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 March 31, 2009o
            Transition
      report under Section 13 or 15(d) of the Exchange
  Act




For the
transaction period from _____________ to _____________




Commission
file number 333-62216


HEALTH
      DISCOVERY CORPORATION(Exact
      name of small business issuer as specified in its
  charter)





Georgia
              
              74-3002154(State
      or other jurisdiction of incorporation or organization)
              
              (IRS
      Employer Identification No.)




2 East
Bryan Street, Suite #601 Savannah, Georgia
31401 (Address
of principal executive offices)


912-443-1987(Issuer’s
      telephone number, including area
code)




(Former
name, former address and former fiscal year, if
changed since the last report)




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




Indicate
by check mark whether the registrant 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 x




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


Large
      Accelerated Filer o
              
              Non-Accelerated
      Filer oAccelerated
      Filer o
              
              Smaller
      Reporting Company x




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes o No x







APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS




Check
whether the registrant filed all documents and reports required to be filed by
Section l2, 13 or 15(d) of the Exchange Act after the distribution of securities
under a plan confirmed by a court. Yes o No o




APPLICABLE
ONLY TO CORPORATE ISSUERS




Indicate
the number of shares outstanding of each of the issuer’s classes of common
equity, as of the latest practicable date:


Class
            
            Outstanding
      May 13, 2009Common
      Stock, no par value
            
            169,522,590Preferred
      Stock Series A, stated value $0.08 per share
            
            7,437,184Preferred
      Stock Series B
            
            3,125,000




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
            
            15ITEM
      2.
            UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
            
            15ITEM
      6.
            EXHIBITS
            
            16SIGNATURES
            
            
            17




iii




PART I FINANCIAL
INFORMATION --


Item 1.
              Financial
      Statements




HEALTH
DISCOVERY CORPORATION Balance Sheet


March
      31,
                                                      2009
                                                      (unaudited)
                                                    
                                                    
                                                    December
      31,
                                                      2008AssetsCurrent
      AssetsCash
                                                    
                                                    $
                                                    310,377
                                                    
                                                    
                                                    
                                                    325,887Accounts
      Receivable, Less Allowance for Doubtful Accounts of $112,500 and
      $0
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    112,500Prepaid
      Expenses and Other Assets
                                                    
                                                    
                                                    23,238
                                                    
                                                    
                                                    
                                                    34,355Stock
      Subscription Receivable
                                                    
                                                    
                                                    100,000
                                                    
                                                    
                                                    
                                                    —Total
      Current Assets
                                                    
                                                    
                                                    433,615
                                                    
                                                    
                                                    
                                                    472,742Equipment,
      Less Accumulated Depreciation of $14,347 and $25,947
                                                    
                                                    
                                                    15,914
                                                    
                                                    
                                                    
                                                    14,888Other
      AssetsDeferred
      Charges
                                                    
                                                    
                                                    26,212
                                                    
                                                    
                                                    
                                                    —Patents,
      Less Accumulated Amortization of $1,271,373 and $1,205,963
                                                    
                                                    
                                                    2,714,421
                                                    
                                                    
                                                    
                                                    2,780,101Total
      Assets
                                                    
                                                    $
                                                    3,190,162
                                                    
                                                    
                                                    
                                                    3,267,731Liabilities and Stockholders’
      EquityCurrent
      LiabilitiesAccounts
      Payable – Trade
                                                    
                                                    $
                                                    370,164
                                                    
                                                    
                                                    
                                                    220,972Accrued
      Liabilities
                                                    
                                                    
                                                    235,103
                                                    
                                                    
                                                    
                                                    245,742Deferred
      Revenue
                                                    
                                                    
                                                    50,970
                                                    
                                                    
                                                    
                                                    57,153Total
      Current Liabilities
                                                    
                                                    
                                                    656,237
                                                    
                                                    
                                                    
                                                    523,867Deferred
      Revenue – Long Term
                                                    
                                                    
                                                    423,555
                                                    
                                                    
                                                    
                                                    396,562Total
      Liabilities
                                                    
                                                    
                                                    1,079,792
                                                    
                                                    
                                                    
                                                    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
                                                    
                                                    
                                                    15,815,399
                                                    
                                                    
                                                    
                                                    15,744,873Accumulated
      Deficit
                                                    
                                                    
                                                    (14,550,004
                                                    )
                                                    
                                                    
                                                    (13,992,546
                                                    )Total
      Stockholders’ Equity
                                                    
                                                    
                                                    2,110,370
                                                    
                                                    
                                                    
                                                    2,347,302Total
      Liabilities and Stockholders’ Equity
                                                    
                                                    $
                                                    3,190,162
                                                    
                                                    
                                                    
                                                    3,267,731




See
accompanying notes to financial statements.







HEALTH
DISCOVERY CORPORATION




Statements of Operations (unaudited)


Three
      Months
                        Ended
                        March
      31,
                        2009
                      
                      
                      Three
      Months
                        Ended
                        March
      31,
                        2008Revenues:Licensing
                      
                      $
                      16,690
                      
                      
                      $
                      15,677Cost of
      Revenues:Internal
      Development
                      
                      
                      3,287
                      
                      
                      
                      3,600Gross
      Profit
                      
                      
                      13,403
                      
                      
                      
                      12,077Operating
      Expenses:Amortization
                      
                      
                      65,680
                      
                      
                      
                      65,679Professional
      and Consulting Fees
                      
                      
                      277,554
                      
                      
                      
                      153,850Compensation
                      
                      
                      167,766
                      
                      
                      
                      197,186Other
      General and Administrative Expenses
                      
                      
                      61,188
                      
                      
                      
                      169,543Total
      Operating Expenses
                      
                      
                      572,188
                      
                      
                      
                      586,258Loss
      From Operations
                      
                      
                      (558,785
                      )
                      
                      
                      (574,181
                      )Other
      Income (Expense)Interest
      Income
                      
                      
                      1,641
                      
                      
                      
                      17,742Interest
      Expense
                      
                      
                      (314
                      )
                      
                      
                      (312
                      )Total
      Other Income (Expense)
                      
                      
                      1,327
                      
                      
                      
                      17,430Net
      Loss
                      
                      $
                      (557,458
                      )
                      
                      $
                      (556,751
                      )Weighted
      Average Outstanding Shares
                      
                      
                      169,522,590
                      
                      
                      
                      169,007,206Loss
      Per Share
                      
                      $
                      (.00
                      )
                      
                      $
                      (.00
                      )




See
accompanying notes to financial statements.


2




HEALTH
DISCOVERY CORPORATION Statements of Cash Flows (unaudited) For the
Three Months Ended March 31, 2009 and 2008


Three
      Months
                              Ended
                              March
      31, 2009
                            
                            
                            Three
      Months
                              Ended
                              March
      31, 2008Cash
      Flows From Operating ActivitiesNet
      Loss
                            
                            $
                            (557,458
                            )
                            
                            $
                            (556,751
                            )Adjustments
      to Reconcile Net Loss to Net Cash Used by Operating
      Activities:Stock-based
      Compensation
                            
                            
                            58,340
                            
                            
                            
                            23,169Services
      Exchanged for Warrants
                            
                            
                            38,186
                            
                            
                            
                            105,788Depreciation
      and Amortization
                            
                            
                            67,119
                            
                            
                            
                            66,997Increase
      in Deferred Charges
                            
                            
                            (26,212
                            )
                            
                            
                            —Decrease
      in Interest Receivable
                            
                            
                            151
                            
                            
                            
                            251Increase
      (Decrease) in Deferred Revenue
                            
                            
                            133,310
                            
                            
                            
                            (15,677
                            )Decrease
      in Prepaid Expenses and Other Assets
                            
                            
                            10,965
                            
                            
                            
                            6,878Increase
      in Accounts Payable – Trade
                            
                            
                            149,192
                            
                            
                            
                            67,513Decrease
      in Accrued Liabilities
                            
                            
                            (36,638
                            )
                            
                            
                            (30,766
                            )Net
      Cash Used by Operating Activities
                            
                            
                            (163,045
                            )
                            
                            
                            (332,598
                            )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
                            
                            
                            
                            —Increase
      in Stock Subscriptions Receivable
                            
                            
                            (100,000
                            )
                            
                            
                            —Net
      Cash Provided by Financing Activities
                            
                            
                            150,000
                            
                            
                            
                            —Net
      (Decrease) Increase in Cash
                            
                            
                            (15,510
                            )
                            
                            
                            (332,598
                            )Cash,
      at Beginning of Period
                            
                            
                            325,887
                            
                            
                            
                            1,648,439Cash,
      at End of Period
                            
                            $
                            310,377
                            
                            
                            $
                            1,315,841Supplemental
      disclosures of cash flow information:Cash
      Paid for Interest
                            
                            $
                            314
                            
                            
                            $
                            312




See
accompanying notes to financial statements.


3




HEALTH
DISCOVERY CORPORATION




Notes to Financial Statements




Note A -
BASIS OF PRESENTATION




Health
Discovery Corporation (the “Company”) is a biotechnology-oriented company that
has acquired certain patents and has patent pending applications for certain
machine learning tools used for diagnostic and drug discovery. The Company
licenses the use of its patent protected technology and utilizes such technology
internally to develop diagnostic tests, drug monitoring tests and drug targets
for therapeutic use, and sells or licenses such discoveries to diagnostic or
pharmaceutical companies worldwide.




The
accounting principles followed by the Company and the methods of applying these
principles conform with accounting principles generally accepted in the United
States of America (GAAP). In preparing financial statements in conformity with
GAAP, management is required to make estimates and assumptions that affect the
reported amounts in the financial statements. Actual results could differ
significantly from those estimates.




The
interim financial statements included in this report are unaudited but reflect
all adjustments which, in the opinion of management, are necessary for a fair
presentation of the financial position and results of operations for the interim
periods presented. All such adjustments are of a normal recurring nature. The
results of operations for the period ended March 31, 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 sales
commissions 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 $474,525 as of
March 31, 2009. Unearned revenue of $50,970 is recorded as current and
$423,555 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 ended March 31, 2009
consisted of $96,526 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 ended March 31, 2008
was $128,957.




As of
March 31, 2009 and March 31, 2008, there was approximately $249,837 and
$398,562, 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 three months ended March 31, 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
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Exercised
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Expired
      un-exercised
                                      
                                      
                                      (2,500,000
                                      )
                                      
                                      $
                                      (0.13
                                      )Outstanding,
      March 31, 2009
                                      
                                      
                                      126,277,644
                                      
                                      
                                      $
                                      0.15


5




HEALTH
DISCOVERY CORPORATION




Notes
to Financial Statements, continued




Note D - STOCK-BASED
COMPENSATION, continued




March
31, 2009


Exercise
      Prices
                                                                              
                                                                              
                                                                              Number
                                                                                Outstanding
                                                                              
                                                                              
                                                                              Weighted-
                                                                                Average
                                                                                Remaining
                                                                                Contractual
                                                                                Life
      (years)
                                                                              
                                                                              
                                                                              Number
                                                                                Exercisable
                                                                              
                                                                              
                                                                              Weighted
                                                                                Average
                                                                                Remaining
                                                                                Contractual
      Life
                                                                                (years)
      of
                                                                                Exercisable
                                                                                Warrants$0.08
                                                                              
                                                                              
                                                                              9,300,000
                                                                              
                                                                              
                                                                              7.4
                                                                              
                                                                              
                                                                              1,300,000
                                                                              
                                                                              
                                                                              3.2$0.10
                                                                              
                                                                              
                                                                              300,000
                                                                              
                                                                              
                                                                              0.4
                                                                              
                                                                              
                                                                              300,000
                                                                              
                                                                              
                                                                              0.4$0.11
                                                                              
                                                                              
                                                                              500,000
                                                                              
                                                                              
                                                                              0.8
                                                                              
                                                                              
                                                                              500,000
                                                                              
                                                                              
                                                                              0.8$0.13
                                                                              
                                                                              
                                                                              2,500,000
                                                                              
                                                                              
                                                                              2.8
                                                                              
                                                                              
                                                                              2,500,000
                                                                              
                                                                              
                                                                              2.8$0.14
                                                                              
                                                                              
                                                                              52,138,822
                                                                              
                                                                              
                                                                              1.4
                                                                              
                                                                              
                                                                              52,138,822
                                                                              
                                                                              
                                                                              1.4$0.16
                                                                              
                                                                              
                                                                              10,000,000
                                                                              
                                                                              
                                                                              0.5
                                                                              
                                                                              
                                                                              10,000,000
                                                                              
                                                                              
                                                                              0.5$0.19
                                                                              
                                                                              
                                                                              51,538,822
                                                                              
                                                                              
                                                                              1.4
                                                                              
                                                                              
                                                                              51,538,822
                                                                              
                                                                              
                                                                              1.4Total
                                                                              
                                                                              
                                                                              126,277,644
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              118,277,644




The
weighted average remaining life of all outstanding warrants and options at March
31, 2009 is 1.8 years. As of March 31, 2009, the aggregate intrinsic value of
options and warrants outstanding is zero.




In the
first quarter of 2008, the Company fully vested a 1,500,000 warrant grant for a
retiring director by accelerating the vesting of 375,000 warrants exercisable at
$0.13. A charge of $44,438 was recorded as directors’ fees




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 $2,714,421 in patents and patent related costs, net of
$1,271,373 in accumulated amortization, at March 31, 2009.




Amortization
charged to operations for the three months ended March 31, 2009 and 2008 was
$65,680 and $65,679, respectively. The weighted average amortization period for
patents is 14 years. Estimated amortization expense for the next five years is
$262,720 per year.




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. 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 first quarter of 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 completed the sale to
individual investors to acquire 1,875,000 shares of Series B Preferred
Stock for $150,000 in cash and recorded a subscription receivable of
$100,000 for which we have subsequently received cash. In connection with the
Purchase Agreement, the Company may issue
up to 6,250,000 shares of Series B Preferred Stock. The Series B Preferred Stock
may be converted into Common Stock of the Company at the option of the holder,
without the payment of additional consideration by the holder, so long as the
Company has a sufficient number of authorized shares to allow for the exercise
of all of its outstanding warrants and options. The Shares of Series B Preferred
Stock must be converted into Common Stock of the Company upon the demand by the
Company after the fifth anniversary of the date of issuance. The Series B
Preferred Stock 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.




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 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 will receive an annual salary of
$120,000 and 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, vesting over an
eighteen (18) month period, and with respect to a portion of the options, the
Company attaining certain performance metrics, as more fully described in the
Option Award.




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.


7




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




Corporate
Overview




Our
Company is a pattern recognition company that uses advanced mathematical
techniques to analyze large amounts of data to uncover patterns that might
otherwise be undetectable. Our Company operates primarily in the emerging field
of molecular diagnostics where such tools are critical to scientific discovery.
Our primary business consists of licensing our intellectual property and working
with prospective customers on the development of varied products that utilize
pattern recognition tools. We also endeavor to develop our own product line of
newly discovered biomarker-based diagnostic tests 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 have
partnered and intend to continue partnering with clinical laboratories to
commercialize our clinical diagnostic tests and to provide pharmaceutical and
diagnostic companies with all aspects of all phases of diagnostic and drug
discovery, from expert assessment of the clinical dilemma through proper
selection and procurement of high quality specimens. We will then apply our
proprietary analytical evaluation methods and state-of-the-art computational
analysis to derive relevant and accurate clinical data, producing accurate
biomarker and pathway discoveries, resulting in patent protection of our
biomarker discoveries for future development.




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




Operational
Activities




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




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




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




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


8




In
February 2009, Abbott paid to us a one-time initial signing fee of $100,000. In
addition, with respect to the products subject to the license (the “Products”),
Abbott will pay milestone payments to us upon achievement of the following
events: $250,000 upon completion of 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” 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.




The
Company is continuing to move forward on the development of the urine based
prostate cancer test with Abbott. The objective of Phase 1 of the
commercialization development cycle was to develop the HDC 4-gene assay in urine
using RT-PCR assays for the 4 genes of interest and the housekeeping genes.
Additionally, in Phase 1 of the study, prostate cancer cells obtained from
tissue culture were to be analyzed to determine if the test is performing
properly and correctly identifying the molecular signature of clinically
significant prostate cancer in these specimens. The Company is pleased to report
that the HDC 4-gene RT-PCR test is now successfully developed and running at a
premier US academic cancer center and the molecular signature for prostate
cancer in the initial specimens has been successfully identified and validated.
This first phase of development is now successfully completed. The Company will
now proceed to collect the human specimens required to demonstrate test
performance, thereby completing Phase 2 of the commercialization
process.




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




On
February 20, 2009, the U.S. Patent and Trademark Office issued a notice of
allowance of the claims of the Company’s patent application for “Feature
Selection Using Support Vector Machine Classifier.” The claims of this
application are directed to the Company’s innovative SVM-based Recursive Feature
Elimination (RFE) technique. Although the Company has already been granted a
U.S. patent covering this important method, because of its widespread use in
industry and research, alternative claims were submitted to expand the scope of
coverage. The newest set of allowed claims is directed to both biological and
non-biological applications of RFE- SVM.




On
February 26, 2009, the U.S. Patent and Trademark Office issued a notice of
allowance for the Company’s pending patent application entitled “Kernels and
Kernel Methods for Spectral Data.” The allowed claims in the application are
directed to a method for identification of patterns in mass spectrographic data
for protein analysis using support vector machines. The method includes
pre-processing steps that involve alignment of the spectra and feature selection
to utilize only the most determinative peaks of the spectra for separation of
the data. The claimed technique identifies protein biomarkers that may be useful
for diagnosis, prognosis or monitoring of diseases, including cancer,
psychiatric conditions and others. Once the above identified applications and
the application identified in “Operational Activities” above issue as patents,
which is expected to occur in mid-2009, the Company will own exclusive rights in
37 issued U.S. and foreign patents covering SVM and FGM technologies and their
uses.




On
March 31, 2009, we entered into the Purchase Agreement with several
individual investors for the private issuance of shares of our Series B
Preferred Stock at an offering price of $ 0.08 per share (the “Private
Placement”) . We completed the sale to acquire 1,875,000 shares of Series B
Preferred Stock for $150,000 in cash. Since March 31, 2009, we have
received additional investments in aggregate amount of $100,000. We anticipate
that, in connection with the Private Placement, we will receive up to $500,000
in cash in exchange for the issuance of up to 6,250,000 shares of Series B
Preferred Stock. The shares will be offered and sold in reliance upon
exemptions from registration pursuant to Section 4(2) under the Securities Act
of 1933, as amended, and Regulation D promulgated thereunder.


9


As we
disclosed in our Form 10-K for the fiscal year ended December 31, 2007, we were
in discussions regarding the licensing of and product development using SVMs and
FGMs in diagnostic radiology, including mammography, PET scans, CT scans, MRI
and other radiological images. In August 2008, we entered into a licensing
agreement with Smart Personalized Medicine, LLC, a company founded by our former
director, Dr. Richard Caruso. Under the terms of this agreement, we will work to
develop a superior breast cancer prognostic test using our SVM technology in
collaboration with a prominent cancer research hospital. In exchange for a
license to use our SVM technology, we received a 15% equity position in Smart
Personalized Medicine, LLC (which will remain undiluted until there is at least
$5 million in investment from investors in Smart Personalized Medicine,
LLC) and a per test royalty up to 7.5% based on
net proceeds received from the sale of the new breast cancer prognostic test.
After months of negotiations, Smart Personalized Medicine, LLC is finalizing
development and commercialization discussions with third parties, including one
or more prestigious U.S. academic cancer centers as well as national clinical
laboratories, for developing and commercializing a new state-of-the-art
prognostic test for breast cancer. Once each of these negotiations are finalized
and signed, of which we can make no assurance, Smart Personalized Medicine, LLC
will immediately begin developing the 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.




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 at DCL Laboratories 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 President, CEO and 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. In exchange for the non-exclusive license,
Clarient will pay the Company 10% of Clarient’s net proceeds with respect to all
licensed laboratory tests performed during the term of the license. During 2008,
we and Clarient successfully completed all phases of the clinical trial process
with the hope of achieving the statistical significance necessary to validate
the ability to commercialize a test. Results from both the Phase I,
Phase II and Phase III double-blinded clinical validation studies now
completed at Clarient demonstrated a very high success rate for identifying the
presence of Grade 3 or higher prostate cancer cells (clinically significant
cancer), as well as normal BPH (benign prostatic hyperplasia) cells. On November
6, 2008, we announced that the RT-PCR assay for the four genes comprising the
Company’s recently commercialized gene-based molecular diagnostic test for
prostate cancer, which is currently available at Clarient’s Clinical Laboratory,
can be successfully used in urine samples for gene testing. The study, completed
in collaboration with a prominent cancer research hospital, demonstrated that
the gene expression of all four genes comprising the molecular signature for
clinically significant prostate cancer could be detected in urine samples spiked
with as few as 50 prostate cancer cells. 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.


10




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, and since that time the SVM
Capital system has yielded a return of 4.33%, which is a value-added return of
5.39%, compared to the -1.06% for the indices. Based on the success of these
results, SVM Capital is now in final negotiations with a New York investment
company to create and market an investment fund specifically utilizing the SVM
Capital quantitative algorithm for making the investment decisions. SVM Capital
expects to have the terms of the fund finalized in mid-2009, with the
preparation of offering materials and fundraising to follow. 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.




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 were
in discussion with a large international pharmaceutical company to develop a
diagnostic test using our discovered biomarkers during a clinical trial for its
new drug to treat BPH (enlarged prostate). As a result of the company’s
acquisition and related integration issues, these discussions have been
postponed.




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 a proposed project with one of the world’s largest
pharmaceutical companies and other prospective partnership opportunities with
additional companies and research institutions. We also continue to pursue
development opportunities with our existing licensing customers.




The
Company has recognized revenue of $568,485 through March 31, 2009 and has
deferred revenue yet to be recognized of $474,525 as of March 31, 2009. The
Company received cash payments in 2009 of $150,000 through May 15, resulting in
aggregate receipts created by its patent portfolio to date of
$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.


11




Three
Months Ended March 31, 2009 Compared with Three Months Ended March 31,
2008




Revenue




For the
three months ended March 31, 2009, revenue was $16,690 compared with
$15,677 for the three months ended March 31, 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 $3,287 were recorded as cost of sales for the first quarter
2009 compared with $3,600 for the first 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 first quarter of 2009 compared to $65,679 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 $277,554 for the first quarter of 2009 compared with
$153,850 for the first quarter of 2008. The increase is due to increased legal
fees, resulting from the resignation of the Company’s Executive Vice President
in June 2008, and the unfavorable impact of mark to market accounting related to
stock grants earned by scientific advisory board members.




Compensation
of $167,766 for the first quarter of 2009 was lower than the $197,186 reported
for the first quarter of 2008. Compensation decreased due to the resignation of
the Company’s Executive Vice President in June 2008.




Other
general and administrative expenses decreased to $61,188 for the first quarter
of 2009 compared to $169,543 for the first 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 first quarter of 2009 was $558,785 compared to $574,181
for the first quarter of 2008. This decreased loss was due to decreased costs as
discussed previously.




Other
Income and Expense




Interest
income was $1,641 for the first quarter of 2009 compared to $17,742 in 2008.
Interest income decreased because the Company had less cash on hand to invest
throughout the first quarter of 2009.




Interest
expense of $314 in the first quarter of 2009 was comparable to the $312 recorded
in the first quarter of 2008.




Net
Loss




The net
loss for the first quarter of 2009 was $557,458 compared to $556,751 for the
first quarter of 2008. The increased loss was due to the decrease in interest
income offset by the decreased operating loss as previously
described.




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




Liquidity
and Capital Resources




At March
31, 2009, the Company had $310,377 in available cash. Cash used by operating
activities for the quarter was $163,045. This was due primarily to the net loss
of $557,458; however, net non-cash charges and adjustments of $394,413 favorably
impacted the computation of the net cash used. Cash used by investment
activities was $2,465
due to the acquisition of fixed assets. Net cash provided by financing
activities was $150,000 as a result of the Preferred Stock Series B
proceeds.


12




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




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




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




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




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




On
March 31, 2009, pursuant to a Securities Purchase Agreement (the “Purchase
Agreement”), we completed the sale to individual investors to acquire 1,875,000
shares of Series B Preferred Stock for $150,000 in cash. Since March 31,
2009, we have received additional investments for 1,250,000 shares of Series B
Preferred Stock in aggregate amount of $100,000. In connection with the Purchase
Agreement, the Company may issue up to 6,250,000 shares of Series B Preferred
Stock.




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


Total
                          
                          
                          1
      Year
                            Or
      Less
                          
                          
                          More
      than 1 YearDeferred
      Compensation
                          
                          $
                          51,500
                          
                          
                          $
                          51,500
                          
                          
                          $
                          —Office
      Lease
                          
                          
                          26,115
                          
                          
                          
                          20,892
                          
                          
                          
                          5,223Total
                          
                          $
                          77,615
                          
                          
                          $
                          72,392
                          
                          
                          $
                          5,223


13




The
Company has relied primarily on equity funding plus debt financing for
liquidity. The Company produced sales, licensing, and developmental revenue
starting in late 2005 and must continue to do so in order to generate sufficient
cash to continue operations. The Company’s plan to have sufficient cash to
support operations is comprised of generating revenue through licensing its
significant patent portfolio, providing services related to those patents, and
obtaining additional equity or debt financing. The Company has been and
continues to be in meaningful discussions with a variety of parties, which if
successful, may result in significant revenue, as further described above. In
the meantime, the Company maintains a vigilant cash conservation
program.




Subsequent
Events




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 an option to purchase an aggregate of 4,500,000
shares of the Company’s common stock at an exercise price of $0.08, which vest
over an eighteen (18) month period, and with respect to a portion of the
options, the Company attaining certain performance metrics, 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 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 will be 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.




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.


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Item 4T.
              Controls
      and Procedures.




As of
March 31, 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.




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 serve as our Principal Financial Officer for the first quarterly
2009.




PART II—OTHER INFORMATION




Item 2.
              Unregistered
      Sales of Equity Securities and Use of
Proceeds




During
the first quarter of 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 completed the sale to
individual investors to acquire 1,875,000 shares of Series B Preferred
Stock for $150,000 in cash. Since March 31, 2009, we have received
additional investments in aggregate amount of $100,000. In connection with the
Purchase Agreement, the Company may issue up to 6,250,000 shares of Series B
Preferred Stock. We relied upon the exemption from securities registration
afforded by Rule 506 under Regulation D as promulgated by the United States
Securities and Exchange Commission under Section 4(2) of the Securities Act of
1933, as amended. To make the exemption available, we relied upon the investors’
representations, warranties and covenants contained in the Purchase Agreement.
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.


15




Item 6.
              Exhibits.




The
following exhibits are attached hereto or incorporated by reference herein
(numbered to correspond to Item 601(a) of Regulation S-K, as promulgated by the
Securities and Exchange Commission) and are filed as part of this Form
10-Q:




10.1
            
            Amendment
      to License Agreement between Health Discovery Corporation and Clarient,
      Inc., dated January 13, 2009. Registrant incorporates by reference Exhibit
      10.2 to Form 8-K filed February 5, 2009.10.2
            
            License
      Agreement between Health Discovery Corporation and Abbott Molecular Inc.,
      dated January 30, 2009. Registrant incorporates by reference Exhibit 10.13
      to Form 10-K filed March 31, 2009. **10.3
            
            License
      Agreement between Health Discovery Corporation and Quest Diagnostics
      Incorporated, dated January 30, 2009. Registrant incorporates by reference
      Exhibit 10.3 to Form 8-K filed February 5, 2009. **10.4
            
            Form
      of Securities Purchase Agreement. Registrant incorporates by reference
      Exhibit 10.15 to Form 10-K filed March 31, 2009.10.5
            
            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. *10.6
            
            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**
            Portions
      of exhibit have been omitted pursuant to a request for confidential
      treatment


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:
      May 15, 2009
                  /s/
      Stephen D. BarnhillPrinted
      Name: Stephen D. Barnhill M.D.Title:
      Chief Executive Officer and Principal Financial
  Officer






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