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
      1934For
      the quarterly period ended June 30, 2009o
                            Transition
      report under Section 13 or 15(d) of the Exchange ActFor
      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 #601Savannah,
      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 x   No o




Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes o   No o




Indicate
by check mark 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




Indicate by check mark
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:


Class
                Outstanding
      August 13, 2009Common
      Stock, no par value
                169,522,590Preferred
      Stock Series A, stated value $0.08 per share
                7,437,184Preferred
      Stock Series B
                5,625,000


ii




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 Condition and Results of
      Operations
                  8Item
      4T.
                  Controls
      and Procedures
                  15PART
      II —
      OTHER INFORMATION
                  16Item
      6.
                  Exhibits
                  16SIGNATURES
                  17


iii




PART I


FINANCIAL INFORMATION
—


Item 1.
                Financial
      Statements




HEALTH
DISCOVERY CORPORATION


Balance Sheet


June
      30,
                                    2009
                                    (unaudited)
                                  
                                  
                                  December
      31,
                                    2008AssetsCurrent
      AssetsCash
                                  
                                  $
                                  616,949
                                  
                                  
                                  
                                  325,887Accounts
      Receivable, Less Allowance for Doubtful Accounts of $112,500 and
      $0
                                  
                                  
                                  —
                                  
                                  
                                  
                                  112,500Prepaid
      Expenses and Other Assets
                                  
                                  
                                  27,738
                                  
                                  
                                  
                                  34,355Recoverable
      Development Costs
                                  
                                  
                                  100,000
                                  
                                  
                                  
                                  —Total
      Current Assets
                                  
                                  
                                  744,687
                                  
                                  
                                  
                                  472,742Equipment,
      Less Accumulated Depreciation of $15,775 and $25,947
                                  
                                  
                                  14,486
                                  
                                  
                                  
                                  14,888Other
      AssetsDeferred
      Charges
                                  
                                  
                                  25,770
                                  
                                  
                                  
                                  —Patents,
      Less Accumulated Amortization of $1,337,053 and $1,205,693
                                  
                                  
                                  2,648,741
                                  
                                  
                                  
                                  2,780,101Total
      Assets
                                  
                                  $
                                  3,433,684
                                  
                                  
                                  
                                  3,267,731Liabilities
      and Stockholders’ EquityCurrent
      LiabilitiesAccounts
      Payable – Trade
                                  
                                  $
                                  549,885
                                  
                                  
                                  
                                  220,972Accrued
      Liabilities
                                  
                                  
                                  208,552
                                  
                                  
                                  
                                  245,742Deferred
      Revenue
                                  
                                  
                                  42,637
                                  
                                  
                                  
                                  57,153Promissory
      Note Payable – Related Party
                                  
                                  
                                  500,000
                                  
                                  
                                  
                                  —Total
      Current Liabilities
                                  
                                  
                                  1,301,074
                                  
                                  
                                  
                                  523,867Deferred
      Revenue – Long Term
                                  
                                  
                                  415,673
                                  
                                  
                                  
                                  396,562Total
      Liabilities
                                  
                                  
                                  1,716,747
                                  
                                  
                                  
                                  920,429CommitmentsStockholders’
      EquitySeries
      A Preferred Stock, Convertible, Stated Value of $0.08 per Share, 7,437,184
      Shares Authorized, Issued and Outstanding
                                  
                                  
                                  594,975
                                  
                                  
                                  
                                  594,975Series
      B Preferred Stock, Convertible,  13,750,000 Shares Authorized,
      3,125,000 Issued and Outstanding
                                  
                                  
                                  250,000
                                  
                                  
                                  
                                  —Common
      Stock, No Par Value, 300,000,000 Shares Authorized 169,522,590 Shares
      Issued and Outstanding
                                  
                                  
                                  15,972,854
                                  
                                  
                                  
                                  15,744,873Accumulated
      Deficit
                                  
                                  
                                  (15,100,892
                                  )
                                  
                                  
                                  (13,992,546
                                  )Total
      Stockholders’ Equity
                                  
                                  
                                  1,716,937
                                  
                                  
                                  
                                  2,347,302Total
      Liabilities and Stockholders’ Equity
                                  
                                  $
                                  3,433,684
                                  
                                  
                                  
                                  3,267,731




See
accompanying notes to financial statements.







HEALTH
DISCOVERY CORPORATION




Statements of
Operations


(unaudited)


Three
      Months
                            Ended
                            June
      30,
                            2009
                          
                          
                          Three
      Months
                            Ended
                            June
      30,
                            2008
                          
                          
                          Six
      Months
                            Ended
                            June
      30,
                            2009
                          
                          
                          Six
      Months
                            Ended
                            June
      30,
                            2008Revenues:Licensing
                          
                          $
                          16,215
                          
                          
                          $
                          15,677
                          
                          
                          $
                          32,905
                          
                          
                          $
                          31,354Cost
      of
    Revenues:Internal
      Development
                          
                          
                          9,417
                          
                          
                          
                          3,000
                          
                          
                          
                          12,704
                          
                          
                          
                          6,600Gross
      Profit
                          
                          
                          6,798
                          
                          
                          
                          12,677
                          
                          
                          
                          20,201
                          
                          
                          
                          24,754Operating
      Expenses:Amortization
                          
                          
                          65,680
                          
                          
                          
                          65,681
                          
                          
                          
                          131,360
                          
                          
                          
                          131,360Professional
      and Consulting Fees
                          
                          
                          155,842
                          
                          
                          
                          171,149
                          
                          
                          
                          433,396
                          
                          
                          
                          324,999Compensation
                          
                          
                          270,233
                          
                          
                          
                          196,654
                          
                          
                          
                          437,999
                          
                          
                          
                          393,840Other
      General and Administrative Expenses
                          
                          
                          66,655
                          
                          
                          
                          93,044
                          
                          
                          
                          127,843
                          
                          
                          
                          262,587Total
      Operating Expenses
                          
                          
                          558,410
                          
                          
                          
                          526,528
                          
                          
                          
                          1,130,598
                          
                          
                          
                          1,112,786Loss
      From Operations
                          
                          
                          (551,612
                          )
                          
                          
                          (513,851
                          )
                          
                          
                          (1,110,397
                          )
                          
                          
                          (1,088,032
                          )Other
      Income (Expense)Interest
      Income
                          
                          
                          772
                          
                          
                          
                          11,782
                          
                          
                          
                          2,413
                          
                          
                          
                          29,524Interest
      Expense
                          
                          
                          (48
                          )
                          
                          
                          (170
                          )
                          
                          
                          (362
                          )
                          
                          
                          (482
                          )Total
      Other Income (Expense)
                          
                          
                          724
                          
                          
                          
                          11,612
                          
                          
                          
                          2,051
                          
                          
                          
                          29,042Net
      Loss
                          
                          $
                          (550,888
                          )
                          
                          $
                          (502,239
                          )
                          
                          $
                          (1,108,346
                          )
                          
                          $
                          (1,058,990
                          )Weighted
      Average Outstanding Shares
                          
                          
                          169,522,590
                          
                          
                          
                          169,007,206
                          
                          
                          
                          169,522,590
                          
                          
                          
                          169,007,206Loss
      Per Share
                          
                          $
                          (.00
                          )
                          
                          $
                          (.00
                          )
                          
                          $
                          (.01
                          )
                          
                          $
                          (.01
                          )




See
accompanying notes to financial statements.


2




HEALTH
DISCOVERY CORPORATION




Statements of Cash
Flows


(unaudited)


For the
Six Months Ended June 30, 2009 and 2008


Six
      Months
                  Ended
                  June
      30, 2009
                
                
                Six
      Months
                  Ended
                  June
      30, 2008Cash
      Flows From Operating ActivitiesNet
      Loss
                
                $
                (1,108,346
                )
                
                $
                (1,058,990
                )Adjustments
      to Reconcile Net Loss to Net CashUsed
      by Operating Activities:Stock-based
      Compensation
                
                
                144,536
                
                
                
                46,338Services
      Exchanged for Warrants
                
                
                83,445
                
                
                
                151,741Depreciation
      and Amortization
                
                
                134,227
                
                
                
                133,833Increase
      in Recoverable Development Costs
                
                
                (100,000
                )
                
                
                —Increase
      in Deferred Charges
                
                
                (25,770
                )
                
                
                —(Increase)
      Decrease in Interest Receivable
                
                
                235
                
                
                
                (412
                )Increase
      (Decrease) in Deferred Revenue
                
                
                117,095
                
                
                
                (31,354
                )(Increase)
      Decrease in Prepaid Expenses and Other Assets
                
                
                6,381
                
                
                
                (2,234
                )Increase
      (Decrease) in Accounts Payable – Trade
                
                
                328,913
                
                
                
                (49,225
                )Decrease
      in Accrued Liabilities
                
                
                (37,189
                )
                
                
                (19,643
                )Net
      Cash Used by Operating Activities
                
                
                (456,473
                )
                
                
                (829,946
                )Cash
      Flows From Investing Activities:Purchase
      of Equipment
                
                
                (2,465
                )
                
                
                —Net
      Cash Used by Investing Activities
                
                
                (2,465
                )
                
                
                —Cash
      Flows From Financing Activities:Proceeds
      from Sales of Preferred B Stock
                
                
                250,000
                
                
                
                —Proceeds
      from Borrowing
                
                
                500,000
                
                
                
                —Net
      Cash Provided by Financing Activities
                
                
                750,000
                
                
                
                —Net
      (Decrease) Increase in Cash
                
                
                291,062
                
                
                
                (829,946
                )Cash,
      at Beginning of Period
                
                
                325,887
                
                
                
                1,648,439Cash,
      at End of Period
                
                $
                616,949
                
                
                $
                818,493Supplemental
      disclosures of cash flow information:Cash
      Paid for Interest
                
                $
                362
                
                
                $
                482




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 molecular diagnostics 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 June 30, 2009 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-K for the year ended December 31,
2008.




Recent
Accounting Pronouncements




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
was January 1, 2009. The adoption of SFAS No. 160 did not have a material effect
on its 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.




The
Company received $150,000 in cash in February 2009 in connection with two
licensing agreements completed in the first quarter of 2009. Deferred revenue of
$150,000 was recorded and will be recognized as income over the 15 year
remaining term of the underlying patents. The Company treats the incremental
direct cost of revenue arrangements, which consist principally of employee
bonuses and legal fees, as deferred charges and such incremental direct costs
are amortized to expense using the straight-line method over the same
term.




The
Company established an allowance for uncollectible accounts in the amount of
$112,500 as a result of a client company’s bankruptcy filing. The account
receivable had been originally recorded in connection with a long-term license
agreement, for which revenue was deferred to be recognized over the term of the
agreement. Accordingly, the Company recorded the allowance for uncollectible
accounts as a reduction in deferred revenue.




Deferred
revenue represents the unearned portion of payments received in advance for
licensing agreements. The Company had total unearned revenue of $458,310 as of
June 30, 2009. Unearned revenue of $42,637 is recorded as current and $415,673
is classified as long-term.


4




HEALTH
DISCOVERY CORPORATION




Notes
to Financial Statements, continued




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 COMPENSATION




Stock-based
expense included in our net loss for the three months and six months ended
June 30, 2009 consisted of $126,955 and $223,481 respectively in
compensatory stock, warrants and options for professional consulting services,
directors fees and compensation. Stock-based expense included in our net loss
for the three months and six months ended June 30, 2008 was $69,122 and $198,079
respectively.




As of
June 30, 2009 and June 30, 2008, there was approximately $315,868 and $214,840,
respectively, of unrecognized cost related to stock option and warrant grants.
The cost is to be recognized over the remaining vesting periods with a weighted
average of approximately one year.




The
following schedules summarize combined stock option and warrant information for
the six months ended June 30, 2009 and the twelve months ended December 31,
2008:


Option
      and
                                                    Warrant
                                                    Shares
                                                  
                                                  
                                                  Weighted
                                                    Average
                                                    Exercise
      PriceOutstanding,
      January 1, 2008
                                                  
                                                  
                                                  162,599,644
                                                  
                                                  
                                                  $
                                                  0.17Granted
                                                  
                                                  
                                                  8,750,000
                                                  
                                                  
                                                  $
                                                  0.08Exercised
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —Expired
      un- exercised
                                                  
                                                  
                                                  (42,572,000
                                                  )
                                                  
                                                  $
                                                  0.21Outstanding,
      December 31, 2008
                                                  
                                                  
                                                  128,777,644
                                                  
                                                  
                                                  $
                                                  0.16Granted
                                                  
                                                  
                                                  5,000,000
                                                  
                                                  
                                                  $
                                                  0.08Exercised
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —Expired
      un-exercised
                                                  
                                                  
                                                  (2,500,000
                                                  )
                                                  
                                                  ($
                                                  0.13
                                                  )Outstanding,
      June 30, 2009
                                                  
                                                  
                                                  131,277,644
                                                  
                                                  
                                                  $
                                                  0.15


5




HEALTH
DISCOVERY CORPORATION




Notes
to Financial Statements, continued




Note
D - STOCK-BASED COMPENSATION, continued




June
30, 2009


Exercise
      Prices
                                                                  
                                                                  
                                                                  Number
                                                                    Outstanding
                                                                  
                                                                  
                                                                  Weighted-
                                                                    Average
                                                                    Remaining
                                                                    Contractual
                                                                    Life
      (years)
                                                                  
                                                                  
                                                                  Number
                                                                    Exercisable
                                                                  
                                                                  
                                                                  Weighted
                                                                    Average
                                                                    Remaining
                                                                    Contractual
      Life
                                                                    (years)
      of
                                                                    Exercisable
                                                                    Warrants$0.08
                                                                  
                                                                  
                                                                  14,300,000
                                                                  
                                                                  
                                                                  7.9
                                                                  
                                                                  
                                                                  2,550,000
                                                                  
                                                                  
                                                                  5.9$0.10
                                                                  
                                                                  
                                                                  300,000
                                                                  
                                                                  
                                                                  0.2
                                                                  
                                                                  
                                                                  300,000
                                                                  
                                                                  
                                                                  0.2$0.11
                                                                  
                                                                  
                                                                  500,000
                                                                  
                                                                  
                                                                  0.5
                                                                  
                                                                  
                                                                  500,000
                                                                  
                                                                  
                                                                  0.5$0.13
                                                                  
                                                                  
                                                                  2,500,000
                                                                  
                                                                  
                                                                  2.6
                                                                  
                                                                  
                                                                  2,500,000
                                                                  
                                                                  
                                                                  2.6$0.14
                                                                  
                                                                  
                                                                  52,138,822
                                                                  
                                                                  
                                                                  1.2
                                                                  
                                                                  
                                                                  52,138,822
                                                                  
                                                                  
                                                                  1.2$0.16
                                                                  
                                                                  
                                                                  10,000,000
                                                                  
                                                                  
                                                                  0.3
                                                                  
                                                                  
                                                                  10,000,000
                                                                  
                                                                  
                                                                  0.3$0.19
                                                                  
                                                                  
                                                                  51,538,822
                                                                  
                                                                  
                                                                  1.2
                                                                  
                                                                  
                                                                  51,538,822
                                                                  
                                                                  
                                                                  1.2Total
                                                                  
                                                                  
                                                                  131,277,644
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  119,527,644




The
weighted average remaining life of all outstanding warrants and options at June
30, 2009 is 1.9 years. As of June 30, 2009, the aggregate intrinsic value of
options and warrants outstanding is zero.




Note
E - PATENTS




The
Company has acquired and developed 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 $2,648,741 in patents and patent
related costs, net of $1,337,053 in accumulated amortization, at June 30,
2009.




Amortization
charged to operations for the three months and six months ended June 30, 2009
and 2008 was approximately $65,680 and $131,360, respectively 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.




Note
F – PROMISSORY NOTE PAYABLE




On
June 30, 2009, the Company issued a secured promissory note to a director
of the Company in the amount of $500,000. The note contains an 8% annual
interest rate and is due on January 4, 2010. The note is completely repayable by
the Company at any time without any related fees or penalties and payment on the
note may be accelerated by the holder upon an Event of Default (as defined in
the note). The note is secured by certain intellectual property and other assets
of the Company.




Note
G – STOCKHOLDERS’ EQUITY




On
March 30, 2009, we filed Articles of Amendment (the “Second Amendment”)
with the Secretary of State of the State of Georgia to amend our Articles of
Incorporation. The Second Amendment sets forth the rights and preferences of the
Series B Preferred Stock, including the right to receive dividends, including
special dividends, the right to vote on matters presented to holders of common
stock, a preference right in the event of liquidation, and the right to convert
the Series B Preferred Stock into Common Stock provided sufficient unissued and
unreserved shares of common stock exist. The Second Amendment was authorized by
the Board of Directors on March 20, 2009.


6




HEALTH
DISCOVERY CORPORATION




Notes
to Financial Statements, continued




Note
G – STOCKHOLDERS’ EQUITY, continued




During
the six months ended June 30, 2009, the Board of Directors authorized the
designation of Series B Preferred Stock. The number of shares constituting the
Series B Preferred Stock is 13,750,000. On March 31, 2009, pursuant to a
Securities Purchase Agreement (the “Purchase Agreement”), we sold to individual
investors 3,125,000 shares of Series B Preferred Stock for $250,000. In
connection with the Purchase Agreement, the Company may issue up toan
additional 10,625,000shares
of Series B Preferred Stock. The Series B Preferred Stock may be converted into Common
Stock of the Company on a one for one basis at the option of the holder, without
the payment of additional consideration by the holder. The conversion ratio is
subject to adjustments for certain events, such as stock splits or stock
dividends, and is only available, so long as the Company has a sufficient number
of authorized shares to allow for the exercise of all of its outstanding
warrants and options. The shares of Series B Preferred Stock must be converted
into Common Stock of the Company upon the demand by the Company after the fifth
anniversary of the date of issuance. The Series B Preferred Stock will not be
immediately registered under either federal or state securities laws and must be
held until a registration statement covering such securities is declared
effective by the Securities and Exchange Commission or an applicable exemption
applies.




On April
29, 2009, the Company entered into an employment agreement with R. Scott Tobin.
Mr. Tobin will serve as the Company’s President and General Counsel. Pursuant to
the terms of the employment agreement, Mr. Tobin was granted an option to
purchase an aggregate of 4,500,000 shares of the Company’s common stock at an
exercise price of $0.08. One million of the options vest immediately and the
rest vest over an eighteen (18) month period provided that the Company attains
certain performance metrics, as more fully described in the Option Award. The
Option Award was valued at $175,331 and will be expensed over a period of time
approximating the vesting period.




Also
during the second quarter of 2009, in connection with his appointment to the
Company’s Board of Directors, the Company granted Dr. Joseph McKenzie an option
to purchase 500,000 shares of the Company’s common stock. The options vest
250,000 shares every six months, have an exercise price of $0.08, and expire on
April 29, 2015. This option grant was valued at $28,292 and will be expensed
over a period of time approximating the vesting period.




Note
H – 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’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 additional revenue generation, as further described in
Item 2 below. In the meantime, the Company maintains a cash conservation
program.




Note
I – SUBSEQUENT EVENTS




On August
13, 2009, pursuant to a Securities Purchase Agreement, the Company sold
2,500,000 shares of Series B Preferred Stock for $200,000 to an individual
investor.


7




Item 2.
                  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations




Corporate
Overview




Our
Company is a molecular diagnostics company that uses advanced mathematical
techniques to analyze large amounts of data to uncover patterns that might
otherwise be undetectable. Our Company operates primarily in the emerging field
of personalized medicine where such tools are critical to scientific discovery.
Our primary business consists of licensing our intellectual property and working
with prospective customers on the development of varied products that utilize
pattern recognition tools. We also endeavor to develop our own product line of
newly discovered biomarker-based diagnostic tests that include human genes and
genetic variations, as well as gene, protein, and metabolite expression
differences and image analysis. In drug discovery, biomarkers can help elicit
disease targets and pathways and validate mechanisms of drug action. They may
also be pharmacodynamic indicators of drug activity, response and toxicity for
use in clinical development.




We intend
to continue partnering with clinical laboratories to commercialize our clinical
diagnostic tests and to provide pharmaceutical and diagnostic companies with all
aspects of all phases of diagnostic and drug discovery, from expert assessment
of the clinical dilemma to proper selection and procurement of high quality
specimens. Through the application of our proprietary analytical evaluation
methods and state-of-the-art computational analysis to derive relevant and
accurate clinical data, we intend to produce accurate biomarker and pathway
discoveries, resulting in patent protection of our biomarker discoveries for
future development.




Our
business is based on the belief that to discover the most clinically relevant
biomarkers the computational component must begin at the inception of the
clinical dilemma to be solved. This process includes several critical levels of
decision-making - all of which are part of our business strategy. We intend to
produce more relevant and predictable biomarkers for drug discovery so that new
and better medicines and diagnostic markers can be developed for patients
worldwide.




Operational
Activities




The
Company actively markets its technology and related developmental expertise to
several prospects in the healthcare field, including some of the world’s largest
corporations in the pharmaceutical, biotech, and life sciences industries. Given
the scope of some of these prospects, the sales cycle can be quite long, but
management believes that these marketing efforts will produce favorable
results.




On
January 30, 2009, we entered into a license agreement with Abbott Molecular Inc.
(“Abbott”), pursuant to which the Company granted Abbott a worldwide, exclusive,
royalty-bearing license for in-vitro diagnostic rights to develop and
commercialize reagent test kits for the Company’s prostate cancer molecular
diagnostic tests in both biopsy tissue and urine. We also
granted Abbott a worldwide, royalty bearing, co-exclusive license (co-exclusive
with Quest Diagnostics Incorporated (“Quest”)) for developing and
commercializing a Laboratory Developed “LDT” urine based
molecular diagnostic test for clinically significant prostate cancer, which
could be commercialized in a clinical laboratory and sold directly to physicians
for their patients. In
addition, we granted Abbott a worldwide, royalty bearing, co-exclusive
license (co-exclusive with Clarient, Inc.) for developing and commercializing a
Laboratory Developed “LDT” tissue based
molecular diagnostic test for clinically significant prostate cancer, which
could be commercialized in a clinical laboratory and sold directly to physicians
for their patients.


8




In
February 2009, Abbott paid to us a one-time initial signing fee of $100,000. On
August 7, 2009, Abbott reimbursed us $100,000 in development costs as required
by the license agreement. In addition, with respect to the products subject to
the license (the “Products”), Abbott will pay milestone payments to us upon
achievement of the following events: $250,000 upon completion of Phases 1 and 2
as described in the FDA Submission Plan; $250,000 upon completion of Phases 3
and 4 as described in the FDA Submission Plan; $500,000 upon submission of
either a 510(k) or Pre Market Approval (“PMA”) submission to the FDA; and
$500,000 upon the receipt of a written notification by the FDA of the approval
of the applicable 510(k) or PMA submission. We will also receive royalty
payments of 10% of Abbott’s Net Sales for the Products with medical utility
claims for use on prostate biopsy tissue samples, and 5% of Abbott’s Net Sales
for the Products with medical utility claims for use on urine samples. We will
also receive royalty payments on the Laboratory Developed Tests “LDT” equal to 10%
of Abbott’s Net Sales for the tests performed on prostate biopsy tissue and 5%
of Abbott’s Net Sales for tests performed on urine samples. In addition to the
royalty payments, with respect to the urine based products, Abbott will also pay
us certain amounts upon the achievement of certain milestones as follows: after
the sale of 50,000 tests in a calendar year, a milestone payment of $200,000;
after a sale of 200,000 tests in a calendar year, a milestone payment of
$750,000; and after a sale of 500,000 tests in a calendar year, a milestone
payment of $1,500,000. “Net Sales” is equal to Abbott’s gross revenue less 5%,
subject to adjustments as described in the license.




On January 30, 2009, we entered into
a license agreement with Quest, pursuant to which the Company granted to Quest a
non-exclusive, royalty bearing license for developing and commercializing a
Laboratory Developed “LDT”urine based molecular diagnostic test for clinically significant prostate
cancer which could be commercialized and sold by Quest’s clinical laboratories
directly to physicians for their patients. In consideration of granting the
license to Quest, Quest paid a license fee to the Company and will pay running
royalty payments, certain milestone payments, and development fees.




The
Company is continuing to successfully advance the development of the urine based
prostate cancer test. The
Company is very pleased with the data and results thus far completed to date as
we progress towards the goal of commercialization of the urine-based prostate
cancer test as a Lab Developed Test “LDT” at Quest Diagnostics Clinical
Laboratory and with Abbott, as well as, an in-vitro diagnostic test (IVD
test kits) offered for sale by Abbott. Upon regulatory approval through Abbott,
the individual in-vitro
diagnostic test kits could be sold to additional national, regional and local
clinical laboratories, as well as hospital, academic and physician laboratories
around the world.  Prostate cancer is the second-leading cause of
cancer death in men, after lung cancer. The National Cancer Institute (NCI)
estimates that more than 186,000 new cases of prostate cancer will be diagnosed
in the U.S. in 2008, with more than 28,660 deaths. The prostate cancer testing
market is approximately 50 million tests performed worldwide annually with
approximately 25 million PSA tests performed annually in the US and an
additional 25 million PSA tests performed annually outside the US. The PSA test
sells in US national clinical laboratories for approximately $100 per test. In a
peer-reviewed paper recently published in the New England Journal of Medicine,
the PSA test was shown to be an ineffective prostate cancer screening test,
leaving open the opportunity for a better test to replace the PSA test as a
screening tool for prostate cancer.  The Company”s prostate cancer
test was the subject of a peer-reviewed paper published in the August 2009
edition of UroToday International, a respected international urology
journal.


As we
disclosed in our Form 10-K for the fiscal year ended December 31, 2007, we were
in discussions regarding the licensing of and product development using SVMs and
FGMs in diagnostic radiology, including mammography, PET scans, CT scans, MRI
and other radiological images. In August 2008, we entered into a licensing
agreement with Smart Personalized Medicine, LLC, a company founded by our former
director and current Senior Advisor, Dr. Richard Caruso. Under the terms of this
agreement, work will be done to develop a superior breast cancer prognostic test
using our SVM technology in collaboration with a prominent cancer research
hospital. In exchange for a license to use our SVM technology, we received a 15%
equity position in Smart Personalized Medicine, LLC (which will remain undiluted
until there is at least $5 million in investment from investors in Smart
Personalized Medicine, LLC) and a per test royalty up to 7.5% based on net
proceeds received from the sale of the new breast cancer prognostic test. Smart
Personalized Medicine, LLC recently
signed a license agreement with a prestigious U.S. academic cancer center and is
now in discussions with a national clinical laboratory for developing and
commercializing a new state-of-the-art prognostic test for breast cancer. Smart
Personalized Medicine, LLC has now started the development ofthe
SVM-based prognostic test for breast cancer on tissue biopsy specimens. Smart
Personalized Medicine, LLC believes that there is a possibility the new breast
cancer test can be ready for clinical laboratory commercialization within the
next twelve months. An estimated 221,000 women are diagnosed with breast cancer
in the United States each year, and one in eight U.S. women will have breast
cancer in her lifetime. Breast cancer is the most common cancer among women and
the second-largest cancer killer among women. Currently, the breast cancer
prognostic market is projected to be about $300 to $400 million. Smart
Personalized Medicine, LLC expects that its new SVM-based prognostic test for
breast cancer can provide physicians and their patients a way to better
determine the probability of relapse, allowing patients with good prognosis
results an opportunity to avoid unnecessary expensive and traumatic chemotherapy
treatments.


9




In July
2008, the Company and DCL Medical Laboratories LLC, a full-service clinical
laboratory focused on women’s health, entered into a development and license
agreement for the collaborative development and commercialization of SVM-based
computer assisted diagnostic tests for the independent detection of ovarian,
cervical and endometrial cancers. Through the application of the advanced
technology of pattern recognition, this new SVM-based system is intended to
further improve the sensitivity of the Pap Smear test and augment the recent
improvements of computer guided screening that have already significantly
improved detection rates. In addition, images and interpretative data from this
new SVM-based system may now be transmitted electronically, thus allowing remote
review and collaborative interpretation. The Company has now completed
development of most of the individual modules for the SVM-based computer
assisted diagnostic test for the analysis of cervical cells in Pap Smears and
has implemented a large number of image processing operations using various
spatial, spectral, morphological, statistical, and other techniques. The Company
is currently finalizing development of the interface software to read and
interpret the Pap Smear scans. The Company has completed development of a suite
of features and custom kernels, and additional methods are being developed to
address the specific challenges in reading and interpreting Pap Smears. The
Company has SVM software for final development and commercialization of HDC’s
Pap Smear Reader. The project is now entering the system integration phase, and
the Company hopes to have this Automated Pap Smear Interpretation Diagnostic
Test in pre-commercialization validation studies by the third quarter of 2009.
Cervical cancer is one of the most common cancers among women throughout the
world, with more than 11,000 primary diagnoses and over 3,700 cancer related
deaths annually. The Pap Smear, as cervical cancer screening, represents a
market of more than 1.7 billion women worldwide with approximately 50 million
Pap Smear tests currently being performed annually in the U.S. When completed,
the HDC SVM-based computer assisted diagnostic test for the analysis of cervical
cells in Pap Smears could be implemented via the Internet for automated
interpretation worldwide. Pursuant to the development and license agreement, HDC
will own any developed intellectual property and DCL will have a sole use
license relating to applications and new mathematical tools developed during the
course of the development and license agreement. Dr. Hanbury, one of our
directors, is currently a shareholder of DCL.




On July
31, 2007, we announced our alliance and licensing agreement with Clarient, Inc.
for development of a new molecular diagnostic test for prostate cancer based on
our discovered prostate cancer biomarker signature. Under the terms of that
agreement, as amended, Clarient obtained a non-exclusive license to make, use
and sell any Licensed Product in the Field of Use within the Licensed
Territory with respect to both the commercial reference laboratory field and the
academic and research fields. During 2008, we and Clarient successfully
completed all phases of the clinical trial process with the hope of achieving
the statistical significance necessary to validate the ability to commercialize
a test. Results from both the Phase I, Phase II and Phase III
double-blinded clinical validation studies now completed at Clarient
demonstrated a very high success rate for identifying the presence of
Grade 3 or higher prostate cancer cells (clinically significant cancer), as
well as normal BPH (benign prostatic hyperplasia) cells. On November 6, 2008, we
announced that the RT-PCR assay for the four genes comprising the Company’s
recently commercialized gene-based molecular diagnostic test for prostate
cancer, which is currently available at Clarient’s Clinical Laboratory, can be
successfully used in urine samples for gene testing. The study, completed in
collaboration with a prominent cancer research hospital, demonstrated that the
gene expression of all four genes comprising the molecular signature for
clinically significant prostate cancer could be detected in urine samples spiked
with as few as 50 prostate cancer cells. Clarient commercially launched its new
gene expression test for prostate cancer in the first quarter of 2009, which is
a Licensed Product under the agreement, as amended. This new test is available
through Clarient’s PATHSiTETM virtual reporting tool and accessible to
Clarient’s entire pathology network. HDC will receive 10% royalty on each test
performed.




In August
2008, we announced 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. PPI’s marketing of our patent portfolio is ongoing.




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. SVM Capital has developed a machine learning
based software system for analysis and prediction of stock market data. The
system is completely data driven. It applies innovative technologies developed
by SVM Capital that are capable of adapting advanced machine learning methods to
the highly non-stationary systems commonly presented by the financial data. A
preliminary software system was implemented for trading the four major indices.
An analysis on the historical data was conducted for the period of January 1970
to December 2008. The SVM Capital system produced an average annual return of
19.81%, with an annualized alpha of 17.67% compared to the S&P 500 index
rate of return of only 5.83% for the same time period. SVM Capital began a
program of real-time live trading in November 2008. SVM Capital is now exploring
opportunities to create and market an investment fund specifically utilizing the
SVM Capital quantitative algorithm for making the investment decisions. SVM
Capital expects to charge a management fee and a performance fee related to its
investment activities. Depending on the level of its success, this venture can
be profitable given its reliance on cost effective use of computer technology
and ready access to efficient trading platforms.


10




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. Because the
contract expired by its terms, we are now in discussion with other companies to
commercialize these applications.




We
continue our dialogue with several other important industry players in the
healthcare field and, in certain situations, related to the field of molecular
diagnostics, including proposed projects with some of the world’s largest
pharmaceutical and diagnostic companies and other prospective partnership
opportunities with additional companies and research institutions. We also
continue to pursue development opportunities with our existing licensing
customers.




The
Company has recognized revenue of $584,700 from inception through June 30, 2009
and has deferred revenue yet to be recognized of $458,310 as of June 30, 2009.
Aggregate receipts created by its patent portfolio to date are
$1,043,010.




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 in the near term, or that
those that may be finalized do not provide the economic return that we
expect.




On April
29, 2009 the Company entered into an employment agreement with Mr. R. Scott
Tobin for his employment as President and General Counsel. Mr. Tobin will be
responsible for strategic and operational leadership of the Company. The
employment agreement has an initial term of eighteen (18) months, beginning
April 15, 2009, and will automatically renew and continue for successive twelve
(12) month periods unless otherwise terminated. Mr. Tobin will receive an annual
base salary of $120,000 and will also be eligible to receive a bonus, which may
be paid in cash, stock, enhanced employee benefits or a combination thereof as
determined by the Company, of up to one hundred percent (100%) of his salary,
based on objectives jointly determined by Mr. Tobin and the Chairman and CEO.
Mr. Tobin was also granted options to purchase an aggregate of 4,500,000 shares
of the Company’s common stock at an exercise price of $0.08, which vest over an
eighteen (18) month period. A portion of the options require that the Company
attain certain performance metrics, as more fully described in the Option Award.
Mr. Tobin is eligible to receive health insurance benefits and other benefits
maintained by us for our executives. If Mr. Tobin’s employment is terminated
without Cause, as defined in the employment agreement, or if Mr. Tobin
terminates the employment agreement for Good Reason, as defined in the
employment agreement, then Mr. Tobin will receive as severance (i) the maximum
incentive bonus he would have received had he remained employed by the Company
the later of the entire calendar year in which the termination occurs or the end
of the term, (ii) the amount of his base salary for the remainder of the term of
the agreement plus ninety (90) days, and (iii) an amount equal to the actual
cost of ninety (90) days of his COBRA premium payments. If the employment
agreement is otherwise terminated, Mr. Tobin is not eligible to receive
severance, and will only receive his base salary accrued up to the effective
date of the termination, any unpaid earned and accrued incentive bonus, payment
for accrued and unused vacation, and reimbursement of expenses, if any. The
employment agreement also generally provides that Mr. Tobin will keep
confidential information that is confidential and that he will not compete with
us in our business nor solicit our customers or employees for a period of twelve
(12) months following termination of employment.




On April
29, 2009, the Company also appointed Dr. Joseph McKenzie and Mr. R. Scott Tobin
to the Board to fill vacancies created by the resignation of former directors.
In recognition of his service as a director, Dr. McKenzie was granted an option
to purchase 500,000 shares of the Company’s common stock. The options vest
250,000 shares every six months, have an exercise price of $0.08, and expire on
April 29, 2015.




Intellectual
Property Activities




The U.S.
Patent and Trademark Office issued a new patent to the Company in
January 2009, which covers the use of SVM technology for ranking of input
features for selection of the most relevant input parameters needed to classify
data. In June 2009, the U.S. Patent and Trademark Office issued two new patents
to the Company. One of the patents includes additional, broader claims to the
Company’s exclusive SVM recursive feature elimination (SVM-RFE) method, the
first patent for which issued in 2006. The SVM-RFE method has been used to
successfully identify the most important pieces of information needed to solve
complex pattern-recognition problems. The second patent covers an SVM-based data
mining platform for classification of data from heterogeneous biological
datasets. Also in June 2009, the European Patent Office issued a notice of its
intent to grant a patent covering the Company’s SVM-based computer-aided image
analysis techniques. Corresponding patents have already been granted in the
U.S., Australia and Japan.


11




Three
Months Ended June 30, 2009 Compared with Three Months Ended June 30,
2008




Revenue




For the
three months ended June 30, 2009, revenue was $16,215 compared with $15,677 for
the three months ended June 30, 2008. 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 $9,417 were recorded as cost of sales for the second
quarter 2009 compared with $3,000 for the second quarter of 2008. 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.




Operating
and Other Expenses




Amortization
expense was $65,680 for the second quarter of 2009 compared to $65,681 for the
comparable 2008 period. Amortization expense relates primarily to the costs
associated with filing patent application and acquiring rights to the
patents.




Professional
and consulting fees totaled $155,842 for the second quarter of 2009 compared
with $171,149 for the second quarter of 2008. The decrease is due to the
reduction of use of outside legal counsel due to the hiring of
Mr. Tobin.




Compensation
of $270,233 for the second quarter of 2009 was higher than the $196,654 reported
for the second quarter of 2008. Compensation increased due to the higher charge
for option awards in 2009 and the addition of Mr. Tobin to the
Company.




Other
general and administrative expenses decreased to $66,655 for the second quarter
of 2009 compared to $93,044 for the second quarter of 2008. The decrease was due
primarily to a reduction in the charge for director’s warrants.




Loss
from Operations




The loss
from operations for the second quarter of 2009 was $551,612 compared to $513,851
for the second quarter of 2008. This increased loss was due to increased costs
as discussed previously.




Other
Income and Expense




Interest
income was $772 for the second quarter of 2009 compared to $11,782 in 2008.
Interest income decreased because the Company had less cash on hand to invest
throughout the second quarter of 2009.




Interest
expense of $48 in the second quarter of 2009 was comparable to the $170 recorded
in the second quarter of 2008.




Net
Loss




The net
loss for the second quarter of 2009 was $550,888 compared to $502,239 for the
second quarter of 2008. The increased loss was due to the increased operating
loss as previously described and by the reduced interest income.




Net loss
per share was $0.00 for both the second quarter of 2009 and
2008.


12




Six
Months Ended June 30, 2009 Compared with Six Months Ended June 30,
2008




Revenue




For the
six months ended June 30, 2009, revenue was $32,905 compared with $31,354 for
the six months ended June 30, 2008. 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 $12,704 were recorded as cost of sales for the six months
ended June 30, 2009 compared with $6,600 for the comparable 2008 period. Cost of
revenues includes all direct costs, including wages and research fees and some
professional fees associated with licensing negotiations associated with the
acquisition and development of patents and processes sold.




Operating
and Other Expenses




Amortization
expense was $131,360 for both the six months ended June 30, 2009 and 2008.
Amortization expense relates primarily to the costs associated with filing
patent application and acquiring rights to the patents.




Professional
and consulting fees totaled $433,396 for the six months ended June 30, 2009
compared with $324,999 for the same 2008 period. The increase is due to
increased licensing and patent related activities and the increased use of
outside counsel upon the departure last year of our Executive Vice
President.




Compensation
of $437,999 for the six months ended June 30, 2009 was higher than the $393,840
reported for the comparable 2008 period. Compensation increased due to the
hiring of Mr. Tobin in April, 2009.




Other
general and administrative expenses decreased to $127,843 for six months ended
June 30, 2009 compared to $262,587 for the comparable 2008 period. The decrease
was due primarily to a reduction in the charge for director’s
warrants.




Loss
from Operations




The loss
from operations for the six months ended June 30 2009 was $1,110,397 compared to
$1,088,032 for the previous year. This increased loss was due to increased costs
as discussed previously.




Other
Income and Expense




Interest
income was $2,413 for the six months ended June 30, 2009 compared to $29,524 in
2008. Interest income decreased because the Company had less cash on hand to
invest throughout 2009.




Interest
expense of $362 in 2009 was comparable to the $482 recorded for
2008.




Net
Loss




The net
loss for the six months ended June 30, 2009 was $1,108,346 compared to
$1,058,990 for the six months ended June 30, 2008. The increased loss was due to
the increased operating loss as previously described.




Net loss
per share was $0.01 for both 2009 and 2008.




Liquidity
and Capital Resources




At June
30, 2009, the Company had $616,949 in available cash. Cash used by operating
activities for the six months ended June 30, 2009 was $456,473. This was due
primarily to the net loss of $1,108,346. However, this loss is favorably offset
by net non-cash charges and adjustments of $651,873, which reduced the amount of
cash used. Cash used by investment activities was $2,465 due to the acquisition
of fixed assets. Net cash provided by financing activities was $750,000,
comprised of the sale of Series B Preferred Stock for $250,000 and the
promissory note dated June 30, 2009 in the amount of $500,000.


13




On
January 30, 2009, we entered into a license agreement with Abbott, pursuant to
which the Company granted Abbott a worldwide, exclusive, royalty-bearing license
for in-vitro diagnostic rights to develop and commercialize reagent test kits
for the Company’s prostate cancer molecular diagnostic tests in both biopsy
tissue and urine. Upon regulatory approval, these individual test kits could be
sold to national, regional and local clinical laboratories, as well as hospital,
academic and physician laboratories around the world.




We also
granted Abbott a worldwide, royalty bearing, co-exclusive license (co-exclusive
with Quest) for developing and commercializing a “laboratory developed” urine
based molecular diagnostic test for clinically significant prostate cancer which
could be commercialized and sold directly to physicians for their patients in a
clinical laboratory.




We also
granted Abbott a worldwide, royalty bearing, co-exclusive license (co-exclusive
with Clarient, Inc.) for developing and commercializing a “laboratory developed”
biopsy tissue based molecular diagnostic test for clinically significant
prostate cancer which could be commercialized and sold directly to physicians
for their patients in a clinical laboratory.




In
February 2009 in connection with the licensing agreement, Abbott paid to us a
one-time initial signing fee of $100,000. In addition, with respect to the
Products, Abbott will pay milestone payments outlined above.




On
January 30, 2009, we entered into a license agreement with Quest pursuant to
which the Company granted to Quest a non-exclusive, royalty bearing license for
developing and commercializing a “laboratory developed” urine based molecular
diagnostic test for clinically significant prostate cancer which could be
commercialized and sold by Quest’s clinical laboratories directly to physicians
for their patients. In consideration of granting the license to Quest, Quest
paid a license fee to the Company and will pay running royalty payments, certain
milestone payments, and development fees.




On
March 31, 2009, pursuant to a Securities Purchase Agreement (the “Purchase
Agreement”), we completed the sale to individual investors to acquire 3,125,000
shares of Series B Preferred Stock for $250,000 in cash and subscription
note, which was subsequently paid in cash by the investor. In connection with
the Purchase Agreement, the Company may issue an additional 10,625,000 shares of
Series B Preferred Stock.




On June
30, 2009, we issued a secured promissory note (the “Promissory Note”) to Joseph
McKenzie, a director and long term shareholder of the Company, for $500,000. The
Promissory Note contains an 8% annual interest rate and is due on January 4,
2010. The Promissory Note is completely repayable by the Company at any time
without any related fees or penalties, and payment on the Promissory Note may be
accelerated by the holder upon an Event of Default (as such term is defined in
the Promissory Note). The Promissory Note is secured by certain intellectual
property and other assets of the Company. The proceeds of the Promissory Note
will be used for general working capital purposes. This short term debt
financing is intended to serve as a bridge to anticipated future licensing
revenues in a manner which is not dilutive to shareholders.




The
following table summarizes the due dates of our contractual
obligations.


Total
                                    
                                    
                                    1
      Year
                                      Or
      Less
                                    
                                    
                                    More
      than 1 YearDeferred
      Compensation
                                    
                                    $
                                    48,500
                                    
                                    
                                    $
                                    48,500
                                    
                                    
                                    $
                                    —Office
      Lease
                                    
                                    
                                    20,892
                                    
                                    
                                    
                                    20,892
                                    
                                    
                                    $
                                    —Total
                                    
                                    $
                                    69,392
                                    
                                    
                                    $
                                    69,392
                                    
                                    
                                    $
                                    —




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 cash conservation program.


14




Subsequent
Events




In July
2009, the U.S. Patent and Trademark Office issued a notice of allowance of the
Company’s application covering an alternative method of feature selection that
reduces the number of support vectors to create a sparse-SVM that can be used to
generate a codebook for identifying patterns in data,
including applications to signal compression. With the issuance of these
patents, the Company now holds the exclusive rights to 38 issued U.S. and
foreign patents covering uses of SVM and FGM technology for discovery of
knowledge from large data sets.




In
addition, the Company recently received notice that in September 2008, the
Indian Patent Office issued the Company’s patent covering a computer implemented
method for processing multiple data sets using SVMs. Counterparts to this patent
have issued in eight other countries, including the U.S.




On August
7, 2009, Abbott reimbursed us $100,000 in development costs as required by the
license agreement.




On August
13, 2009, pursuant to a Securities Purchase Agreement, the Company sold
2,500,000 shares of Series B Preferred Stock for $200,000 to an individual
investor. The Series B Preferred Stock may be converted into Common Stock of the
Company at the option of the holder, at a price of $0.08 per share (subject to
adjustment) so long as the Company has a sufficient number of authorized shares
to allow for the exercise of all of its outstanding derivative securities, and
without the payment of additional consideration by the holder. The Shares of
Series B Preferred Stock must be converted into Common Stock of the Company upon
the demand by the Company after the fifth anniversary of the date of issuance.
The Series B Preferred Stock will not be immediately registered under either
federal or state securities laws and must be held until a registration statement
covering such securities is declared effective by the Securities and Exchange
Commission or an applicable exemption applies.




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, 2008, filed on March 31, 2009.


Item 4T.
              Controls
      and Procedures.




As of
June 30, 2009 (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 effective to provide reasonable assurance that information
required to be disclosed in the reports that are filed or submitted under the
Exchange Act is recorded, processed, summarized, and reported within the time
periods specified by the Securities and Exchange Commission’s rules and forms
and that our disclosure controls and procedures are designed to ensure that
information required to be disclosed in the reports that we file or submit under
the Exchange Act is accumulated and communicated to our management including our
Chief Executive Officer and Principal Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.


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, and our Chief Executive
Officer will continue to serve as our Principal Financial Officer for the second
quarter of 2009.




PART II—OTHER
INFORMATION


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
                Form
      of Securities Purchase Agreement. Registrant incorporates by reference
      Exhibit 10.15 to Form 10-K filed March 31, 2009.10.2
                Employment
      Agreement between the Company and R. Scott Tobin, dated as of April 15,
      2009. Registration incorporates by reference Exhibit 10.1 to Form 8-K
      filed May 5, 2009. *10.3
                Option
      Award to R. Scott Tobin, dated April 29, 2009. Registrant incorporates by
      reference Exhibit 10.2 to Form 8-K filed May 5, 2009.*31.1
                Rule
      13a-14(a)/15(d)-14(a) Certifications of Chief Executive Officer and
      Principal Financial Officer.32.1
                Section
      1350 Certification of Chief Executive Officer and Principal Financial
      Officer.




*           Management
contract or compensatory plan or arrangement


16




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:
      August 14, 2009
                              /s/
      Stephen D. BarnhillPrinted
      Name: Stephen D. Barnhill M.D.Title:
      Chief Executive Officer and Principal Financial
  Officer






17