UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C.  20549
  FORM
10-Q
  x
              Quarterly
      report under Section 13 or 15(d) of the Securities Exchange Act of
      1934
 For
      the quarterly period endedSeptember 30,
      2008
  o
              Transition
      report under Section 13 or 15(d) of the Exchange Act
 
 For
      the transaction period from _____________ to
  _____________Commission
      file number 333-62216
 
 HEALTH DISCOVERY
      CORPORATION
                (Exact
      name of small business issuer as specified in its
  charter)
 
 Georgia
              
              74-3002154(State
      or other jurisdiction of incorporation or organization)
              
              (IRS
      Employer Identification No.)
 
 2
      East Bryan Street, Suite #601
                Savannah, Georgia
      31401
                (Address
      of principal executive offices)912-443-1987
                (Issuer's
      telephone number, including area code)(Former
      name, former address and former fiscal year,
                if
      changed since the last report)
  Indicate
by check mark whether the registrant:  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for at least the past 90 days.  Yes o No 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 definition of “accelerated filer and large accelerated
filer” in Rule 12b-2 of the Exchange Act.  (check one):
  Large
      Accelerated Filer  o
              Non-Accelerated
      Filer oAccelerated
      Filer  o
              Smaller
      Reporting Company x
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
 Yes o No  x
  APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
 PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
  Check
whether the registrant filed all documents and reports required to be filed by
Section l2, 13 or 15(d) of the Exchange Act after the distribution of securities
under a plan confirmed by a court.  Yes o No o
  APPLICABLE
ONLY TO CORPORATE ISSUERS
  Indicate
the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 169,522,590 shares of common stock,
no par value, were issued and outstanding as of November 13, 2008;
7,437,184 shares of Series A Preferred Stock with a stated value of $0.08 per
share were issued and outstanding as of November 13, 2008.
 
  TABLE
OF CONTENTS
  PART I  -- FINANCIAL
      INFORMATION
                                                                                                      1Item
      1. Financial
    Statements
                                                                                                      1Balance Sheet
                                                                                                      1Statements of
      Operations
                                                                                                      2Statements of Cash
      Flows
                                                                                                      3Notes to Financial
      Statements
                                                                                                      4Item
      2. Management’s Discussion and
      Analysis of
      Financial Conditionand
                                                                                                        Results of
      Operations
                                                                                                      10Item
      4T. Controls and
      Procedures.
                                                                                                      15PART II -- OTHER
      INFORMATION
                                                                                                      16Item
      2. Unregistered
      Sales of Equity Securities and Use of Proceeds
                                                                                                      16Item
      5. Other
Information
                                                                                                      16Item
      6. Exhibits.
                                                                                                      17SIGNATURES
                                                                                                      18
  ii
  PART
I
 FINANCIAL
INFORMATION
 
 Item
1.  Financial Statements
 
 HEALTH
DISCOVERY CORPORATION
 Balance
Sheet
 AssetsSeptember
    30,
                                                                                
                                                                                
                                                                                December
31,2008
                                                                                  (unaudited)
                                                                                
                                                                                
                                                                                2007Current
      AssetsCash
                                                                                
                                                                                $
                                                                                570,161
                                                                                
                                                                                
                                                                                
                                                                                1,648,439Accounts
      Receivable
                                                                                
                                                                                
                                                                                112,500
                                                                                
                                                                                
                                                                                
                                                                                112,500Prepaid
      Expenses and Other Assets
                                                                                
                                                                                
                                                                                42,007
                                                                                
                                                                                
                                                                                
                                                                                33,829Total
      Current Assets
                                                                                
                                                                                
                                                                                724,668
                                                                                
                                                                                
                                                                                
                                                                                1,794,768Equipment,
      Less Accumulated Depreciation of $24,307 and $22,402
                                                                                
                                                                                
                                                                                16,528
                                                                                
                                                                                
                                                                                
                                                                                7,596Other
      AssetsAccounts
      Receivable – Long Term
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                112,500Patents,
      Less Accumulated Amortization of $1,096,227 and $942,974
                                                                                
                                                                                
                                                                                2,845,781
                                                                                
                                                                                
                                                                                
                                                                                3,042,820Total
      Assets
                                                                                
                                                                                $
                                                                                3,586,977
                                                                                
                                                                                
                                                                                
                                                                                4,957,684Liabilities and Stockholders’
      EquityCurrent
      LiabilitiesAccounts
      Payable – Trade
                                                                                
                                                                                $
                                                                                174,973
                                                                                
                                                                                
                                                                                
                                                                                61,173Accrued
      Liabilities
                                                                                
                                                                                
                                                                                213,171
                                                                                
                                                                                
                                                                                
                                                                                239,589Deferred
      Revenue
                                                                                
                                                                                
                                                                                62,708
                                                                                
                                                                                
                                                                                
                                                                                62,708Total
      Current Liabilities
                                                                                
                                                                                
                                                                                450,852
                                                                                
                                                                                
                                                                                
                                                                                363,470Deferred
      Revenue – Long Term
                                                                                
                                                                                
                                                                                406,684
                                                                                
                                                                                
                                                                                
                                                                                453,715Total
      Liabilities
                                                                                
                                                                                
                                                                                857,536
                                                                                
                                                                                
                                                                                
                                                                                817,185CommitmentsStockholders’
      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 Authorized169,522,590 Shares Issued
      and Outstanding
                                                                                
                                                                                
                                                                                15,654,941
                                                                                
                                                                                
                                                                                
                                                                                15,390,609Accumulated
      Deficit
                                                                                
                                                                                
                                                                                (13,520,475
                                                                                )
                                                                                
                                                                                
                                                                                (11,845,085
                                                                                )Total
      Stockholders’ Equity
                                                                                
                                                                                
                                                                                2,729,441
                                                                                
                                                                                
                                                                                
                                                                                4,140,499Total
      Liabilities and Stockholders' Equity
                                                                                
                                                                                $
                                                                                3,586,977
                                                                                
                                                                                
                                                                                
                                                                                4,957,684
 
 See
accompanying notes to financial statements.
  1
 HEALTH
DISCOVERY CORPORATION
 
 Statements
of Operations
 (unaudited)
  Three
      Months
                      
                      
                      Three
      Months
                      
                      
                      Nine
      Months
                      
                      
                      Nine
      MonthsEnded
                      
                      
                      Ended
                      
                      
                      Ended
                      
                      
                      EndedSeptember
      30,
                      
                      
                      September
      30,
                      
                      
                      September
      30,
                      
                      
                      September
      30,2008
                      
                      
                      2007
                      
                      
                      2008
                      
                      
                      2007Revenues:Licensing
                      
                      $
                      18,700
                      
                      
                      $
                      17,343
                      
                      
                      $
                      50,054
                      
                      
                      $
                      39,010Cost
      of Revenues:Internal
      Development
                      
                      
                      600
                      
                      
                      
                      7,500
                      
                      
                      
                      7,200
                      
                      
                      
                      18,900Gross
      Profit
                      
                      
                      18,100
                      
                      
                      
                      9,843
                      
                      
                      
                      42,854
                      
                      
                      
                      20,110Operating
      Expenses:Amortization
                      
                      
                      65,680
                      
                      
                      
                      65,680
                      
                      
                      
                      197,040
                      
                      
                      
                      197,040Professional
      and Consulting Fees
                      
                      
                      261,826
                      
                      
                      
                      304,352
                      
                      
                      
                      586,825
                      
                      
                      
                      796,661Compensation
                      
                      
                      208,710
                      
                      
                      
                      218,396
                      
                      
                      
                      602,550
                      
                      
                      
                      540,106Other
      General and Administrative Expenses
                      
                      
                      104,490
                      
                      
                      
                      128,729
                      
                      
                      
                      367,077
                      
                      
                      
                      362,464Total
      Operating Expenses
                      
                      
                      640,706
                      
                      
                      
                      717,157
                      
                      
                      
                      1,753,492
                      
                      
                      
                      1,896,271Loss
      From Operations
                      
                      
                      (622,606
                      )
                      
                      
                      (707,314
                      )
                      
                      
                      (1,710,638
                      )
                      
                      
                      (1,876,161
                      )Other
      Income (Expense)Interest
      Income
                      
                      
                      6,459
                      
                      
                      
                      4,926
                      
                      
                      
                      35,983
                      
                      
                      
                      14,902Litigation
      Settlement
                      
                      
                      -
                      
                      
                      
                      (42,000
                      )
                      
                      
                      -
                      
                      
                      
                      (42,000
                      )Gains
      on Restructuring of Accounts Payable
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      44,594Interest
      Expense
                      
                      
                      (253
                      )
                      
                      
                      (81,395
                      )
                      
                      
                      (735
                      )
                      
                      
                      (285,509
                      )Total
      Other Income (Expense)
                      
                      
                      6,206
                      
                      
                      
                      (118,469
                      )
                      
                      
                      35,248
                      
                      
                      
                      (268,013
                      )Net
      Loss
                      
                      $
                      (616,400
                      )
                      
                      $
                      (825,783
                      )
                      
                      $
                      (1,675,390
                      )
                      
                      $
                      (2,144,174
                      )Weighted
      Average Outstanding Shares
                      
                      
                      169,136,052
                      
                      
                      
                      129,865,585
                      
                      
                      
                      169,058,744
                      
                      
                      
                      121,832,264Loss
      Per Share
                      
                      $
                      (.00
                      )
                      
                      $
                      (.01
                      )
                      
                      $
                      (.01
                      )
                      
                      $
                      (.02
                      )
  See accompanying notes to financial
statements.
 2
 
 HEALTH
DISCOVERY CORPORATION
 Statements
of Cash Flows
 (unaudited)
 For the
Nine Months Ended September 30, 2008 and 2007
 Nine
      Months
                            
                            
                            Nine
      MonthsEnded
                            
                            
                            EndedCash
      Flows From Operating Activities
                            
                            September 30, 2008
                            
                            
                            September 30, 2007Net
      Loss
                            
                            $
                            (1,675,390
                            )
                            
                            $
                            (2,144,174
                            )Adjustments
      to Reconcile Net Loss to Net CashUsed
      by Operating Activities:Stock
      Issued in Settlement of Litigation
                            
                            
                            -
                            
                            
                            
                            32,000Stock-based
      Compensation
                            
                            
                            75,515
                            
                            
                            
                            158,187Services
      Exchanged for Warrants
                            
                            
                            188,817
                            
                            
                            
                            226,669Issuance
      of Warrants
                            
                            
                            -
                            
                            
                            
                            33,756Accretion
      of Debt Discount
                            
                            
                            -
                            
                            
                            
                            192,361Gains
      on Restructuring of Accounts Payable
                            
                            
                            -
                            
                            
                            
                            (44,594
                            )Depreciation
      and Amortization
                            
                            
                            200,827
                            
                            
                            
                            203,556Refund
      of Deposit
                            
                            
                            -
                            
                            
                            
                            25,759Decrease
      in Interest Receivable
                            
                            
                            1,106
                            
                            
                            
                            -Decrease
      (Increase) in Accounts Receivable
                            
                            
                            112,500
                            
                            
                            
                            (280,000
                            )(Decrease)
      Increase in Deferred Revenue
                            
                            
                            (47,031
                            )
                            
                            
                            430,989Increase
      in Prepaid Expenses and Other Assets
                            
                            
                            (9,284
                            )
                            
                            
                            (8,198
                            )Decrease
      in Accounts Payable – Trade
                            
                            
                            (26,418
                            )
                            
                            
                            (34,538
                            )Increase
      in Accrued Liabilities
                            
                            
                            113,800
                            
                            
                            
                            185,518Net
      Cash Used by Operating Activities
                            
                            
                            (1,065,558
                            )
                            
                            
                            (1,022,709
                            )Cash
      Flows From Investing Activities:Purchase
      of Equipment
                            
                            
                            (12,720
                            )
                            
                            
                            (998
                            )Investment
      in Joint Venture
                            
                            
                            -
                            
                            
                            
                            (5,000
                            )Net
      Cash Used by Investing Activities
                            
                            
                            (12,720
                            )
                            
                            
                            (5,998
                            )Cash
      Flows From Financing Activities:Proceeds
      from Sales of Common Stock, Net of Fees
                            
                            
                            -
                            
                            
                            
                            2,436,540Net
      Cash Provided by Financing Activities
                            
                            
                            -
                            
                            
                            
                            2,436,540Net
      (Decrease) Increase in Cash
                            
                            
                            (1,078,278
                            )
                            
                            
                            1,407,833Cash,
      at Beginning of Period
                            
                            
                            1,648,439
                            
                            
                            
                            674,366Cash,
      at End of Period
                            
                            $
                            570,161
                            
                            
                            $
                            2,082,199Stock-Based
      Investing and Financing Transactions:
                              Common
      Stock, Series A Preferred Stock and Warrants
                              Issued
      in Settlement of Promissory Note
                            
                            
                            -
                            
                            
                            
                            1,893,774Supplemental
      disclosures of cash flow information:Cash
      Paid for Interest
                            
                            $
                            735
                            
                            
                            $
                            3,167
 
 
 See accompanying notes to financial
statements.
 
 3
  HEALTH
DISCOVERY CORPORATION
 
 Notes
to Financial Statements
 
 Note A -
BASIS OF PRESENTATION
  Health
Discovery Corporation (the “Company”) is a biotechnology-oriented company that
has acquired certain patents and has patent pending applications for certain
machine learning tools used for diagnostic and drug discovery.  The
Company licenses the use of its patent protected technology and utilizes such
technology internally to develop diagnostic tests, drug monitoring tests and
drug targets for therapeutic use, and sells or licenses such discoveries to
diagnostic or pharmaceutical companies worldwide.
  The accounting principles followed by
the Company and the methods of applying these principles conform with accounting
principles generally accepted in the United States of America
(GAAP).  In preparing financial statements in conformity with GAAP,
management is required to make estimates and assumptions that affect the
reported amounts in the financial statements.  Actual results could
differ significantly from those estimates.
  The interim financial statements
included in this report are unaudited but reflect all adjustments which, in the
opinion of management, are necessary for a fair presentation of the financial
position and results of operations for the interim periods
presented.  All such adjustments are of a normal recurring
nature.  The results of operations for the period ended
September 30, 2008 are not necessarily indicative of the results of a full
year’s operations and should be read in conjunction with the financial
statements and footnotes included in the Company’s annual report on Form 10-KSB
for the year ended December 31, 2007.
  Recent 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.  This pronouncement is effective for fiscal years
beginning after November 15, 2007.  Certain provisions of SFAS No. 157
are effective for the Company beginning in the first quarter of
2008.  The adoption of SFAS No. 157 for financial assets and
liabilities in the first quarter of 2008 did not have a material effect on the
Company’s results of operations and financial position.
  In February 2007, FASB issued Statement
of Financial Accounting Standards No. 159,“Fair Value Option
for Financial Assets and Financial Liabilities”(“SFAS No. 159”), which permits
entities to choose to measure many financial instruments and certain other items
at fair value that were not currently required to be measured at fair
value.  The objective of SFAS No. 159 is to improve financial
reporting by providing entities with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting provisions.  SFAS No.
159 was effective for the Company beginning in the first quarter of
2008.  The adoption of SFAS No. 159 did not have a material impact in
the Company’s financial position.
  In December 2007, FASB issued Statement
of Financial Accounting Standards No. 141 (revised 2007),“Business
Combinations”(“SFAS No.
141(R)”), which continues the evolution toward fair value reporting and
significantly changes the accounting for acquisitions that close beginning in
2009, both at the acquisition date and in subsequent periods.  SFAS
No. 141(R) is not expected to have a material impact on the Company’s financial
statements.
  4
  HEALTH
DISCOVERY CORPORATION
 
 Notes
to Financial Statements, continued
 
 Note A -
BASIS OF PRESENTATION, continued
  In December 2007, FASB issued Statement
of Financial Accounting Standards No. 160,“Noncontrolling
Interests in Consolidated Financial Statements – an amendment of ARB No.
51”(“SFAS No. 160”), which
requires companies to measure an acquisition of noncontrolling (minority)
interest at fair value in the equity section of the acquiring entity’s balance
sheet.  The objective of SFAS No. 160 is to improve the comparability
and transparency of financial data as well as to help prevent manipulation of
earnings.  The changes introduced by the new standards are likely to
affect the planning and execution, as well as the accounting and disclosure, of
merger transactions.  The effective date to adopt SFAS No. 160 for the
Company is January 1, 2009.  The adoption of SFAS No. 160 is not
expected to have a material effect on its results of operations and financial
position.
  In March
2008, FASB issued Statement of Financial Accounting Standards No. 161,
“Disclosures about
Derivative  Instruments and Hedging Activities, an amendment of FASB
Statement No. 133” (“SFAS No 161”).  SFAS No. 161
amends and expands the disclosure requirements of SFAS No. 133 with the intent
to provide users of financial statements with an enhanced understanding of how
and why an entity uses derivative instruments, how derivative instruments and
related hedged items are accounted for under SFAS No. 133 and its related
interpretations and how derivative instruments and related hedged items affect
an entity’s financial position, financial performance, and cash
flow.  The provisions of SFAS No. 161 are effective for the
Company beginning in the first quarter of 2009.  The adoption of SFAS
No. 161 is not expected to have a material effect on the Company’s results
of operations and financial position.
  Note B – 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 controlled by contracts that dictate responsibilities and
payment terms.  The Company recognizes revenues as 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 earned under
development agreements in the period the services are performed.
  Effective
July 1, 2007, the Company entered into a patent license and settlement agreement
with Ciphergen Biosystems, Inc. (“Ciphergen”) in connection with the then
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
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.
  Deferred
revenue represents the unearned portion of payments received in advance for
licensing agreements.  The Company had total unearned revenue of
$469,392 as of September 30, 2008.  Unearned revenue of $62,708
is recorded as current and $406,684 is classified as long-term.
  Note C - 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 create an anti-dilutive result
and therefore is not presented.
  Note D -STOCK-BASED
EXPENSE
  Stock-based
expense included in our net loss for the three months and nine months ended
September 30, 2008 consisted of $66,253 and $264,332 respectively in
compensatory warrants and options for professional consulting services,
directors fees and compensation.  Stock-based expense included in our
net loss for the three months and nine months ended September 30, 2007 was
$180,858 and $450,612 respectively.
  5
  HEALTH
DISCOVERY CORPORATION
  Notes
to Financial Statements, continued
   Note D -STOCK-BASED EXPENSE,
continued
  As of September 30, 2007 and
September 30, 2008, there was approximately $528,558 and $595,141,
respectively, of unrecognized cost related to stock option and warrant
grants.  The cost is to be recognized over the remaining vesting
periods of approximately 2.0 years.
  The
following schedule summarizes stock option activity for the nine months ended
September 30, 2008 and the twelve months ended December 31,
2007:
  Option
                      Shares
                    
                    
                    Weighted
                      Average
                      Exercise PriceOutstanding,
      January 1, 2007
                    
                    
                    3,500,000
                    
                    
                    $
                    0.11Granted
                    
                    
                    -
                    
                    
                    
                    -Exercised
                    
                    
                    -
                    
                    
                    
                    -Forfeited
                    
                    
                    -
                    
                    
                    
                    -Outstanding,
      December 31, 2007
                    
                    
                    3,500,000
                    
                    
                    $
                    0.11Granted
                    
                    
                    7,250,000
                    
                    
                    $
                    0.08Exercised
                    
                    
                    -
                    
                    
                    
                    -Forfeited
                    
                    
                    (1,500,000
                    )
                    
                    $
                    ( 0.11
                    )Outstanding,
      September 30, 2008
                    
                    
                    9,250,000
                    
                    
                    $
                    0.09
 
  The
weighted average remaining life of the outstanding options at September 30, 2008
is 9.2 years.
  During
the third quarter, 1,250,000 options with an exercise price of $0.08 were
granted to a former director who continues to provide services to the
Company.  Full vesting occurs over two years.  The aggregate
computed value of these options is $74,693 and the amount will be charged as
expense over the vesting period.
  On
August 15, 2008, the Chief Executive Officer of the Company was granted
6,000,000 options with an exercise price of $0.08 per share.  The
options vest over two years and are subject to performance criteria related to
share price and other metrics.  The estimated value of these options
as computed using the Black-Scholes Pricing Model was $0.0738 per share or
$443,000.  This amount will be recorded as compensation over the
two-year vesting period.
  In July
2008, 1,500,000 options expired un-exercised due to the departure of the
Company's former Executive Vice President.
  There
were 2,250,000 options exercisable at September 30, 2008.  The
exercisable options have a weighted average exercise price of $0.09 and a
weighted average remaining life of 8.6 years.  The aggregate intrinsic
value of options outstanding is zero at September 30, 2008.
  6
  HEALTH
DISCOVERY CORPORATION
  Notes
to Financial Statements, continued
  Note D -STOCK-BASED EXPENSE,
continued
  Information
about warrants outstanding at September 30, 2008 is summarized
below:
  Nine
      Months Ended
                      
                      
                      Twelve
      Months EndedSeptember
      30
                      
                      
                      December
      31Number
      of warrants issued
                      
                      2008
                      
                      
                      2007Outstanding
      beginning of period
                      
                      
                      159,099,644
                      
                      
                      
                      68,796,250Issued
                      
                      
                      1,500,000
                      
                      
                      
                      122,773,394Exercised
                      
                      
                      -
                      
                      
                      
                      (100,000
                      )Expired
      or forfeited
                      
                      
                      (3,050,000
                      )
                      
                      
                      (32,370,000
                      )Outstanding
      end of the period
                      
                      
                      157,549,644
                      
                      
                      
                      159,099,644
 
  Exercise Prices
                                          
                                          Number
                                            Outstanding
                                          
                                          Weighted-
                                            Average
                                            Remaining
                                            Contractual
                                            Life   (years)
                                          
                                          Number
                                            Exercisable
                                          
                                          Weighted
                                            Average
                                            Remaining
                                            Contractual
      Life
                                            (years)
      of
                                            Exercisable
                                            Warrants$0.01
                                          
                                          200,000
                                          
                                          0.3
                                          
                                          200,000
                                          
                                          0.3$0.08
                                          
                                          2,050,000
                                          
                                          5.1
                                          
                                          841,667
                                          
                                          2.0$0.10
                                          
                                          1,425,750
                                          
                                          0.5
                                          
                                          1,425,750
                                          
                                          0.5$0.11
                                          
                                          1,500,000
                                          
                                          0.9
                                          
                                          1,500,000
                                          
                                          0.9$0.12
                                          
                                          150,000
                                          
                                          0.3
                                          
                                          150,000
                                          
                                          0.3$0.13
                                          
                                          5,000,000
                                          
                                          1.5
                                          
                                          5,000,000
                                          
                                          1.5$0.14
                                          
                                          52,138,822
                                          
                                          1.9
                                          
                                          52,138,822
                                          
                                          1.9$0.15
                                          
                                          1,000,000
                                          
                                          0.3
                                          
                                          1,000,000
                                          
                                          0.3$0.16
                                          
                                          10,000,000
                                          
                                          1.0
                                          
                                          10,000,000
                                          
                                          1.0$0.19
                                          
                                          51,538,822
                                          
                                          2.0
                                          
                                          51,538,822
                                          
                                          2.0$0.24
                                          
                                          32,546,250
                                          
                                          0.3
                                          
                                          32,546,250
                                          
                                          0.3Total
                                          
                                          157,549,644
                                          
                                          
                                          
                                          156,341,311
  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, 1,000,000 warrants previously issued to service
providers expired unexercised. The Company issued an option to purchase
1,250,000 shares of the Company’s common stock to a former director of the
Company in connection with his performance of consulting services.
  During
the first nine months of  2008, a total of 3,050,000 warrants were
forfeited or expired unexercised.
  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.
  7
  HEALTH
DISCOVERY CORPORATION
  Notes
to Financial Statements, continued
  Note D -STOCK-BASED EXPENSE,
continued
  On
February 1, 2007, the Company issued in the aggregate 15,235,000 warrants to
purchase common stock of the Company (the “Warrants”) to certain institutional
investors and individual accredited investors.  The Warrants vested
immediately and had an exercise price of $0.35 per share.  The
Warrants expired on November 1, 2007.  On February 1, 2007, an equal
number of warrants issued to the same institutional and individual investors and
with substantially similar terms expired.  The fair value of these
warrants 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.  The expense was recorded over the vesting
period.
  During
the third quarter of 2007, the Company issued 60,750 warrants, which expire on
December 31, 2008, to a vendor as payment for professional services
rendered.  These warrants had an exercise price of $0.10 and were
fully vested upon issuance.  The fair value of $1,719 was recorded as
expense.  The Company also issued 300,000 warrants with an exercise
price of $0.18 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. Upon the resignation of one director in
June 2007, 1,500,000 of these warrants were forfeited. During the third quarter
of 2008, 1,250,000 remaining unvested shares of a 1,500,000 share warrant were
forfeited due to the resignation of a director. The non-forfeited warrants
will be charged as directors’ fees over the vesting period.
  The
Company also issued warrants in connection with the sale of common stock
effective September 7, 2007.  Each purchaser of common stock
received one warrant exercisable at $0.14 (the “Tranche 1 Warrants”) and
one warrant exercisable at $0.19  (the “Tranche 2 Warrants”) for
each share of common stock purchased or converted from debt.  All
these warrants vested immediately, expire three years from the date of issuance,
and are subject to call rights based upon the trading value of the Company’s
stock.  With respect to the Tranche 1 Warrants, if the Company’s
stock trades for an amount in excess of $0.17 for thirty (30) consecutive days,
then 50% of the warrants may be called by the Company.  With respect
to the Tranche 2 Warrants, if the Company’s stock trades for an amount in
excess of $0.24 for thirty (30) consecutive days, then 50% of the warrants may
be called by the Company.  The Tranche 1 Warrants, if exercised,
may result in the issuance of up to 51,538,832 shares of the Company’s common
stock, at an exercise price of $0.14 per share, and the Tranche 2 Warrants,
if exercised, may result in the issuance of up to 51,538,832 shares of Company
common stock at an exercise price of $0.19 per share.  These warrants
were valued at $0.005 each resulting in $515,388 of common stock proceeds being
allocated to the fair value of the warrants and credited to equity.
  Note E – GAIN ON
RESTRUCTURING OF ACCOUNTS PAYABLE
  On March
1, 2007, the Company recorded a gain on accounts payable restructuring of
$44,594 pursuant to the agreement made in the third quarter of 2006 deferring
some payments until certain conditions were met or eliminating the liability if
these conditions did not occur.
  Note F -
PATENTS
  The
Company has acquired a group of patents related to biotechnology and certain
machine learning tools used for diagnostic and drug discovery. Legal costs
associated with patent acquisitionsand the application
process for new patents are also capitalized as patent assets. The Company has
recorded as other assets $2,845,781 in patents and patent related costs, net of
$1,096,227 in accumulated amortization, at September 30, 2008.
  Amortization
charged to operations for the three months and nine months ended
September 30, 2008 and 2007 was $65,680 and $197,040, respectively, for
both years.  The weighted average amortization period for patents is
14 years.  Estimated amortization expense for the next five years is
$262,720 per year.
  8
  HEALTH
DISCOVERY CORPORATION
  Notes
to Financial Statements, continued
  Note G –
INVESTMENTS
  On March
27, 2007, the Company and an investment partner formed SVM Capital LLC as an
equity investment for purposes of utilizing SVMs as a quantitative investment
management technique.  The Company owns 45% of the membership interest
and has significant influence with the operation of the entity but it 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 at June 30,
2008.  The Company has no contractual obligation to fund this
venture.
  As of
August 22, 2008, the Company entered into an operating agreement with the
principals of Smart Personalized Medicine, LLC (“SPM”) wherein the
Company received at 15% membership interest in return for executing a
licensing agreement with SPM.  No cash investment has been made, and
no value for this investment has been recorded.
  Note H – STOCKHOLDERS’
EQUITY
  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 September 2008, the Company issued 515,384 shares of
Company common stock to certain investors pursuant to the terms of the
Securities Purchase Agreement dated as of August 15, 2007.
  Note I – 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 earned 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 control certain costs and
obtain new contracts to eventually attain a profitable level of
operations.
  The Company is licensing the technology
underlying several of its patents and providing supporting services related to
the application of such technology that is resulting in ongoing
revenue.  The Company raised $2.55 million in cash through a common
stock offering and additionally converted $2.2 million of secured debt to equity
in the third quarter of 2007.  The Company’s plan to have sufficient
cash to support operations is comprised of generating revenue through licensing
its significant patent portfolio, providing services related to those patents,
and obtaining additional equity or debt financing.  The Company has
been and continues to be in meaningful discussions with a variety of parties,
which if successful, may result in significant revenue, as further described in
Item 2 below.  In the meantime, the Company maintains a vigilant cash
conservation program.
  9
  Item
2.                      Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
  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 biomarker-based diagnostic tests thatinclude human genes and
genetic variations, as well as gene, protein, and metabolite expression
differences and image analysis.  In drug discovery, biomarkers can
help elicit disease targets and pathways and validate mechanisms of drug
action.  They may also be pharmacodynamic indicators of drug activity,
response and toxicity for use in clinical development.
  We have
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 all phases 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.
  In August 2008, we announced that 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 MD Anderson
Cancer Center.  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.
  In August 2008, weannounced the
signing of 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. The Company anticipates that PPI will initiate the marketing of our
patent portfolio in the fourth quarter of 2008.
  In August
2008, we announced that 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.
  10
  In July 2008, the Company and DCL
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 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, our new
director, is currently President, CEO and a shareholder of
DCL.
  On July 31, 2007, we entered into an
alliance and licensing agreement with Clarient, Inc. for development of a new
molecular diagnostic test for prostate cancer based on our discovered prostate
cancer biomarker signature.  Under the terms of that agreement,
Clarient obtained an exclusive license to the biomarker signature in exchange
for HDC’s 30% 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.  Combining
all of the patients from all three phases of the clinical trials, the new
gene-based molecular diagnostic test achieved a Sensitivity rate of 90% for
correctly identifying the presence of Grade 3 or higher prostate cancer
cells, a Specificity rate of 97% for correctly identifying normal prostate cells
and a Specificity rate of 90% for identifying BPH cells, representing an overall
test accuracy of 93%.  With the completion of the clinical trial,HDC’s new gene-based molecular diagnostic test is now ready for
commercialization 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 30% royalty on each
test performed.
  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 the patents 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.  With the issuance of these patents, the Company now
holds the exclusive rights to 33 issued U.S. and foreign patents covering uses
of SVM and FGM technology for discovery of knowledge from large data
sets.
  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 ClinProToolsTMclinical proteomics product line for
its mass spectrometers, which contains HDC’s SVM technology.  Bruker
launched its ClinProToolsTMat approximately the same time as the
license with HDC.  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.
  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.
  11
  We have advanced discussions with two
large international healthcare companies with respect to diagnostic imaging
opportunities.  Our objective is licensing and product development
using SVMs and FGMs in diagnostic radiology, including mammography, PET scans,
CT scans, MRI and other radiological images.  In addition, given the
scope of these two prospects, we believe wecan demonstrate the
computational power of our SVM technology analyzing combined data from imaging,
proteomics, and genomics.  We own a number of SVM and FGM patents
in this field that we believe are very important.
  Negotiations with a large European
pharmaceutical company to develop a companion diagnostic test using our
discovered biomarkers as surrogates in the last phase of a clinical trial for
its new drug to treat BPH (enlarged prostate) remain delayed due to the
prospect’s post-acquisition integration issues.  Based on the
prospect’s representations, we hope that discussions regarding this prospective
opportunity will resume sometime in 2009.  We have also initiated
discussions to bring this opportunity to other pharmaceutical companies with new
BPH drugs in clinical development.
  We have advanced our dialogue with
several other important industry players in the healthcare field and, in certain
situations, related to the field of pathology imaging and genomic, including a
proposed project with one of the world’s largest diagnostic/pharmaceutical
companies, a marketing arrangement with one of the world’s largest generic drug
manufacturers, and other prospective partnership opportunities with additional
companies and research institutions.  We also continue to pursue
development opportunities with our existing licensing
customers.
  In
January 2007, SVM Capital, LLC was formed as a joint venture between HDC and
Atlantic Alpha Strategies, LLC (“Atlantic Alpha”) to explore and exploit the
potential applicability of our SVM technology to quantitative investment
management techniques.  Atlantic Alpha has over thirty years of
experience in commodity and futures trading.  SVM Capital has made
significant progress since the formation of the joint venture.  The
SVM technology is now working well with dynamic time series for S&P data
accumulated over the past fifty-eight years.  The latest SVM-derived
models generated by SVM Capital have successfully outperformed the static buy-and-hold model both in
increased returns as well as in reduced risk.  Once the stability of
these models is confirmed, SVM Capital intends to apply the models to a wide
range of financial asset classes such as interest rates, currencies, metals and
petroleum products.  The joint venture partners plan to apply the
investment model either in a single fund or a fund of funds.  SVM
Capital will charge a management fee and a performance fee for managing client
assets.  Depending on the level of its success, this venture can be
profitable given its reliance on cost effective use of computer technology and
ready access to efficient trading platforms.  The initial investment
was $5,000 and was subsequently written off as the Company recorded its share of
the losses of this venture.  The Company has no further funding
commitment for this venture.  In November 2008, SVM Capital’s system
began trading live with a full beta test.
  Since
December 2005, the total value of licenses and development contracts signed is
approximately $1,362,000.
  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 return that we expect.
  Three
Months Ended September 30, 2008 Compared with Three Months Ended
September 30, 2007
  Revenue
  For the
three months ended September 30, 2008, revenue was $18,700 compared with
$17,343 for the three months ended September 30, 2007.  Revenue
is recognized for licensing and development fees over the period
earned.  This revenue is primarily related to the amortization of
deferred revenue resulting from prior licensing agreements.
  Cost
of Revenues and Gross Margin
  Internal
development costs of $600 were recorded as cost of sales for the third quarter
2008 compared with $7500  for the third quarter of
2007.  Cost of revenues includes all direct costs, primarily wages and
research fees, associated with the acquisition and development of patents and
processes sold.  All direct costs, including some professional fees
associated with licensing negotiations, are also included in cost of
revenues.
  12
  Operating
and Other Expenses
  Amortization
expense was $65,680 for both the third quarter of 2008 and
2007.  Amortization expense relates primarily to the costs associated
with filing patent application and acquiring rights to the patents.
  Professional
and consulting fees totaled $261,826 for the third quarter of 2008 compared with
$304,352 for the third quarter of 2007.  The decrease is due to an
unusually high legal fees amount last year.
  Compensation
of $208,710 for the third quarter of 2008 was lower than the $218,396reported for the third
quarter of 2007.  Compensation decreased because of the departure of
an employee in 2008.  Additionally, a $50,000 bonus was recorded in
the third quarter of 2008.  A $45,000 settlement with a former
employee was recorded in the third quarter of 2007.
  Other
general and administrative expenses decreased to $104,490 for the third quarter
of 2008 compared to $128,729 for the third quarter of 2007.  The
decrease was due to a reduction in the charge for directors
warrants.
  Loss
from Operations
  The loss
from operations for the third quarter of 2008 was $622,606 compared to $707,314
for the third quarter of 2007.  This decreased loss was due to
decreased costs as discussed previously.
  Other
Income and Expense
  Interest
income was $6,459 for the third quarter of 2008 compared to $4,926 in
2007.  Interest income increased because the Company had more cash on
hand to invest throughout the third quarter of 2008.
  Interest
expense was $253 in the third quarter of 2008 compared with $81,395 in the third
quarter of 2007.  This decrease reflects the elimination of debt in
the fourth quarter of 2007.
  Net
Loss
  The net
loss for the third quarter of 2008 was $616,400 compared to $825,783 for the
third quarter of 2007.  The decreased loss was due to the decrease in
expenses as previously described.
  Net loss
per share was $0.00 and $0.01 for the third quarter of 2008 and 2007
respectively.
  Nine
Months Ended September 30, 2008 Compared with Nine Months Ended September 30,
2007
  Revenue
  For the
nine months ended September 30, 2008, revenue was $50,054 compared with $39,010
for the nine months ended September 30, 2007.  Revenue is
recognized for licensing and development fees over the period
earned.
  Cost
of Revenues and Gross Margin
  Internal
development costs of $7,200 were recorded as cost of sales for the nine months
ended September 30, 2008 compared with $18,900 for the comparable 2007
period.  Cost of revenues includes all direct costs, primarily wages
and research fees, associated with the acquisition and development of patents
and processes sold.  All direct costs, including some professional
fees associated with licensing negotiations, are also included in cost of
revenues.
  13
  Operating
and Other Expenses
  Amortization
expense was $197,040 for both the nine months ended September 30, 2008 and
2007.  Amortization expense relates primarily to the costs associated
with filing patent application and acquiring rights to the patents.
  Professional
and consulting fees totaled $586,825 for the nine months ended
September 30, 2008 compared with $796,661 for the nine months ended
September 30, 2007.  The decrease is due to lower fees, primarily
legal, incurred for 2008.
  Compensation
of $602,550 for the nine months ended September 30, 2008 was higher than
the $540,106reported for
the comparable 2007 period.  Compensation increased because of the
$50,000 bonus paid to the Chief Executive Officer and increased charges for
medical insurance.
  Other
general and administrative expenses increased slightly to $367,077 for the nine
months ended September 30, 2008 compared to $362,464 for the nine months
ended September 30, 2007.
  Loss
from Operations
  The loss
from operations for the nine months ended September 30, 2008 was $1,710,638
compared to $1,876,161 for the comparable 2007 period.  This decreased
loss was due to decreased costs as discussed previously.
  Other
Income and Expense
  Interest
income was $35,983 for the nine months ended September 30, 2008 compared to
$14,902 for the nine months ended September 30, 2007.  Interest
income increased because the Company had more cash on hand to invest throughout
2008.
  Interest
expense was $735 in the nine months ended September 30, 2008 compared with
$285,509 in the nine months ended September 30, 2007.  This
decrease reflects the elimination of debt in the fourth quarter of
2007.
  Net
Loss
  The net
loss for the nine months ended September 30, 2008 was $1,675,390 compared
to $2,144,174 for the nine months ended September 30, 2007.  The
decreased loss was due to the smaller net loss from operations and the decrease
in interest expense.
  Net loss
per share was $0.01 and $0.02 for the nine months ended September 30, 2008
and 2007 respectively.
  Liquidity
and Capital Resources
  At
September 30, 2008, the Company had $570,161 in available cash.  Cash
used by operating activities year to date was $1,065,558.  This was
due primarily to the net loss of $1,675,390; however, net non-cash charges and
adjustments of $609,832 favorably impacted the computation of the net cash
used.  Cash used by investment activities was $12,720 due to the
acquisition of fixed assets.  Net cash provided by financing
activities was zero.
  The
following table summarizes the due dates of our contractual obligations.
  Total
                    
                    
                    1
      Year
                      Or Less
                    
                    
                    More than 1 YearDeferred
      Compensation
                    
                    $
                    57,500
                    
                    
                    $
                    57,500
                    
                    
                    $
                    -Office
      Lease
                    
                    
                    37,182
                    
                    
                    
                    21,246
                    
                    
                    
                    15,936Total
                    
                    $
                    94,682
                    
                    
                    $
                    78,746
                    
                    
                    $
                    15,936
  14
  The
Company has relied primarily on equity funding plus debt financing for
liquidity.  The Company produced sales, licensing, and developmental
revenue starting in late 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, as further
described above.  In the meantime, the Company maintains a vigilant
cash conservation program.
  Subsequent Events
  In
October 2008, the U.S. Patent and Trademark Office issued the Company’s newest
patent covering a data mining platform for collecting and analyzing
bioinformatics data using SVMs.  This new patent addresses methods for
taking gene expression data from different sources, such as experimental results
and published literature, and using various feature ranking algorithms for
classifying the combined information to generate ranked lists of genetic
data.  The ranked lists include biomarkers useful for diagnosis,
screening and monitoring of diseases or conditions.
  On
November 6, 2008 the Company 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 MD Anderson
Cancer Center, 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.  Based on these initial findings, the Company intends to begin
clinical testing to confirm these successful findings in a larger clinical
trial.
  Off-Balance
Sheet Arrangements
  The
Company has no off-balance sheet arrangements that provide financing, liquidity,
market or credit risk support or involve leasing, hedging or research and
development services for our business or other similar arrangements that may
expose us to liability that is not expressly reflected in the financial
statements.
  Forward-Looking
Statements
  This
Report contains certain forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 12E of the Securities Exchange Act
of 1934, including or related to our future results, certain projections and
business trends. Assumptions relating to forward-looking statements involve
judgments with respect to, among other things, future economic, competitive and
market conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond our control. When
used in this Report, the words “estimate,” “project,” “intend,” “believe,”
“expect” and similar expressions are intended to identify forward-looking
statements. Although we believe that assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove inaccurate, and we
may not realize the results contemplated by the forward-looking statement.
Management decisions are subjective in many respects and susceptible to
interpretations and periodic revisions based on actual experience and business
developments, the impact of which may cause us to alter our business strategy or
capital expenditure plans that may, in turn, affect our results of operations.
In light of the significant uncertainties inherent in the forward-looking
information included in this Report, you should not regard the inclusion of such
information as our representation that we will achieve any strategy, objective
or other plans. The forward-looking statements contained in this Report speak
only as of the date of this Report as stated on the front cover, and we have no
obligation to update publicly or revise any of these forward-looking statements.
These and other statements which are not historical facts are based largely on
management’s current expectations and assumptions and are subject to a number of
risks and uncertainties that could cause actual results to differ materially
from those contemplated by such forward-looking statements. These risks and
uncertainties include, among others, the failure to successfully develop a
profitable business, delays in identifying customers, and the inability to
retain a significant number of customers, as well as the risks and uncertainties
described in “Risk Factors” section to our Annual Report for the fiscal year
ended December 31, 2007, filed on March 31, 2008.
  Item
4T.  Controls and Procedures.
  As of September 30, 2008 (the
“Evaluation Date”), our Chief Executive Officer, who is also serving as our
Principal Financial Officer, carried out an evaluation 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 effectiveto provide reasonable assurance that
information required to be disclosed in the reports that are filed or submitted
under the Exchange Act is recorded, processed, summarized, and reported within
the time periods specified by the Securities and Exchange Commission’s rules and
forms and that our disclosure controls and procedures are designed to ensure
that information required to be disclosed in the reports that we file or submit
under the Exchange Act is accumulated and communicated to our management
including our Chief Executive Officer and Principal Financial Officer, as
appropriate to allow timely decisions regarding required
disclosure.
  15
 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.  As of the Evaluation Date, no changes in the Company’s
internal control over financial reporting occurred that have materially affected
or are reasonably likely to materially affect, the Company’s internal control
over financial reporting.
  On June 30, 2008, our Principal
Financial Officer resigned.  The Company is undertaking a search
process to identify a suitable replacement.  Until we hire a
replacement, our Chief Executive Officer will serve as our Principal Financial
Officer.
  PART
II—OTHER INFORMATION
  Item
2.  Unregistered Sales of Equity Securities and Use of
Proceeds
  During
the third quarter of 2008, the Company issued an option to purchase 1,250,000
shares of the Company’s common stock to a former director of the Company in
connection with his performance of consulting services.  The options
will vest over two years, so long as the recipient continues to serve the
Company as an advisor, and expire in five years.  These warrants have
an exercise price of $0.08.
  Also
during the third quarter of 2008, the Company’s Chief Executive Officer was
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, and with respect to a portion
of the options, the Company attaining certain performance metrics, as more fully
described in the Option Award filed as Exhibit 10.3 to the Company’s Form 8-K
filed August 18, 2008.
  In
September 2008, the Company issued 515,384 shares of Company common stock to
certain investors for no additional consideration pursuant to the terms of the
Securities Purchase Agreement dated as of August 15, 2007.
  The shares and the options described
herein were offered and sold in reliance upon exemptions from registration
pursuant to Section 4(2) under the Securities Act of 1933, as amended, and
Regulation D promulgated thereunder.  There were no underwriters in
connection with either of these transactions, and there were no underwriting
discounts or commissions.
  Item
5.  Other Information.
  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
warrants are currently outstanding and were issued in the Private
Placement.  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.
 
 16
  Item
6.  Exhibits.
  The
following exhibits are attached hereto or incorporated by reference herein
(numbered to correspond to Item 601(a) of Regulation S-K, as promulgated by the
Securities and Exchange Commission) and are filed as part of this Form
10-Q:
   10.1
                Amendment
      to Stock Purchase Warrant with Dr. Richard Caruso.  Registrant
      incorporates by reference Exhibit 10.1 to Form 8-K filed August 18,
      2008.
  10.2
                Employment
      Agreement between the Company and Stephen D. Barnhill, M.D., dated August
      15, 2008.  Registrant incorporates by reference Exhibit 10.2 to
      Form 8-K filed August 18, 2008.
  10.3
                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.
   10.4
                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.
  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.
  17
  SIGNATURES
 
 In accordance with the requirement of
the Exchange Act, the Registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
  Health
      Discovery CorporationRegistrantDate:
      November 14, 2008
                      By:
                      /s/ Stephen
      D. BarnhillPrinted
      Name: Stephen D. Barnhill M.D.Title:
      Chief Executive Officer and Principal Financial Officer






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