
                                      
                                      34,355
                                      
                                      
                                      
                                      33,829Total
      Current Assets
                                      
                                      
                                      472,742
                                      
                                      
                                      
                                      1,794,768Equipment,
      Less Accumulated Depreciation of $25,947 and $22,402
                                      
                                      
                                      14,888
                                      
                                      
                                      
                                      7,596Other
      AssetsAccounts
      Receivable – Long Term
                                      
                                      
                                      —
                                      
                                      
                                      
                                      112,500Patents,
      Less Accumulated Amortization of $1,205,963 and $942,972
                                      
                                      
                                      2,780,101
                                      
                                      
                                      
                                      3,042,820Total
      Assets
                                      
                                      $
                                      3,267,731
                                      
                                      
                                      
                                      4,957,684Liabilities and
      Stockholders’ EquityCurrent
      LiabilitiesAccounts
      Payable – Trade
                                      
                                      $
                                      220,972
                                      
                                      
                                      
                                      61,173Accrued
      Liabilities
                                      
                                      
                                      245,742
                                      
                                      
                                      
                                      239,589Deferred
      Revenue
                                      
                                      
                                      57,153
                                      
                                      
                                      
                                      62,708Total
      Current Liabilities
                                      
                                      
                                      523,867
                                      
                                      
                                      
                                      363,470Deferred
      Revenue – Long Term
                                      
                                      
                                      396,562
                                      
                                      
                                      
                                      453,715Total
      Liabilities
                                      
                                      
                                      920,429
                                      
                                      
                                      
                                      817,185Commitments
      and ContingenciesStockholders’
      EquitySeries
      A Preferred Stock, Convertible, Stated Value of $0.08 per Share 7,437,184
      Shares Authorized, Issued and Outstanding
                                      
                                      
                                      594,975
                                      
                                      
                                      
                                      594,975Common
      Stock, No Par Value, 300,000,000 Shares Authorized, Issued and Outstanding
      169,522,590 and 169,007,206 Shares, respectively
                                      
                                      
                                      15,744,873
                                      
                                      
                                      
                                      15,390,609Accumulated
      Deficit
                                      
                                      
                                      (13,992,546
                                      )
                                      
                                      
                                      (11,845,085
                                      )Total
      Stockholders’ Equity
                                      
                                      
                                      2,347,302
                                      
                                      
                                      
                                      4,140,499Total
      Liabilities and Stockholders’ Equity
                                      
                                      $
                                      3,267,731
                                      
                                      
                                      
                                      4,957,684
  See
accompanying notes to financial statements.
 F-2
  HEALTH
DISCOVERY CORPORATION
  Statements
of Operations
  For the
Years Ended December 31, 2008 and 2007
 2008
                    
                    
                    2007RevenuesLicensing
      and Development
                    
                    $
                    65,731
                    
                    
                    
                    57,905Cost
      of RevenuesLicensing
      and Development
                    
                    
                    9,000
                    
                    
                    
                    21,300Gross
      Profit
                    
                    
                    56,731
                    
                    
                    
                    36,605Expenses:Amortization
                    
                    
                    262,719
                    
                    
                    
                    262,719Professional
      and Consulting Fees
                    
                    
                    748,748
                    
                    
                    
                    980,833Compensation
                    
                    
                    745,918
                    
                    
                    
                    783,726Other
      General and Administrative Expenses
                    
                    
                    484,806
                    
                    
                    
                    459,064Total
      Expenses
                    
                    
                    2,242,191
                    
                    
                    
                    2,486,342Net
      Loss from Operations
                    
                    
                    (2,185,460
                    )
                    
                    
                    (2,449,737
                    )Other
      Income (Expense):Interest
      Income
                    
                    
                    39,160
                    
                    
                    
                    39,614Gains
      on Restructuring of Accounts Payable
                    
                    
                    —
                    
                    
                    
                    44,594Loss
      from Unconsolidated Joint Venture
                    
                    
                    —
                    
                    
                    
                    (5,000
                    )Litigation
      Settlement
                    
                    
                    —
                    
                    
                    
                    (42,000
                    )Interest
      Expense
                    
                    
                    (1,161
                    )
                    
                    
                    (286,398
                    )Total
      Other Income (Expense)
                    
                    
                    37,999
                    
                    
                    
                    (249,190
                    )Net
      Loss
                    
                    $
                    (2,147,461
                    )
                    
                    
                    (2,698,927
                    )Weighted
      Average Outstanding Shares
                    
                    
                    169,165,786
                    
                    
                    
                    132,718,789Loss
      Per Share
                    
                    $
                    (.01
                    )
                    
                    
                    (.02
                    )
  See
accompanying notes to financial statements.
 F-3
  HEALTH
DISCOVERY CORPORATION
  Statements
of Changes in Stockholders’ Equity
  For the
Year Ended December 31, 2008 and 2007
 Issued
      and OutstandingPreferred
                                  Shares
                                
                                
                                Common
                                  Shares
                                
                                
                                Preferred
                                  Amount
                                
                                
                                Common
                                  Amount
                                
                                
                                Accumulated
                                  Deficit
                                
                                
                                Total
                                  Stockholders’
                                  EquityBalance
      – January 1, 2007
                                
                                
                                —
                                
                                
                                
                                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
                                )
                                
                                $
                                4,140,499Shares
      issued pursuant to the terms of the Securities Purchase Agreement for no
      additional consideration
                                
                                
                                —
                                
                                
                                
                                515,384
                                
                                
                                
                                —
                                
                                
                                
                                36,077
                                
                                
                                
                                —
                                
                                
                                
                                36,077Options
      Issued for Services
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                9,336
                                
                                
                                
                                —
                                
                                
                                
                                9,336Warrants
      Issued for Services
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                217,666
                                
                                
                                
                                —
                                
                                
                                
                                217,666Stock
      Compensation Expense for Compensatory Options
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                91,185
                                
                                
                                
                                
                                
                                
                                
                                91,185Net
      Loss
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                (2,147,461
                                )
                                
                                
                                (2,147,461
                                )Balance
      - December 31, 2008
                                
                                
                                7,437,184
                                
                                
                                
                                169,522,590
                                
                                
                                $
                                594,975
                                
                                
                                $
                                15,744,873
                                
                                
                                $
                                (13,992,546
                                )
                                
                                $
                                2,347,302
  See
accompanying notes to financial statements.
 F-4
  HEALTH
DISCOVERY CORPORATION
  Statements
of Cash Flows
  For the
Years Ended December 31, 2008 and 2007
 2008
                            
                            
                            2007Cash
      Flows From Operating Activities:Net
      Loss
                            
                            $
                            (2,147,461
                            )
                            
                            $
                            (2,698,927
                            )Adjustments
      to Reconcile Net Loss to Net Cash Used by Operating
      Activities:Stock
      Issued in Settlement of Litigation
                            
                            
                            —
                            
                            
                            
                            32,000Stock
      Issued Pursuant to Shareholder Agreement
                            
                            
                            36,077
                            
                            
                            
                            —Non-cash
      Compensation
                            
                            
                            100,520
                            
                            
                            
                            188,025Accretion
      of Debt Discount
                            
                            
                            —
                            
                            
                            
                            192,361Services
      Exchanged for Common Stock or Warrants
                            
                            
                            217,667
                            
                            
                            
                            286,814Issuance
      of Warrants
                            
                            
                            —
                            
                            
                            
                            33,756Gain
      on Restructuring Accounts Payable
                            
                            
                            —
                            
                            
                            
                            (44,594
                            )Depreciation
      and Amortization
                            
                            
                            268,147
                            
                            
                            
                            270,865Changes
      in Assets and Liabilities:Decrease
      (Increase) in Accounts Receivable
                            
                            
                            112,500
                            
                            
                            
                            (205,000
                            )(Increase)
      Decrease in Prepaid Expense & Other Assets
                            
                            
                            (526
                            )
                            
                            
                            21,358Increase
      (Decrease)in Accounts Payable – Trade
                            
                            
                            159,799
                            
                            
                            
                            (132,161
                            )(Decrease)
      Increase in Deferred Revenue
                            
                            
                            (62,708
                            )
                            
                            
                            415,312Increase
      in Accrued Liabilities
                            
                            
                            6,153
                            
                            
                            
                            173,073Net
      Cash Used by Operating Activities
                            
                            
                            (1,309,832
                            )
                            
                            
                            (1,467,118
                            )Cash
      Flows From Investing Activities:Purchase
      of Equipment
                            
                            
                            (12,720
                            )
                            
                            
                            (998
                            )Net
      Cash Used by Investing Activities
                            
                            
                            (12,720
                            )
                            
                            
                            (998
                            )Cash
      Flows From Financing Activities:Repayment
      of Notes Payable
                            
                            
                            —
                            
                            
                            
                            (49,351
                            )Proceeds
      from Issuance of Common Stock
                            
                            
                            —
                            
                            
                            
                            2,491,540Net
      Cash Provided by Financing Activities
                            
                            
                            —
                            
                            
                            
                            2,442,189Net
      Increase (Decrease) in Cash
                            
                            
                            (1,322,552
                            )
                            
                            
                            974,073Cash,
      at Beginning of Period
                            
                            
                            1,648,439
                            
                            
                            
                            674,366Cash,
      at End of Period
                            
                            $
                            325,887
                            
                            
                            $
                            1,648,439Stock-Based
      Investing and Financing Transactions:Common
      Stock, Series A Preferred Stock, and Warrants Issued in Settlement of
      Promissory Notes
                            
                            $
                            —
                            
                            
                            $
                            1,893,775Supplemental
      Disclosures of cash Flow Information:Cash
      Paid for Interest
                            
                            $
                            1,161
                            
                            
                            $
                            10,084
  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 provide services to develop specific learning tools under
development agreements or to sell to third parties.
  USE
OF ESTIMATES
  The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the period. Accordingly, actual results could differ from those estimates.
Significant estimates that are particularly suspectible to change in the
near-term include the valuation of share-based compensation and consideration
for services and the recoverability of the patents.
  REVENUE
RECOGNITION
  Revenue
is generated through the sale or license of patented technology and processes
and from services provided through development agreements. These arrangements
are generally governed by contracts that dictate responsibilities and payment
terms. The Company recognizes revenues as they are earned over the duration of a
license agreement or upon the sale of any owned patent once all contractual
obligations have been fulfilled. Revenue is recognized under development
agreements in the period the services are performed.
  COST
OF REVENUE
  Cost of
revenue includes 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
financial institutions.
  ACCOUNTS
RECEIVABLE
  Trade
accounts receivable for licensing fees and development services are recorded at
net contract value based upon the written agreement with the customer. In
certain cases, accounts receivable may include royalties receivable from
customers based upon those customers estimated sales of the products or
diagnostic tests containing patented processes and technologies. The Company
considers amounts past due based on the related terms of the agreement and
reviews its exposure to amounts receivable based upon collection history and
specific customer credit analysis. The Company provides an allowance for
doubtful amounts if collectability is no longer reasonably assured. As of
December 31, 2008 and 2007, 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,
2008, 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.
  On
January 1, 2007 the Company adopted the provisions of 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 recognized in a company’s financial statements in accordance with
SFAS No. 109. FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. The interpretation also
provides guidance on derecognition, classification, interest, and penalties,
accounting in interim periods, disclosure, and transition. Based in its
evaluation of tax positions, the Company has concluded that there are no
significant uncertain tax positions requiring recognition in its financial
statements. The Company’s evaluation was performed for all tax years which
remain subject to examination and adjustment by major tax jurisdictions as of
December 31, 2008. FIN 48 did not have an impact on the Company’s financial
position or results of operations.
  STOCK-BASED
COMPENSATION
  Stock-based
compensation cost is measured at grant date, based on the fair value of the
award, and is recognized as expense over the requisite service period.
Stock-based expense included in the 2008 net loss consisted of $309,687 in
compensatory warrants, options and stock for professional consulting services
and compensation. Stock-based expense included in the net loss for 2007
consisted of $540,595 for the issuance of common stock, warrants and
options.
  Valuation
and Amortization Method – Under SFAS No. 123(R), the fair value awards of
stock which do not contain market conditions, such as a specified hurdle price,
is based on the market price of the Company’s common stock on the date of grant
and the fair value of each stock option or warrant which does not contain a
market condition is estimated on the grant date using the Black-Scholes
option-pricing model. Under SFAS No. 123(R), the fair value of options which
contain a market condition, such as a specified hurdle price, is estimated on
the grant date using a probability weighted fair value model similar to a
lattice valuation model. Both the Black-Scholes and the probability weighted
valuation models require assumptions and estimates to determine expected
volatility, expected life, expected dividend yield and expected risk-free
interest rates.
  F-7
  HEALTH
DISCOVERY CORPORATION
  Notes
to Financial Statements, continued
  Note
A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
continued
  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.
  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, the dividend rate is assumed to be
zero.
  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 $14,160 for 2008 and $46,432 for 2007.
  FAIR
VALUE OF FINANCIAL INSTRUMENTS
  The
Company’s financial instruments consist of cash, accounts receivable, accounts
payable and accrued expenses. The Company considers the carrying values of its
financial instruments in the financial statements to approximate their fair
value due to the short term nature of such items.
  NET
LOSS PER SHARE
  Basic
Earnings Per Share (“EPS”) includes no dilution and is computed by dividing
income or loss available to common shareholders by the weighted average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution of securities that could share in the earnings or losses of the entity.
Due to the net loss in all periods presented, the calculation of diluted per
share amounts would cause an anti-dilutive result and therefore is not
presented. Potentially dilutive shares at December 31, 2008 and 2007 include the
following:
 2008
                                      
                                      
                                      2007Stock
      options
                                      
                                      
                                      7,250,000
                                      
                                      
                                      
                                      3,500,000Warrants
                                      
                                      
                                      121,527,644
                                      
                                      
                                      
                                      159,099,644128,777,644
                                      
                                      
                                      
                                      162,599,644
  F-8
  HEALTH
DISCOVERY CORPORATION
  Notes
to Financial Statements, continued
  Note
A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
continued
  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.
  NEW
ACCOUNTING PRONOUNCEMENTS
  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. We adopted Statement No. 157
effective January 1, 2008. The adoption of Statement No. 157 did not have a
material impact on our financial statements.
  In
April 2008, the FASB issued FASB Staff Position FAS 142-3, Determination
of the Useful Life of Intangible Assets (“FSP 142-3”). FSP 142-3 amends
the factors to be considered in developing renewal and extension assumptions
used to determine the useful life of a recognized intangible asset accounted for
under FAS No. 142, Goodwill
and Other Intangible Assets. FSP 142-3 is effective for the Company’s
fiscal year 2009 and must be applied prospectively to intangible assets acquired
after January 1, 2009. Early adoption is not permitted. The Company does
not expect the adoption of FSP 142-3 will have a material impact on its
Consolidated Financial Statements.
  In
December 2007, FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51” (“SFAS No.
160”). SFAS No. 160 requires that noncontrolling (i.e. Minority) ownership
interests in subsidiaries held by parties other than the parent, and the amount
of consolidated net income, be clearly identified, labeled, and presented in the
consolidated financial statements within equity, but separate from the parent’s
equity. It also requires that once a subsidiary is deconsolidated, any retained
noncontrolling equity investment in the former subsidiary be initially measured
at fair value. Sufficient disclosures are required to clearly identify and
distinguish between the interests of the parent and the interests of the
noncontrolling owners. In addition to the amendments to ARB 51, this Statement
amends SFAS No. 128 “Earnings per Share”; so that earnings-per-share data will
continue to be calculated the same way those data were calculated before SFAS
No. 160 was issued. SFAS No. 160 is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008. SFAS
No. 160 was effective for us beginning January 1, 2009 and did not have a
material impact on our financial statement.
  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 $453,715 as of December 31, 2008. Unearned
revenue of $57,153 is recorded as current and $396,562 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 $516,423 as of December 31, 2007. Of this amount, $62,708 was
recognized as income in 2008.
  F-9
  HEALTH
DISCOVERY CORPORATION
  Notes
to Financial Statements, continued
  Note
B – DEFERRED REVENUE, continued
  The
expected future annual recognition of revenue is as follows (in
thousands):
 For the Year Ending December 31,2009
                      
                      $
                      57,1532010
                      
                      
                      29,3752011
                      
                      
                      29,3752012
                      
                      
                      29,3752013
                      
                      
                      29,375Thereafter
                      
                      
                      279,062Total
      expected future annual amortization
                      
                      $
                      453,715
  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 $2,780,101 and
$3,042,820 in patents and patent related costs, net of accumulated amortization,
at December 31, 2008 and 2007.
  Amortization
charged to operations for each of the years ended December 31, 2008 and 2007 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
  The
Company uses the equity method to account for its equity investments in ventures
for which it has 50% or less ownership and the ability to exercise significant
influence over operating and financial policies, but does not control. The
Company uses the cost method to account for its investments in companies that it
does not control and for which it does not have the ability to exercise
significant influence over operating and financial policies. In accordance with
the cost method, these investments are recorded at cost or fair value, as
appropriate. As of December 31, 2008, the Company had investments in SVM
Capital, which it owned 45% and account for under the equity method, and Smart
Personalized Medicine, which it owned 15% and will account for by the cost
method. The carrying value of both investments was zero at December 31,
2008.
  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 zero as
of December 31, 2008 and December 31, 2007. The Company has no contractual
obligation to provide any additional funds to this venture.
  Note
E – 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.
  F-10
  HEALTH
DISCOVERY CORPORATION
  Notes
to Financial Statements, continued
  Note
E – LITIGATION SETTLEMENT, continued
  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 2008 and
2007, 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, 2008 or
2007.
  The
following items comprise the Company’s net deferred tax assets (liabilities) as
of December 31, 2008.
 2008
                          
                          
                          2007Deferred
      tax assets:Net
      operating loss carry-forward
                          
                          $
                          3,655,365
                          
                          
                          $
                          2,975,861Deferred
      revenue
                          
                          
                          154,263
                          
                          
                          
                          175,584Contributions
                          
                          
                          2,491
                          
                          
                          
                          2,474Depreciation
      and amortization
                          
                          
                          1,148
                          
                          
                          
                          1,724Warrants
      and options granted
                          
                          
                          560,136
                          
                          
                          
                          783,341Total
                          
                          
                          4,373,403
                          
                          
                          
                          3,938,984Less
      valuation allowance
                          
                          
                          (4,373,403
                          )
                          
                          
                          (3,938,984
                          )Net
      deferred asset
                          
                          
                          —
                          
                          
                          
                          —
  As of
December 31, 2008, an increase in the valuation allowance of $434,418
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-11
  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, 2008 and 2007 as follows:
 2008
                                  
                                  
                                  2007Total
      expense (benefit) computed by:Applying
      the U.S. Federal statutory rate
                                  
                                  
                                  (34.0
                                  )%
                                  
                                  
                                  (34.0
                                  )%State
      income taxes, net of federal tax benefit
                                  
                                  
                                  (3.0
                                  )
                                  
                                  
                                  (3.0
                                  )Valuation
      allowance
                                  
                                  
                                  37.0
                                  
                                  
                                  
                                  37.0Effective
      tax rate (benefit)
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
  The
Company has unused net operating loss carry-forwards of approximately $10.8
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
  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.
 Converted
                      Debt
                    
                    
                    Common
                      Stock
                      19,601,323
                      Shares
                    
                    
                    Common
                      Stock
                      Warrants
                      @0.14
                      19,601,323
                    
                    
                    Common
                      Stock
                      Warrants
                      @$0.19
                      19,601,323
                    
                    
                    Common
                      Stock
                      Total
                    
                    
                    Preferred
                      Stock
                      7,437,184
                      SharesTerm
      Debt
                    
                    $
                    321,911
                    
                    
                    $
                    157,167
                    
                    
                    
                    11,227
                    
                    
                    
                    11,227
                    
                    
                    
                    179,621
                    
                    
                    
                    142,290Convertible
      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
                    
                    
                    
                    87,899Total
      Debt
                    
                    $
                    2,163,081
                    
                    
                    
                    1,372,094
                    
                    
                    
                    98,007
                    
                    
                    
                    98,007
                    
                    
                    
                    1,568,108
                    
                    
                    
                    594,975Promissory
      Note Payable
                    
                    $
                    (269,307
                    )
                    
                    $
                    (235,644
                    )
                    
                    
                    (16,832
                    )
                    
                    
                    (16,832
                    )
                    
                    
                    (269,308
                    )
                    
                    
                    —Discount
      Unaccreted Increase in Equity
                    
                    $
                    1,893,774
                    
                    
                    $
                    1,136,450
                    
                    
                    
                    81,174
                    
                    
                    
                    81,174
                    
                    
                    
                    1,298,800
                    
                    
                    
                    594,975
  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-12
  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. 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, 2008, the Company has recorded $30,000 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. The Company currently pays $1,741 per month due to subsequent
contractual increases in the rental rate. Future lease payments will be $20,892
and $10,446 in 2009, and 2010 respectively.
  Note
J – STOCK COMPENSATION
  The
Company approved 8,000,000 shares of common stock to be reserved solely for
issuance and delivery upon the exercise of option grants. Information about
options and warrants outstanding for 2008 and 2007 is summarized
below:
 Number
      of Derivative
                                      Securities
      Issued
                                    
                                    2008
                                    
                                    
                                    Weighted
      Average
                                      Exercise
      Price
                                    
                                    
                                    2007
                                    
                                    
                                    Weighted
      Average
                                      Exercise
      PriceOutstanding
      beginning of year
                                    
                                    
                                    162,599,644
                                    
                                    
                                    $
                                    0.17
                                    
                                    
                                    
                                    72,296,250
                                    
                                    
                                    $
                                    0.23Granted
                                    
                                    
                                    8,750,000
                                    
                                    
                                    $
                                    0.08
                                    
                                    
                                    
                                    122,773,394
                                    
                                    
                                    $
                                    0.18Exercised
                                    
                                    
                                    0
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (100,000
                                    )
                                    
                                    $
                                    0.01Expired
      un-exercised
                                    
                                    
                                    (42,572,000
                                    )
                                    
                                    $
                                    0.21
                                    
                                    
                                    
                                    (32,370,000
                                    )
                                    
                                    $
                                    0.33Outstanding
      end of the year
                                    
                                    
                                    128,777,644
                                    
                                    
                                    $
                                    0.16
                                    
                                    
                                    
                                    162,599,644
                                    
                                    
                                    $
                                    0.17
  December
31, 2008
 Exercise
      Prices
                      
                      Number
                        Outstanding
                      
                      Weighted-
                        Average
                        Remaining
                        Contractual
                        Life
      (years)
                      
                      Number
                        Exercisable
                      
                      Weighted
                        Average
                        Remaining
                        Contractual
      Life
                        (years)
      of
                        Exercisable
                        Warrants$0.08
                      
                      
                      9,300,000
                      
                      
                      7.75
                      
                      
                      1,050,000
                      
                      4.15$0.10
                      
                      
                      300,000
                      
                      
                      0.7
                      
                      
                      300,000
                      
                      0.7$0.11
                      
                      
                      500,000
                      
                      
                      1.0
                      
                      
                      500,000
                      
                      1.0$0.13
                      
                      
                      5,000,000
                      
                      
                      0.7
                      
                      
                      5,000,000
                      
                      0.7$0.14
                      
                      
                      52,138,822
                      
                      
                      1.7
                      
                      
                      52,138,822
                      
                      1.7$0.16
                      
                      
                      10,000,000
                      
                      
                      1.7
                      
                      
                      10,000,000
                      
                      1.7$0.19
                      
                      
                      51,538,822
                      
                      
                      1.7
                      
                      
                      51,538,822
                      
                      1.7Total
                      
                      
                      128,777,644
                      
                      
                      
                      
                      
                      120,527,644
  F-13
  HEALTH
DISCOVERY CORPORATION
  Notes
to Financial Statements, continued
  Note
J – STOCK COMPENSATION, continued
  There
were 2,875,000 options exercisable at December 31, 2007. There were 250,000
options exercisable at December 31, 2008. The weighted average exercise prices
of options were $0.08 and $0.11 at December 31, 2008 and 2007 respectively. The
weighted average remaining life of all exercisable and non-vested options at
December 31, 2008 is 8.8 years.
  As of
December 31, 2008, there was approximately $179,030 of unrecognized cost related
to stock option grants. The cost is to be recognized over the remaining vesting
periods that average approximately 1.17 years. The aggregate intrinsic value of
options outstanding and exercisable as of December 31, 2008 was
zero.
  The
Company granted 1,250,000 options to an advisor during the third quarter of
2008. The fair value of each option granted was $0.06 and was estimated on the
date of grant using the Black-Scholes pricing model with the following
assumptions: dividend yield at 0%, risk-free interest rate of 2.62%, an expected
life of 5 years, and volatility of 98.61 %. The aggregate computed value of
these options was $74,693 and this amount will be charged as expense over the
two year vesting period.
  The
Company entered into an award agreement with the Chief Executive Officer
granting 6,000,000 stock options. The options vest in the following increments
once both the service condition, indicated by the applicable Vesting Date, and
the market condition, indicated by attaining the minimum share price for any 20
consecutive trading days, are satisfied:
  Vesting
      Date
                                    
                                    Minimum
      Share Price
                                    
                                    Number
      of OptionsAugust
      15, 2008
                                    
                                    $0.10
                                    
                                    1,000,000January
      1, 2009
                                    
                                    $0.15
                                    
                                    2,000,000January
      1, 2010
                                    
                                    $0.20
                                    
                                    2,000,000January
      1, 2010
                                    
                                    $0.25
                                    
                                    1,000,000
  The fair
value of each option was $0.03 and was estimated on the date of the grant using
a probability weighted fair value model similar to a lattice valuation model
with the following assumptions: dividend yield at 0%, risk free interest rate of
3.50%, an expected life of 6 years, and volatility of 106.52%. The aggregate
computed value of these options was $172,485 and this amount will be charged as
expense over the 1.4 year vesting period.
  On
February 1, 2007, the Company issued in the aggregate 15,235,000 warrants to
purchase common stock of the Company to certain institutional investors and
individual accredited investors. These 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 vested 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.
  F-14
  HEALTH
DISCOVERY CORPORATION
  Notes
to Financial Statements, continued
  Note
J – STOCK COMPENSATION, continued
  During
the third quarter of 2007, the Company issued 60,750 warrants, which expired 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.
  The
Company also issued warrants to purchase up to 103,077,644 shares of common
stock 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. 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. 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. As of
December 31, 2008 there was approximately $196,033 in unrecognized cost related
to warrants granted.
  In the
first quarter of 2008, the Company fully vested a 1,500,000 warrant grant for a
retiring director by accelerating the vesting of 375,000 warrants exercisable at
$0.13. A charge of $44,438 was recorded as directors’ fees.
  In June
2008, a warrant to purchase 1,500,000 shares of Company common stock at an
exercise price of $0.08, vesting over three years and expiring in six years, was
issued by the Company to a new director. The value of $85,200 will be charged as
directors’ fees over the vesting period.
  Note
K - STOCKHOLDERS’ EQUITY
  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.
  During
2007, 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.
  In August
2008, the Company issued 515,384 shares of common stock to certain investors,
pursuant to the terms of the Securities Purchase Agreement dated August 15,
2007, for no additional consideration. The Company recorded expense of $36,076
or $0.07 per share. The Company did not issue any other shares during the twelve
months ended December 31, 2008.
  F-15
  HEALTH
DISCOVERY CORPORATION
  Notes
to Financial Statements, continued
  Note
K – STOCKHOLDERS’ EQUITY, continued
  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.
  Note
L - 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 in 2007.
  The
Company acquired a specialized cryogenic freezer system used to keep tissue
samples from the Chief Executive Officer on July 11, 2008 for
$9,752.
  In July
2008, the Company and DCL Medical Laboratories, LLC, a full-service clinical
reference laboratory focused on women’s health, entered into a Development and
License Agreement for the collaborative development and commercialization of
SVM-based computer assisted diagnostic tests for the independent detection of
ovarian, cervical and endometrial cancers. Dr. Hanbury, one of the Company’s
directors, is currently President, CEO and a shareholder of DCL Medical
Laboratories. Pursuant to the Development and License Agreement, HDC will own
any developed intellectual property and DCL Medical Laboratories will have a
sole use license relating to applications and new mathematical tools developed
during the course of the Development and License Agreement. In connection with
the Development and License Agreement, HDC will receive 50% of the profits from
screening services performed by DCL Medical Laboratories. If HDC commercializes
an application and offers services as permitted by the Development and License
Agreement, HDC will pay DCL Medical Laboratories 25% of HDC’s
profits.
  In August
2008, the Company entered into a licensing agreement with Smart Personalized
Medicine, LLC, a company founded by our former director, Dr. Richard Caruso.
Under the terms of this agreement, we will work to develop a superior breast
cancer prognostic test using our SVM technology in collaboration with a
prominent cancer research hospital. In exchange for a license to use our SVM
technology, the Company will receive a 15% equity position in Smart Personalized
Medicine, LLC (which will remain undiluted until there is at least $5
million in investment from investors in Smart Personalized Medicine, LLC)
and a per test royalty up to 7.5% based on net proceeds received from the sale
of the new breast cancer prognostic test.
  On August
14, 2008, the Company and Dr. Richard Caruso entered into an Amendment to Stock
Purchase Warrant. The Amendment permits Dr. Caruso’s warrants, which were
previously granted to Dr. Caruso in 2007 for his services as a director, to
continue to vest so long as he serves the Company as an advisor. The amendment
was subsequently rescinded by the Company and Dr. Caruso. The Company granted
1,250,000 options to Dr. Caruso during the third quarter of 2008. These options
will continue to vest so long as Dr. Caruso is an advisor to the
Company.
  F-16
  HEALTH
DISCOVERY CORPORATION
  Notes
to Financial Statements, continued
  Note M – 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.
  Note N – SUBSEQUENT
EVENTS
  On
January 30, 2009, the Company entered into a license agreement with Abbott
Molecular Inc. (“Abbott”), pursuant to which the Company granted Abbott an
exclusive, royalty-bearing license to certain intellectual property rights
related to the Company’s prostate cancer biomarkers. In consideration of the
Company granting the license to Abbott, in January 2009 Abbott paid to the
Company a one-time initial signing fee of $100,000. In addition, Abbott will
also pay milestone payments and royalties to the Company in accordance with the
terms of the license agreement.
  On
January 30, 2009, the Company entered into a license agreement with Quest
Diagnostics Incorporated (“Quest”), pursuant to which the Company granted to
Quest a non-exclusive license to certain intellectual property rights related to
the development of a test for and performing clinical laboratory diagnostic
testing using gene biomarkers to differentiate clinically significant prostate
cancer from other prostate conditions. In consideration of granting the license
to Quest, Quest paid a license fee to the Company and will pay running royalty
payments, certain milestone payments, and development fees.
  On
March 30, 2009, the Company 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
B Preferred Stock, including the right to receive dividends, including special
dividends, the right to vote on matters presented to holders of common stock, a
preference right in the event of liquidation, and the right to convert the
Series B Preferred Stock into common stock. The Amendment was authorized by the
Board of Directors on March 20, 2009. The Company is in the process of raising
capital through an offering of this Series B Preferred Stock and has raised
$200,000 subsequent to year end.
  Note O – COMMITMENTS AND
CONTINGENCIES
  The
Company is subject to various claims primarily arising in the normal course of
business. Although the outcome of these matters cannot be determined, the
Company does not believe it is probable, in accordance with SFAS No. 5,
“Accounting for Contingencies,” that any such claims will result in material
costs and expenses.




F-17