UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
                                     

FORM 10-KSB

 (Mark One)
ý
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
 
THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the fiscal year ended December 31, 2007
OR
 
   
o
TRANSITION REPORT UNDER TO SECTION 13 OR 15(d) OF
 
THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the transition period from to

Commission File No. 333-62216
                                     

HEALTH DISCOVERY CORPORATION
(Name of small business issuer in its charter)

Georgia
74-3002154
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
2 East Bryan Street, Suite #601, Savannah, GA
31401
(Address of principal executive offices)
(Zip Code)

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

Securities Registered Pursuant to Section 12 (b) of the Exchange Act:
None

Securities Registered Pursuant to Section 12 (g) of the Act:
None

 
Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes  o No o
 
Check whether the issuer:  (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x No o
 
Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12(b)-2 of the Exchange Act). o
 
State issuer’s revenues for its most recent fiscal year.  $57,905
 
The aggregate market value of the voting common stock held by non-affiliates as of March 24, 2008 was approximately $4,854,064.  There were 169,007,206 shares of common stock outstanding as of March 24, 2008.  There were 7,437,184 shares of Series A Preferred Stock outstanding as of March 24, 2008.
 
Transitional Small Business Disclosure Format (Check one): Yes ___, No   X

 




PART I

ITEM 1. DESCRIPTION OF BUSINESS
 
Our History
 
We were organized under the name Direct Wireless Communications, Inc., in April 2001 by Direct Wireless Corporation, which licensed to us its technology for a wireless telephone.  In October 2001, Direct Wireless Corporation, then our sole stockholder, pursuant to an effective registration statement under the Securities Act of 1933, distributed its entire holdings of our common stock as a stock dividend to its stockholders.  As a result of the dividend, Direct Wireless Corporation ceased to own any of our equity securities.  The negative events that occurred over the next several years in the communications industry made it difficult for us to fund the advancement of our communication platform.  As a result, we made the decision to strategically change the overall direction of our intended business activities.
 
On August 26, 2003, we acquired all of the assets of The Barnhill Group, LLC, which was owned by Stephen D. Barnhill, M.D.  Dr. Barnhill is a physician trained in laboratory medicine and clinical pathology.  He developed artificial intelligence and pattern recognition computational techniques used in medicine, genomics, proteomics, diagnostics and drug discovery.  Following the acquisition, Dr. Barnhill became our Chief Executive Officer and Chairman of our Board of Directors.  Also, immediately following our acquisition of the assets of The Barnhill Group, LLC and the change in strategic direction of the Company, our licensing rights to the telecommunications technology previously granted by Direct Wireless Corporation were terminated and all payments due to Direct Wireless Corporation were terminated.
 
Subsequently, we amended our charter to change our name to Health Discovery Corporation (“HDC” or the “Company”).  Direct Wireless Communications (DWCM) officially became Health Discovery Corporation on November 6, 2003, at which time the new trading symbol (HDVY) became effective.
 
On September 30, 2003, we acquired the assets of Fractal Genomics, LLC, a company with patented Fractal Genomics Modeling (“FGM”) software, through the issuance of 3,825,000 common shares of the Company.  In addition to the shares of common stock of the Company issued for the acquisition of Fractal Genomics, LLC’s assets, the Company agreed to execute a note for $500,000 payable in $62,500 quarterly installments to the seller beginning on January 1, 2004 with the final payment being made in October 2005.  Our acquisition of Fractal Genomics’ assets was completed on December 30, 2003.
 
On July 30, 2004, we began purchasing rights to a portfolio of 71 patents and pending patent applications, including patents on the use of Support Vector Machines, or SVMs, and other machine learning tools useful for diagnostic and drug discovery (the “SVM Portfolio”).  On May 6, 2005, we acquired the remaining interest in the SVM Portfolio from a group of unrelated third parties.
 
Effective September 26, 2004, we were assigned a patent license agreement with Lucent Technologies GRL Corporation (“Lucent”). The patent license agreement was associated with the patents acquired July 30, 2004. We agreed to pay minimum royalty fees to Lucent, which increases as a percentage of revenue based on each licensed product that is sold, leased, or put into use by the Company. The license granted will continue for the entire unexpired term of Lucent’s patents.
 
On July 12, 2007, we completed our reincorporation in Georgia by effecting a conversion in our legal domicile from Texas to Georgia.  Our business, assets, liabilities, net worth and headquarters were unchanged as a result of the conversion, and our directors and officers prior to the conversion continued to serve after the conversion.  In connection with the conversion, the Company’s shares were converted on a one-for-one basis.
 
The conversion was approved by the shareholders holding at least two-thirds of the outstanding common shares of the Company at the reconvened special meeting of the shareholders held on June 13, 2007.  Articles of Conversion were filed with the Secretaries of State of Texas and Georgia on July 12, 2007 to effect the reincorporation.
 
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In connection with the conversion, we filed Articles of Incorporation in the State of Georgia, which increased the number of authorized shares of common stock, no par value, from two hundred million (200,000,000) shares to three hundred million (300,000,000) shares and authorized thirty million (30,000,000) shares of preferred stock, no par value, with the rights and preferences to be determined by the Company’s Board of Directors prior to issuance.  We also amended and restated our Bylaws.  The Articles of Incorporation and Bylaws were submitted to the shareholders and were approved on June 13, 2007.
 
On October 9, 2007, we filed Articles of Amendment (the “Amendment”) with the Secretary of State of the State of Georgia to amend our Articles of Incorporation.  The Amendment sets forth the rights and preferences of the Series A Preferred Stock, including the right to receive dividends, the right to vote on matters presented to holders of common stock, a preference right in the event of liquidation, and the right to convert the Series A Preferred Stock into Common Stock.  The Amendment was authorized by the Board of Directors on October 5, 2007.
 
On March 4, 2008, we formed two wholly owned subsidiaries, SVM Technology Inc., a Georgia corporation, and SVM Technology Inc., a Delaware corporation.  We anticipate that we will use each of these subsidiaries to expand our business model by applying SVM technology outside of scientific discovery in the healthcare arena.
 
Our Company Overview
 
HDC is a pattern recognition company that uses advanced mathematical techniques to analyze large amounts of data to uncover patterns that might otherwise be undetectable.  The Company operates primarily in the emerging field of molecular diagnostics where such tools are critical to scientific discovery.  The terms artificial intelligence  and  machine learning are sometimes used to describe pattern recognition tools.
 
HDC’s mission is to use its patents, intellectual prowess, and clinical partnerships principally to identify patterns that can advance the science of medicine, as well as to advance the effective use of our technology in other diverse business disciplines, including the high-tech, financial, and homeland security markets.
 
Our historical foundation lies in the molecular diagnostics field where we have made a number of important discoveries that may play a critical role in developing more personalized approaches to the diagnosis and treatment of certain diseases.  However, our SVM assets in particular have broad applicability in many other fields.  Intelligently applied, HDC’s pattern recognition technology can be a portal between enormous amounts of otherwise undecipherable data and truly meaningful discovery.
 
Our Company’s principal asset is its intellectual property which includes advanced mathematical algorithms called Support Vector Machines (SVM) and Fractal Genomic Modeling (FGM), as well as biomarkers that we discovered by applying our SVM and FGM techniques to complex genetic and proteomic data.  Biomarkers are biological indicators or genetic expression signatures of certain disease states.  Our intellectual property is protected by more than 70 patents that have been issued or are currently pending around the world.
 
Our business model has evolved over time to respond to business trends that intersect with our technological expertise and our capacity to professionally manage these opportunities.  In the beginning, we sought only to use our SVMs internally in order to discover and license our biomarker signatures to various diagnostic and pharmaceutical companies.  Today, our commercialization efforts include: utilization of our discoveries and knowledge to help develop biomarkers for use as companion diagnostics, surrogate biomarkers, and diagnostic and prognostic predictive tests; licensure of the SVM and FGM technologies directly to diagnostic and pharmaceutical companies; and, the formation of new ventures with domain experts in other fields where our pattern recognition technology holds commercial promise.
 
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Our Principal Market
 
The principal healthcare market for our pattern recognition technology and biomarker discoveries is medical diagnostics, particularly the rapidly growing field of molecular diagnostics.  The market consists of two basic types of diagnostic procedures:  in vitro tests performed on a patient’s fluid or tissue samples and in vivo tests performed directly on the body, including blood pressure monitoring and imaging analysis such as x-rays.   In vitro   diagnostics (IVD) can be further divided into several major segments including clinical chemistry, immunochemistry, hematology/cytometry, microbiology, and molecular diagnostics.
 
The IVD portion of the diagnostics market currently accounts for over $31 billion in sales worldwide.  Today, the molecular diagnostics segment represents a fraction of the IVD revenues with about $2.5 billion in sales, but it is widely considered to the be the fastest growing segment, estimated at a 20-25% compounded annual growth rate, mainly in the U.S. and EU markets, versus 6-7% for IVD as a whole.  It is difficult to accurately assess the size of this segment since many countries do not have reference laboratories external to hospitals.  Areas of particular growth include infectious diseases, oncology, genetic diseases, and pharmacogenetic analyses.  Companies involved in this space include several major pharmaceutical and diversified corporations.  Roche, Abbott, and Johnson & Johnson have diagnostics divisions that generated $8.8 billion, $4.0 billion, and $1.5 billion in revenue in 2006, respectively, while Siemens and General Electric operate medical imaging segments that are expanding in diagnostics.  Other market players include large technology companies like Becton-Dickinson, Beckman Coulter, and Bio-Rad.
 
IVDs have been established as effective tools for all aspects of disease management, especially in areas of unmet clinical need.  Such tests have been developed for screening and prognosis as well as for applications, such as determination of genetic predisposition to disease, detection of presymptomatic disease, and prediction of individual drug response.
 
Molecular Diagnostics
 
Within the overall IVD market, the molecular diagnostics segment is expected to expand dramatically, largely attributable to advances in genomics and proteomics.   Primary market drivers include the addition of new diagnostic tests in high volume testing areas coupled with the introduction of new instrumentation that provide greater ease, speed, and quality in test performance.  Given its annualized growth rate, the potential for molecular diagnostics is particularly impressive in the U.S. which represents the largest commercial market with the most favorable conditions for entry and marketing.
 
Borrowing from the two disciplines of genomics and proteomics, molecular diagnostics categorizes cancer and other diseases using technology such as mass spectrometry and gene chips.  Genomics is the study of all the genes in a cell or organism, and proteomics is the study of all the proteins.  Molecular diagnostics determines how these genes and proteins interact in patients by focusing on patterns – gene and protein patterns – in different types of healthy and diseased patient cells.  Molecular diagnostics uncover these genomic and proteomic changes and capture this information as expression patterns.  Also called molecular signatures , these expression patterns improve clinicians' ability to diagnose cancer earlier, predict which patients will respond to certain treatments, predict cancer recurrence risk, and select appropriate treatment for individual patients.
 
Molecular diagnostics can facilitate early, accurate screening and prediction of diseases in their asymptomatic stages, years before symptoms manifest or diseases actually begin.  This allows intervention to begin earlier, perhaps preventing the disease entirely.  Early intervention will allow the healthcare system to encompass both preventative and reactive medicine, improving overall healthcare efficiency and possibly reducing systemic healthcare expenditures.
 
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The molecular diagnostics industry is an increasingly powerful health care participant with tremendous potential.  It is characterized by a very diverse, constantly changing technology base that continuously produces new opportunities and applications.  Advances in polymerase chain reaction (“PCR”), multiplexing, sequencing and other technologies are propelling both new and old companies forward with novel capabilities.   Similarly, a growing understanding of the molecular basis of cancer and other chronic diseases has awakened new realms of medicine to the possibilities of molecular diagnostic testing.
 
Clinicians have discovered that molecular diagnostics have many uses beyond just the creation of new screening and diagnostic tools.  Expression patterns can also provide information for the design of new cancer treatments, monitor the treatment’s effectiveness as it is studied in a clinical trial, and even predict the patient’s response to a new treatment.  In addition to its importance in addressing the many kinds of cancer, molecular diagnostics will likely become an important technology for detecting resistance to antibiotics, a major hazard in the hospital setting.  In the future, molecular tests should be able to determine within two to three hours not only the nature of an infection, but also therapeutic selection and any potential resistance. 
 
The molecular diagnostics market is a rapidly growing and rapidly changing market with explosive potential, multiple opportunities for entry and growth, and intensifying competition.  New tests and new instruments to perform automated analysis continue to expand the capabilities of companies in this segment.  The identification and validation of novel genes, gene products, and biomarkers makes it possible to develop and introduce even more tests.  The market includes sales of reagents, instruments, and kits to clinical laboratories and research reagents that can be used by labs to develop their own in-house procedures.  It also includes testing services by those clinical labs that have developed their own products, plus diagnostics companies that operate their own branded, certified testing services.
 
Molecular diagnostic tests typically analyze DNA, RNA, or protein biomarkers (analytes) to identify a disease, determine its course, evaluate response to therapy, or predict individual predisposition to a disease.  The techniques applied involve analysis of DNA sequences, DNA methylation patterns, gene expression profiles, proteins, protein expression, or combinations of these biomarkers.  Such biomarkers provide direct information about genotypic and/or phenotypic changes associated with specific diseases or responses to treatment.  Biomarker analysis has also become an important tool in drug discovery, preclinical drug development, and patient monitoring during clinical trials.
 
Most molecular diagnostics currently on the market are primarily single-analyte tests involving the detection of a single gene or protein.  However, many disease-related processes are multifactorial, involving the abnormal expression of multiple genes or proteins.  Second-generation molecular diagnostics are anticipated to utilize novel detection technologies and multiplexing platforms to allow the measurement of a large number of analytes simultaneously.  These innovations will increasingly utilize multiplexing platforms such as DNA microarrays that perform parallel biomarker analysis.
 
The market has been driven by transition to fully automated systems, real time amplification, and growing development of point-of-care platforms.  Industry experts estimate that future growth will stem from emerging applications like genotyping for identifying drug resistant strains; bioterrorism testing applications within infectious disease; disease diagnostics and prognostic assays for disease applications like sepsis and nosocomial infections, such as MRSA, cancer, cardiovascular disease, and Alzheimer’s disease; diagnosis of inherited disorders; and theranostics companion diagnostics.
 
Genomic testing to determine diagnosis, therapeutic selection and response, and preventative measures is an important segment of the overall IVD market.  Although this segment is small today, it is an extremely fast-growing component.  Today, genomic testing is responsible for driving growth of the overall market, currently constituting approximately 7%–8% of the clinical testing service market.  In the service segment, genomic testing is growing by about 60%–75% per year.
 
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Other market segments include traditional genomics, personalized medicine, and cancer with 13%, 9%, and 8% of the U.S. clinical lab services market, respectively.  Experts predict that the cancer segment is growing at 20% a year, traditional genomics about 15% a year, and personalized medicine about 20% a year, compared to the 5-10% growth rate for infectious diseases.
 
From a demographic standpoint, 12% of the U.S. population was 65 years old or older in 2000. By 2030, that segment is anticipated to grow to 20% of the population, burdening the healthcare system with increased numbers of cardiovascular, neurological, and other age-related diseases.   Age-related conditions are expected to contribute to the health care market that will require greater product development and marketing of assays, including molecular tests.
 
Diagnostics addressing the pharmacogenetic testing segment (i.e. companion diagnostics and surrogate biomarkers) are expected to drive market growth in the years ahead.  Pharmacogenetics broadly relates to the study of genetic variations and their application to drug discovery to provide personalized therapy.  Currently the second largest market sector behind diagnostics for infectious diseases, the pharmacogenetic sector of the molecular diagnostics market is projected to grow rapidly.
 
The Role of HDC’s Technology in Molecular Diagnostics
 
Our SVM technology offers pharmaceutical companies a key tool as they approach drug discovery in this new era of personalized medicine.  Accordingly, our marketing efforts are focused on utilizing our technology in partnership with many of the world’s leading pharmaceutical and life-sciences companies.  Our primary commercialization pathway for our technology and discoveries is to enter into both licensing agreements and joint development opportunities that feature up-front license fees, fee-for-service development revenue, milestone payments, and royalty streams.  We believe the pharmaceutical segment offers us an excellent commercial opportunity for the application of our technology, as the pharmaceutical industry is characterized by costly R&D efforts to create new patent-protected products, fierce competition for products that are not so well protected, and ongoing consolidation as major companies acquire smaller players to add new products to existing pipelines.
 
The use of HDC’s SVM technology and our discovered biomarkers may help pharmaceutical companies develop and evaluate new drugs and medical therapies in less time and at lower cost.  According to the lobby group PhRMA, only 1 of every 10,000 potential medicines investigated by America's drug companies survives the research and development process and is approved for patient use by the U.S. Food and Drug Administration (FDA).  On average, the drug developmental process can take up to 15 years in research and development, with costs approaching many hundreds of millions of dollars. This extended timeframe and enormous expense has led to an emphasis on the development of “blockbuster” drugs.
 
Within the drug discovery R&D process, biomarkers like ours can help pharmaceutical companies identify disease targets and pathways and validate mechanisms of drug action.  They may also serve as pharmacodynamic indicators of drug activity, drug response, and drug toxicity in clinical development.  Biomarkers may also be used to help avoid new drug failures in late stage trials, earlier detection of disease, and improved prognosis of therapeutic outcome.
 
We consistently work to influence the evolving relationship between diagnostics and monitoring patients for therapeutic outcome.  With its February 2007 approval of MammoPrint , Agendia’s multi-gene expression breast cancer prognosis test, the FDA signaled its acceptance of the field of molecular diagnostics and highlighted the growing importance of personalized medicine.  In particular, the advent of molecular diagnostics has led to the promise of a completely new paradigm in the care of patients suffering from cancer and other diseases.
 
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Using companion diagnostics in patient care can substantially improve patient outcomes and pave the way for more personalized, targeted medicine by reducing both misdiagnoses and adverse reactions, and by eliminating unnecessary and expensive downstream tests.  Today, patient dosage levels are based on age, sex, and weight, as determined by empirical studies. However, specific drug metabolism may be as individualized as one’s fingerprint.  In the future, molecular diagnostics may be able to direct physicians to the right drugs for every patient, no matter what the illness.
 
This trend towards personalized medicine may ultimately lead to the reduction of overall healthcare expenditures.  What is known as a surrogate   molecular marker may now be substituted for the lengthy process of comparing the effects of a prospective new drug versus a placebo on the ultimate outcome of a disease.  As a result, a drug’s effectiveness against the disease process in question may be monitored more efficiently by evaluating the presence or absence of a specific biomarker, thereby avoiding failures late in the research and development process as well as the threat of recalls.  One example of the successful application of biomarker data to therapeutic evaluation is the use of blood cholesterol levels to evaluate the effectiveness of cholesterol lowering drugs.   This approach has the potential for creating a revolutionary new paradigm in the conduct of clinical trials worldwide.
 
Current diagnostic tools, such as blood marker-based immunoassays, imaging techniques, and biopsy analyses, provide valuable information and have played an important role in increasing survival rates of cancer patients.  However, these tools have inherent limitations in accuracy (i.e. sensitivity and specificity) and remain quite expensive.  There is a significant need for advanced diagnostic and prognostic tests that can provide meaningful information, screen for cancer, detect early recurrence, and monitor progression and therapeutic response in real time.  HDC’s pattern recognition technology can play a critical role in the development of these tests because an advanced pattern recognition technique is required for this type of discovery.  SVM technology is recognized as a superior pattern recognition tool available today as evidenced in hundreds of scientific papers worldwide.
 
Working with recognized diagnostic and pharmaceutical partners, our goal is to develop a product line of newly discovered biomarker signatures and pathways that can be found in human genes and genetic variations, as well as gene, protein and metabolite expression differences.  In addition, we market our expertise in the design of clinical trials for companion diagnostics to substantiate the clinical validity and commercial utility of those biomarkers.  We also market the potent combination of our intellectual property and intellectual prowess to our prospective collaborative partners.  As inventors of the SVM technology, our world renowned mathematicians offer these companies the strongest possible development team for their drug discovery, diagnostic test, or other applications.
 
Our Technologies and Discoveries
 
HDC owns a patent portfolio of machine learning technology, including certain pioneer patents on SVM.  We also have consulting arrangements with many of the physicians, clinical specialists and mathematicians responsible for developing and filing the pioneer neural network and SVM patents for the analysis of clinical data.
 
The Company’s SVM technology is commonly considered within the context of artificial intelligence .  This is a branch of computer science concerned with giving computers the ability to perform functions normally associated with human intelligence, such as reasoning and optimization through experience. Machine learning is a type of artificial intelligence that enables the development of algorithms and techniques that allow computers to learn.  Pattern recognition is machine learning with a wide spectrum of applications including medical diagnosis, bioinformatics, classifying DNA sequences, detecting credit card fraud, stock market analysis, object recognition in computer vision, and robot locomotion.
 
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SVM Overview
 
SVMs are mathematical algorithms that allow computers to sift through large, complex datasets to identify patterns.  SVMs are widely acknowledged for their ability to discover hidden relationships in these complex datasets.  With the ability to handle what is known as infinite dimensional space , SVMs are broadly considered to be superior to neural networks and other mathematical techniques.  SVM is a core machine learning technology with strong theoretical foundations and excellent empirical successes.
 
Since their introduction in 1992, SVMs marked the beginning of a new era in the learning from examples paradigm in artificial intelligence. Rooted in the Statistical Learning Theory developed by Professor Vladimir Vapnik, a member of HDC’s Scientific Advisory Board, SVMs quickly gained attention from the math and science communities due to a number of theoretical and computational merits.  This development advanced a new framework for modeling learning algorithms.  Within this framework, the fields of machine learning and statistics were merged introducing powerful algorithms designed to handle the difficulties of prior computational techniques.
 
The new generation of learning algorithms that were developed based on this theory has proved to be remarkably resistant to the problems imposed by noisy data and high dimensionality. They are computationally efficient, have an inherent modular design that simplifies their implementation and analysis and allows the insertion of domain knowledge, and, more importantly, they have theoretical guarantees about their generalization ability.  SVMs have been validated in hundreds of independent academic publications and presentations.  In recognition for his work, Professor Vapnik received the prestigious Alexander von Humboldt Prize from the German government honoring foreign scientists and scholars for lifetime achievement.
 
SVMs have become widely established as one of the leading approaches to pattern recognition and machine learning worldwide and are replacing neural networks in a variety of fields, including engineering, information retrieval and bioinformatics.  This technology has been incorporated into product and research applications by many biomedical, pharmaceutical, software, computer and financial companies.  Educational and research institutions throughout the world have successfully applied SVMs to a wide array of applications, including gene and protein expression analysis, medical image analysis, flow cytometry, and mass spectrometry.
 
Recursive Feature Elimination - Support Vector Machine Overview
 
Recursive Feature Elimination (RFE-SVM) is an application of SVM that was created by members of HDC’s science team to find discriminate relationships within clinical datasets, as well as within gene expression and proteomic datasets created from micro-arrays of tumor versus normal tissues. In general, SVMs identify patterns – for instance, a biomarker/genetic expression signature of a disease.  The RFE-SVM utilizes this pattern recognition capability to identify and rank order the data points that contribute most to the desired results based on specificity or sensitivity.  The Company believes that its two RFE-SVM patents are currently the only RFE patents issued in the world.
 
Using RFE-SVM, we have been able to access information in micro-array datasets that the most advanced bioinformatics techniques missed.  In one micro-array experiment, RFE-SVMs were able to filter irrelevant tissue-specific genes from those related to the malignancy. RFE-SVM has also been used to determine gene expression patterns that correlate to the severity of a disease, not just its existence.  It has been shown to improve both diagnosis and prognosis by providing physicians with an enhanced decision tool.  HDC scientists believe that these analytic methods are effective for finding genes and proteins implicated in several cancers, as well as in assisting with the pharmacogenetic and toxicological profiling of patients.  The RFE-SVM method is also capable of finding those specific genes and proteins that are unhindered by ever-increasing patent protection.
 
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Fractal Genomic Modeling Overview
 
On September 30, 2003, we acquired the assets of Fractal Genomics, LLC, a company with patented FGM software.  The fractal technology is used to find discriminate relationships within clinical datasets as well as within gene expression datasets created from micro-arrays of disease versus normal tissues.
 
The FGM data analysis technique has been shown to improve the mapping of genetic pathways involved in the diagnosis and prevention of certain diseases. HDC scientists feel that these analytic methods are effective for finding genes implicated in several cancers, HIV infection, lymphedema, Down's syndrome, and a host of other diseases, as well as the pharmacogenetic profiling of patients.
 
FGM technology is designed to study complex networks. A complex network can be made up of genes inside a living organism, web pages on the Internet, stocks within a financial market, or any group of objects or processes that appear to be connected together in some intricate way. FGM uses a new approach toward modeling network behavior to rapidly generate diagrams and software simulations that facilitate prediction and analysis of whatever process is your particular object of study. Two important concepts behind FGM technology are the notions of scale-free networks and self-similarity.
 
Our Scientific Achievements
 
HDC’s world renowned scientific team is uniquely experienced in the design, analysis and application of machine learning technology, having invented the concepts and many of the methodologies used to exploit domain knowledge.  In addition, through pattern recognition, our science team has identified and patent-protected biomarkers as possible treatment advances for several diseases, including Benign Prostatic Hyperplasia (BPH), prostate cancer, leukemia, colon cancer, and AIDS.
 
Benign Prostatic Hyperplasia (BPH)
 
HDC has identified and patent-protected a subset of genes that separates benign prostatic hyperplasia (BPH) from prostate cancer with a high degree of accuracy.  This same set of genes also separated BPH from normal tissue patterns, indicating that BPH is a disease with molecular characteristics of its own.  This discovery could be used to develop a new non-invasive diagnostic test for BPH, which does not currently exist, as well as a completely new type of therapy for patients with this disease.  This patent-protected gene set is the subject of discussions with an international pharmaceutical company to be used as a surrogate biomarker for their clinical trial evaluating a new BPH drug.
 
BPH is a non-cancerous enlargement of the prostate gland that occurs as men age.  The enlargement often leads to obstruction in the flow of urine through the urethra that passes through the prostate gland. BPH is a common condition, representing a global treatment market of almost $4 billion annually growing by 12% per year in fixed-rate US dollar terms.  According to the National Institutes of Health (NIH), BPH affects more than 50% of men over age 60 and as many as 90% of men over the age of 70.  While BPH does not cause prostate cancer, both may be found together.
 
Prostate Cancer
 
HDC has identified, patent-protected and recently licensed a genetic biomarker signature that identifies clinically significant high grade prostate cancer cells based on analysis of tissue samples.  More than one million men a year undergo biopsies of the prostate gland after a cancer-screening test reveals moderately elevated levels of prostate specific antigen (PSA) in the blood.  Upon the achievement of successful validation, the Company’s test will be used to analyze patients with elevated PSA, abnormal rectal exams, but negative biopsy results to determine if there is genomic evidence of grade three or higher cancer cells present in biopsy tissue, indicating the presence of a cancer missed by the biopsy.
 
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Prostate cancer is the second-leading cause of cancer death in men, after lung cancer. The National Cancer Institute (NCI) estimates that more than 186,000 new cases of prostate cancer will be diagnosed in the U.S. in 2008, with more than 28,660 deaths.
 
Leukemia
 
HDC has identified and patent-protected a set of leukemia genes that can separate ALL-T-cell leukemia from ALL-B-cell leukemia with a high degree of accuracy.  The Company collaborated with the University of Texas M.D. Anderson Cancer Center to analyze a gene expression database to identify new biomarkers and pathways involved in leukemia.  The Company intends to further validate this finding in anticipation of developing a molecular diagnostic product for commercialization.
 
Leukemia is a type of cancer that originates in the bone marrow. The accumulation of malignant cells interferes with the body's production of healthy blood cells and makes the body unable to protect itself against infections. The National Cancer Institute (NCI) estimates that more than 44,000 new cases will be diagnosed in the U.S. in 2008, with almost 22,000 deaths.
 
Colon Cancer
 
HDC has identified and patent- protected colon cancer-specific biomarkers that can be used in the development of diagnostic assays for cancer detection, disease discrimination, and even a potential vaccine. The aim of this early biomarker discovery project was to define the gene expression patterns associated with colon cancer.  Our RFE-SVM served as an effective tool for sifting through the noise of thousands of measurements to highlight only those genes that optimally contributed to the study focus.  The Company is currently validating these findings in anticipation of developing a molecular diagnostic product for commercialization.
 
In the United States, colorectal cancer is the third most common cancer in men and women. The National Cancer Institute (NCI) estimates that more than 108,000 new cases of colon and rectal cancer will be diagnosed in the U.S. in 2008, with nearly 50,000 deaths.
 
AIDS
 
HDC identified and patent-protected an AIDS expression signature that separated AIDS brain cells from non-AIDS brain cells with a high degree of accuracy.
 
This biomarker discovery was accomplished in conjunction with Dr. Paul Shapshak, Director of the Dementia/HIV Laboratory at the University of Miami Medical School, and a group of leading scientists using HDC's proprietary FGM analysis technique.  HDC sold the biomarker discovery to the University of Miami in November 2005.
 
HIV-related dementia occurs in 40-60% of all cases of HIV infection that are left untreated. Even when treated, dementia occurs in 10 percent of all cases of HIV infection, with the number continuing to rise as the virus becomes resistant to treatment. The dementia is related to inflammation in the brain caused by HIV infection, a problem whose underlying genetic causes are complex and largely unknown.
 
Breast Cancer
 
HDC is developing two breast cancer diagnostic technologies; one for detecting malignancy in mammograms ( MammoSIGHT ) and another for identifying circulating tumor cells in the blood ( MetastaSIGHT ). The detection component of these technologies finds the areas of particular interest in the image and separates these objects from the background.  The feature extraction component formulates numerical values relevant to the classification task from the segmented objects.  HDC’s patented technology can be used within all diagnostic imaging radiology techniques, including PET scans, CT scans, and MRIs.
 
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For women, breast cancer is the most common non-skin cancer and the second leading cause of cancer-related death in the United States.  However, death rates from breast cancer have been declining since 1990, and these decreases are believed to be the result, in part, of earlier detection and improved treatment.  Mammography remains the best method of early breast cancer detection.  According to studies cited by the National Cancer Institute, 10-20% of breast cancers detected by a physical exam were missed by a film mammogram.  For this reason, there have been extensive research efforts to improve mammography.
 
The FDA reports that there are about 33.5 million mammography procedures performed each year in the United States.  Data from 2000-2002 show that about 70 percent of all mammograms that are performed annually are for screening purposes (to detect cancer as opposed to following cancer once it has been diagnosed). This translates to about 23.5 million screening procedures every year.
 
Studies have shown that among newly diagnosed breast cancer cases in which the patients have previous mammograms, 75% of the cases will have abnormality detectable in the old films. In fact, missed cancer reading in mammography is a major source of lawsuits in radiology.  Detecting malignancy in mammograms can be very difficult. Individual mammograms are unique and there can be great variation within “normal” images.  Unlike CT and MRI, mammograms are not cross-sectional images.  Basically, a mammogram produces a two-dimensional picture of a three-dimensional object.  The projection from 3D to 2D and the resulting overlaps on the images may interfere with the recognition of the distinguishing features.  The features are often very subtle.  The rules for differentiating the benign and malignant cases are vague and not easily formulated.
 
One way to reduce reading errors is to have two radiologists read the same mammograms independently. However, in most health care systems, it is not feasible to implement such a two-radiologist reading process.  A computer-assisted detection (CAD) system serving as a second reader is therefore an attractive option and CAD is currently reimbursed by both insurance companies and Medicare.
 
Both digital and film mammography use X-rays to produce an image of the breast.  In film mammography, which has been used for over thirty-five years, the image is created directly on a film.  While standard film mammography is very good, it is less sensitive for women who have dense breasts.  A major limitation of film mammography is the film itself.  Once a film mammogram is obtained, it cannot be significantly altered; if the film is underexposed, for example, contrast is lost and cannot be regained.
 
Digital mammography takes an electronic image of the breast and stores it directly in a computer. Digital mammography uses less radiation than film mammography and allows for improvement in image storage and transmission because images can be stored and sent electronically.  Radiologists can use software to help interpret digital mammograms.
 
MammoSIGHT
 
HDC’s MammoSIGHT technology introduces the use of SVMs in detecting malignancy in mammograms. The SVM classifier produces an index discriminating between the benign and malignant cases. The individual components can be developed in parallel because of the modular structure. In developing the calcification segmentation component, a selected set of malignant, benign and normal cases representing a wide range of images was used to guide and test the design in order to produce a general, robust and accurate algorithm. At the same time, the SVM classifier was developed and tested with manually prepared input data. A set of 300 images (150 benign and 150 malignant cases) was used in training the SVM. An independent set of 328 images was used for testing. High dimensional input features were used to ensure a sufficient capacity for automatically extracted features.
 
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Clusters of micro calcifications are characterized by their relatively small sizes and high densities. The algorithm combines a recursive peak seeking technique with morphological operations to achieve a highly accurate calcification detection and segmentation.
 
MetastaSIGHT
 
Cancer cells have the ability to migrate from the organ of its origin to any distant organ throughout the body. This is known as metastasis, the hallmark of malignant cancers. During metastasis, cancerous cells break through barriers to travel through the body's circulatory system to invade other organs. These cells form new cells in vital organs throughout the body, becoming secondary tumors that destroy normal cells by depriving them of nutrition.
 
Even with today’s best treatment when the cancer is forced into remission, metastasis will not necessarily leave the body. Metastasis cannot be eliminated by surgery. Often, malignant cells circulate in the blood   before detection by clinical examination.   MetastaSIGHT uses an SVM-based approach to introduce new cellular imaging technology that identifies circulating tumor cells in the blood.
 
Employees
 
On December 31, 2007, we had 4 full time employees.  We do not expect any significant change in the number of employees over the next 12 months.
 
Website Address
 
Our corporate website address is www.HealthDiscoveryCorp.com.  To view our public filings from the home page, select the “Display SEC Filings” tab followed by “SEC Filings.”  This is a direct link to our filings with the Securities and Exchange Commission (“SEC”), including but not limited to our Annual Report of Form 10-KSB, quarterly reports on Form 10-QSB and current reports on Form 8-K, and any amendments to these reports.  These reports are accessible soon after we file them with the SEC.
 
Governmental Regulation
 
Our business plan involves Biomarker Discovery   in the field of molecular diagnostics.  This early discovery process does not involve any governmental regulations or approvals.  If we are successful in licensing our discoveries to other companies, FDA approvals may be required before the ultimate product may be sold to consumers.  Companies licensing our discoveries or technologies will be responsible for all costs involved in such approvals.  If we are not successful in licensing these discoveries and choose to take these discoveries to market ourselves, we may then be subject to applicable FDA regulations and would then bear the costs of such approvals.
 
We know of no governmental regulations that will affect the Company’s current operations or products.
 
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Intellectual Property 
 
In connection with the SVM Acquisition, we obtained rights to the intellectual property within the “SVM portfolio” that currently consists of twenty-seven patents which were or have since issued as well as thirty-nine other patent applications that are pending in the U.S. and elsewhere in the world.  The issued patents and pending applications in the SVM portfolio to date, including new applications that we have filed since acquiring the original IP, HDC are:
 
Patent/Application No.
Title
Expiration Date
     
U.S. Patent No. 6,128,608
Enhancing Knowledge Discovery Using Multiple Support Vector Machines
05/01/2019
     
U.S. Patent No. 6,157,921
Enhancing Knowledge Discovery Using Support Vector Machines in a Distributed Network Environment
05/01/2019
     
U.S. Patent No. 6,427,141
Enhancing Knowledge Discovery Using Multiple Support Vector Machines.
05/01/2019
     
U.S. Patent No. 6,658,395
Enhancing Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector Machines.
05/01/2019
     
U.S. Patent No. 6,714,925
System for Identifying Patterns in Biological Data Using a Distributed Network.
05/01/2019
     
U.S. Patent No. 6,760,715
Enhancing Biological Knowledge Discovery Using Multiple Support Vector Machines.
05/01/2019
     
U.S. Patent No. 6,789,069
Method of Identifying Patterns in Biological Systems and Method of Uses.
05/01/2019
     
U.S. Patent No. 6,882,990
Method of Identifying Biological Patterns Using Multiple Data Sets.
05/01/2019
     
U.S. Patent No. 6,944,602
Spectral Kernels for Learning Machines
02/19/2023
     
U.S. Patent No. 6,996,542
Computer-Aided Image Analysis
04/21/2021
     
U.S. Patent No. 7,117,188
Methods of Identifying Patterns in Biological Systems and Uses Thereof
05/01/2019
     
U.S. Patent No. 7,299,213
Method of Using Kernel Alignment to Extract Significant Features from a Large Dataset
03/01/2022
     
U.S. Patent No. 7,318,051
Methods for Feature Selection in a Learning Machine
02/25/2021
     
U.S. Patent No. 7,353,215
Kernels and Methods for Selecting Kernels for Use in a Learning Machine
05/07/2022
     
Australian Patent No.  764897
Pre-processing and Post-processing for Enhancing Knowledge Discovery Using Support Vector Machines.
05/01/2019
     
South African Patent No. 00/7122
Pre-processing and Post-processing for Enhancing Knowledge Discovery Using Support Vector Machines.
05/01/2019
     
Australian Patent No.  780050
Enhancing Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector Machines.
05/24/2020
     
Chinese Patent No. ZL00808062.3
Enhancing Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector Machines.
05/24/2020
     
European Patent No. 1192595
Enhancing Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector Machines.
05/24/2020
 
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German Patent No. DE60024452.0-08
Enhancing Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector Machines.
05/24/2020
     
Israeli Patent No. 146705
Enhancing Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector Machines
05/24/2020
     
Norwegian Patent No. 319,838
Enhancing Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector Machines.
05/24/2020
     
South Korean Patent No.  724104
Enhancing Knowledge Discovery from Data Sets Using Multiple Support Vector Machines
05/24/2020
     
Australian Patent No.  779635
Method of Identifying Patterns in Biological Systems and Method of Uses.
10/27/2020
     
Australian Patent No.  2002243783
Computer Aided Image Analysis
01/23/2022
     
Japanese Patent No. 3947109
Computer Aided Image Analysis
01/23/2022
     
Australian Patent No. 2002253879
Methods of Identifying Patterns in Biological Systems and Uses Thereof
01/24/2022
     
Canadian Application No. 2,330,878
Pre-Processing and Post-Processing for Enhancing Knowledge Discovery Using Support Vector Machines
05/01/2019
     
European Publication No. 1082646
Pre-Processing and Post-Processing for Enhancing Knowledge Discovery Using Support Vector Machines
05/01/2019
     
Hong Kong Application No. 011065063
Pre-Processing and Post-Processing for Enhancing Knowledge Discovery Using Support Vector Machines
05/01/2019
     
Indian Application No.  2000/00580
Pre-Processing and Post-Processing for Enhancing Knowledge Discovery Using Support Vector Machines
05/01/2019
     
Canadian Application No.  2,371,240
Enhancing Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector Machines
05/24/2020
     
Indian Application No.  2001/01329
Enhancing Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector Machines
05/24/2020
     
Japanese Application No. 2000-620577
Enhancing Knowledge Discovery from Multiple Data Sets Using Multiple Support Vector Machines
05/24/2020
     
Canadian Application No. 2,388,595
Method of Identifying Patterns in Biological Systems and Method of Uses
08/07/2020
     
European Publication No. 1236173
Method of Identifying Patterns in Biological Systems and Method of Uses
08/07/2020
     
Japanese Application No. 2001-534088
Method of Identifying Patterns in Biological Systems and Methods of Uses
08/07/2020
     
U.S. Patent Publication No. 2005/0165556
Colon Cancer-Specific Markers
05/01/2019
     
U.S. Patent Publication No. 2007/0092917
Biomarkers for Screening, Predicting, and Monitoring Prostate Disease
05/01/2019
     
U.S. Application No. 11/926,129
System for Providing Data Analysis Services Using a Support Vector Machine for Processing Data Received from a Remote Source
05/01/2019
     
U.S. Patent Publication No. 2008/0033899
Feature Selection Using Support Vector Machine Classifier
05/01/2019
     
European Publication No.  1828917
Biomarkers for Screening, Predicting, and Monitoring Prostate Disease
11/14/2025
 
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Canadian Application No. 2,435,254
Methods of Identifying Patterns in Biological Systems and Uses Thereof
01/24/2022
     
European Publication No. 1459235
Methods of Identifying Patterns in Biological Systems and Uses Thereof
01/24/2022
     
Japanese Application No. 2002-560076
Methods of Identifying Patterns in Biological Systems and Uses Thereof
01/24/2022
     
European Publication No. 1384155
Spectral Kernels for Learning  Machines
02/19/2023
     
U.S. Application No. 11/929,354
Kernels and Methods for Selecting Kernels for Use in a Learning Machine
05/07/2022
     
European Publication No. 1393196
Kernels and Methods for Selecting Kernels for Use in a Learning Machine
05/07/2022
     
U.S. Patent Publication No.  2006/0224539
Computer-Aided Image Analysis
05/24/2020
     
Canadian Application No. 2,435,290
Computer Aided Image Analysis
01/23/2022
     
European Publication No. 1356421
Computer Aided Image Analysis
01/23/2022
     
U.S. Application No. 11/929,213
Methods for Feature Selection in a Learning Machine
08/07/2020
     
U.S. Patent Publication No. 2005/0071140
Model Selection for Cluster Data Analysis
05/17/2022
     
U.S. Application No. 11/929,522
Model Selection for Cluster Data Analysis
05/17/2022
     
U.S. Patent Publication No. 2006/0064415
Data Mining Platform for Bioinformatics
08/07/2020
     
U.S. Application No. 11/928,606
Data Mining Platform for Knowledge Discovery from Heterogeneous Data Types and/or Heterogeneous Data Sources
08/07/2020
     
U.S. Application No. 11/928,641
Data Mining Platform for Bioinformatics
08/07/2020
     
U.S. Patent Publication No. 2005/0228591
Kernels and Kernel Methods for Spectral Data
08/07/2020
     
U.S. Application No. 11/929,169
Kernels and Kernel Methods for Spectral Data
08/07/2020
     
U.S. Patent Publication No. 2005/0131847
Pre-Processed Feature Ranking for a Support Vector Machine
08/07/2020
     
U.S. Application No. 11/928,784
Pre-Processed Feature Ranking for a Support Vector Machine
08/07/2020
     
European Publication No. 1449108
Pre-Processed Feature Ranking for a Support Vector Machine
11/07/2022
     
U.S. Application No. 11/829,039
Biomarkers for Screening, Predicting, and Monitoring Benign Prostate Hyperplasia
01/24/2022
     
U.S. Application No. 12/025,724
Biomarkers Upregulated in Prostate Cancer
01/24/2022
 
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U.S. Provisional Application No. 60/976,791
Biomarkers for Screening, Predicting, and Monitoring Prostate Disease
01/24/2022
     
U.S. Provisional Application No. 61/027,416
Analysis of Flow Cytometry Data Using Support Vector Machines
02/08/2028

 
HDC also owns intellectual property rights in U.S. and foreign patents and pending patent applications covering the FGM technology.  The FGM portfolio includes two issued patents and three pending patent applications, which are:
 
Patent/Application No.
Title
Expiration Date
     
U.S. Patent No. 6,920,451
Method for the Manipulation, Storage, Modeling, Visualization and Quantification of Datasets.
01/19/2021
     
European Patent No.: 1252588
Method for the Manipulation, Storage, Modeling, Visualization and Quantification of Datasets.
01/19/2021
     
U.S. Patent Publication No.: 2005/0079524
Method for Identifying Biomarkers Using Fractal Genomics Modeling.
01/19/2021
     
U.S. Patent Publication No.: 2005/0158735
Method for Studying Cellular Chronomics and Causal Relationships of Genes Using Fractal Genomics Modeling.
01/19/2021
     
U.S. Patent Publication No.: 2005/0076190
Method for the Manipulation, Storage, Modeling, Visualization and Quantification of Datasets.
01/19/2021

Our Competition
 
HDC’s main service/product is Biomarker Discovery .  While a number of companies perform Biomarker Discovery , we feel that our SVM and FGM technologies give us a distinct advantage over competing technologies.  Neither classical statistical analysis nor neural networks (the two competing technologies) can handle the large amounts of inputs necessary to produce fully validated biomarkers.
 
Customers and Licensees
 
We have produced sales, licensing, and developmental revenue since 2005 through agreements with a few customers and licensees. We have a strategic alliance and licensing agreement with Clarient, Inc. for commercialization of a new molecular diagnostic test for prostate cancer based on our discovered prostate cancer biomarker signature.  Pursuant to our agreement, Clarient, Inc. obtained an exclusive license to the prostate cancer test in exchange for our 30% royalty interest from all reimbursements of the test once commercialized.  Since entering into the agreement, together we have completed implementation of necessary assays and specimen transfer from an internationally known cancer center required to validate the PCR based tests at Clarient prior to the commercial launch as a CLIA diagnostic test for prostate cancer.  We also received our first royalty proceeds related to our licensing agreement with Bruker Daltonics in December 2007.  These royalties relate to Bruker Daltonics’ sales of its ClinProTools TM clinical proteomics product line for its mass spectrometers, which contains our SVM technology.  While the initial royalty was relatively small, it represents HDC’s first royalty check from this relationship and offers the opportunity of future royalties for the life of the patents related to future sales of the Bruker product.   We have also been and continue to be in meaningful discussions with a variety of parties, which, if successful, may result in additional customers and licensees, and as a result, additional revenue.
 
While we have a number of negotiations in process with potential licensing partners, including in the field of anatomic pathology imaging (which includes such things as PAP smear tests, biopsies, surgical specimens, and cytology specimens), there is a possibility that we will be unable to reach agreement with any party, that the negotiations continue but are not finalized, or that those that may be finalized do not provide the economic returns that we expect.
 
15

 
Research and Development
 
Our past Research and Development costs have been minimal due to the unique relationships we have maintained with the members of our scientific team and their institutions.  Our total R&D costs have consisted solely of the consultant fees paid to Dr. Stamey, Dr. Vapnik, and Dr. Guyon.  These fees consisted of $46,432 in cash for 2007 and $70,734 in cash for 2006.
 
ITEM 1A.  RISK FACTORS
 
This document contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including, without limitation, all statements, other than statements of historical facts, that address activities, events or developments that we expect or anticipate will or may occur in the future, including the successful implementation of our services, business strategies and measures to implement such strategies, competitive strengths, expansion and growth of our business and operations, references to future success and other such matters are forward-looking statements and are based on the beliefs of, assumptions made by and information currently available to our management. The words “expect,” “estimate,” “anticipate,” “believe,” “intend,” “plan” and similar expressions and variations thereof are intended to identify forward-looking statements. Such forward-looking statements may involve uncertainties and other factors that may cause the actual results and performance of our company to be materially different from future results or performance expressed or implied by such statements.
 
The cautionary statements set forth in this “Risk Factors” section and elsewhere in this annual report identify important factors with respect to such forward-looking statements, including certain risks and uncertainties, which could cause actual results to differ materially from those expressed in or implied by such forward-looking statements. Among others, factors that could adversely affect actual results and performance include failure to successfully develop a profitable business, delays in identifying and enrolling customers, and the inability to retain a significant number of customers.  All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by the foregoing cautionary statement.
 
Risks Related to Our Business
 
We are a developing business and a high-risk company.
 
We are a high-risk company in a volatile industry.  In September 2003, we completely changed the focus of our business from wireless telecommunications to biotechnology.  Consequently, we have a limited history on which to base an evaluation of our business and prospects.  Thus, investors should recognize that an investment in our company is risky and highly speculative.  We are a developing business, and our prospects must be considered in light of the risks, uncertainties, expenses and difficulties frequently encountered by companies in their early stages of development.  Failure to implement and execute our business and marketing strategy successfully, to provide superior customer service, to respond to competitive developments and to integrate, retain and motivate qualified personnel could have a material adverse effect on our business, results of operations and financial condition. We must successfully overcome these and other business risks.  If our efforts are unsuccessful or other unexpected events occur, purchasers of the common stock offered hereby could lose their entire investment.
 
We expect to incur future losses, and we may never achieve or sustain profitability.
 
We expect to continue to incur net losses and have negative cash flows in the future due in part to high research and development expenses, including enhancements to our technologies and investments in new technologies.  We cannot assure you that we will ever achieve profitability.  Even if we do achieve profitability, we may not be able to sustain or increase profitability.
 
16

 
Our business is difficult to evaluate because we have a limited history of operations.
 
Since reorganizing in 2003, our focus and our business model have been continually evolving.  Accordingly, we have a history of operations in which there is limited information to identify any historical pattern. Even if we could discern such a pattern, the rapidly evolving nature of the biotechnology and pharmaceutical industries would make it very difficult to identify any meaningful information in such short a history.  Therefore, it is also difficult to make any projections about the future of our operations.  This difficulty may result in our shares trading below their value.
 
We will have negative operating income and may never become profitable.
 
Our operating expenses are expected to exceed our income until we successfully complete transactions resulting in sufficient revenue and thus our capital will be decreased to pay these operating expenses.  If we ever become profitable, of which there is no assurance that we can, from time to time our operating expenses could exceed our income and thus our capital will be decreased to pay these operating expenses.
 
We may need additional financing.
 
If we are unable to generate sufficient revenue, additional proceeds may be required to finance our activities. We cannot assure prospective investors that we will not need to raise additional capital or that we would be able to raise sufficient additional capital on favorable terms, if at all. No binding arrangements have been made to secure such financing, and there can be no assurance that such additional financing will be available when required on terms acceptable to us.  If we fail to raise sufficient funds, we may have to cease operations, which would materially harm our business and financial results. If we raise additional capital by issuing equity securities, our stockholders may experience dilution. If we raise additional funds through collaboration and licensing arrangements, we may be required to relinquish some rights to our technologies or product candidates, or grant licenses on terms that are not favorable to us.
 
Our operating results are unpredictable and may fluctuate significantly from period to period, which may cause our stock price to decline and result in losses to investors.
 
Our operating results may vary from period to period due to numerous factors, many of which are outside our control, including the number, timing and acceptance of our services. Factors that may cause our results to vary by period include:
 
 
§
changes in the demand for our products and services;
     
 
§
the nature, pricing and timing of products and services provided to our collaborators;
     
 
§
acquisition, licensing and other costs related to the expansion of our operations, including operating losses of acquired businesses;
     
 
§
reduced capital investment for extended periods;
     
 
§
losses and expenses related to our investments in joint ventures and businesses;
     
 
§
regulatory developments or changes in public perceptions relating to the use of genetic information and the diagnosis and treatment of disease based on genetic information;
     
 
§
changes in intellectual property laws that affect our rights in genetic information that we sell; and
     
 
§
payments of milestones, license fees or research payments under the terms of our increasing number of external alliances.
 
17

 
Research and development costs associated with our technologies and services, as well as personnel costs, marketing programs and overhead, account for a substantial portion of our operating expenses. These expenses cannot be adjusted quickly in the short term.  If revenues of the business decline or do not grow as anticipated, we may not be able to reduce our operating expenses accordingly.  Failure to achieve anticipated levels of revenue could therefore significantly harm our operating results for a particular period.
 
Our stock price has been, and is likely to continue to be, highly volatile .
 
Our stock price has, since September 1, 2003, traded as high as $0.60 and as low as $0.04.  Our stock price could fluctuate significantly due to a number of factors beyond our control, including:
 
 
§
variations in our actual or anticipated operating results;
     
 
§
sales of substantial amounts of our stock;
     
 
§
announcements about us or about our competitors, including technological innovation or new products or services;
     
 
§
litigation and other developments related to our patents or other proprietary rights or those of our competitors;
     
 
§
conditions in the life sciences, pharmaceuticals or genomics industries; and
     
 
§
governmental regulation and legislation.
 
In addition, the stock market in general, and the market for life sciences and technology companies in particular, have experienced extreme price and volume fluctuations recently. These fluctuations often have been unrelated or disproportionate to the operating performance of these companies. These broad market and industry factors may decrease the market price of our common stock, regardless of our actual operating performance.
 
In the past, companies that have experienced volatility in the market prices of their stock have been the objects of securities class action litigation. If we became the object of securities class action litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could affect our profitability.
 
Our approach of incorporating ideas and methods from mathematics, computer science and physics into the disciplines of biology, organic chemistry and medicine is novel and may not be accepted by our potential customers or collaborators.
 
We intend to create a fully integrated biomarker discovery company to provide pharmaceutical and diagnostic companies worldwide with new, clinically relevant and economically significant biomarkers.  We are a drug and diagnostic discovery company, which incorporates ideas and methods from mathematics, computer science and physics into the disciplines of biology, organic chemistry and medicine. Our objective is to significantly increase the probability of success of drug discovery and diagnostic development.  Our approach and the products and technologies derived from our approach are novel. Our potential customers and collaborators may be reluctant to accept our new, unproven technologies, and our customers may prefer to use traditional services. In addition, our approach may prove to be ineffective or not as effective as other methods.  Our products and technologies may prove to be ineffective if, for instance, they fail to account for the complexity of the life processes that we are now attempting to model.  If our customers or collaborators do not accept our products or technologies and/or if our technologies prove to be ineffective our business may fail or we may never become profitable.
 
Even if our computational technologies are effective as research tools, our customers or we may be unable to develop or commercialize new drugs, therapies or other products based on them.
 
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Even if our computational technologies perform their intended functions as research tools, our customers may be unable to use the discoveries resulting from them to produce new drugs, therapies, diagnostic products or other life science products.  Despite recent scientific advances in the life sciences and our improved understanding of biology, the roles of genes and proteins and their involvement in diseases and in other life processes is not well understood.  Only a few therapeutic products based on the study of and discoveries relating to genes or proteins have been developed and commercialized.  If our customers are unable to use our discoveries to make new drugs or other life science products, our business may fail or we may never become profitable.
 
Our acquired SVM Portfolio utilizes technology covered by an earlier-issued patent, and if we lose the rights to use that patent, our ability to exploit certain aspects of our SVM technology will be impaired.
 
Our acquired SVM Portfolio utilizes technology covered by the original hyperplane patent (Pat. No. 5,649,068) invented by members of our Scientific Advisory Board and owned by Lucent Technologies, Inc. - GRL Corp. (“Lucent”).  We have obtained an assignment of a pre-existing patent license from Lucent. If Lucent were to terminate the license, it is possible that we would not be able to use portions of the Support Vector Machine technology.
 
The industries in which we are active are evolving rapidly, and we may be unable to keep pace with changes in technology.
 
The pharmaceutical and biotechnology industries are characterized by rapid technological change.  This is especially true of the data-intensive areas of such technologies.  Our future success will largely depend on maintaining a competitive position in the field of drug, therapeutics and diagnostic products discovery.  If we fail to keep pace with changes in technology, our business will be materially harmed. Rapid technological development may result in our products or technologies becoming obsolete. This may occur even before we recover the expenses that we incurred in connection with developing those products and technologies.  Products or services offered by us could become obsolete due to the development of less expensive or more effective drug or diagnostics discovery technologies.  We may not be able to make the necessary enhancements to our technologies to compete successfully with newly emerging technologies.
 
We face intense competition and if we are unable to compete successfully we may never achieve profitability.
 
The markets for our products and services are very competitive, and we expect our competition to increase in the future.  Although we have not identified one company that provides the full suite of services that we do, we compete with entities in the U.S. and elsewhere that provide products and services for the analysis of genomic information and information relating to the study of proteins (proteomic information) or that commercializes novel genes and proteins.  These include genomics, pharmaceutical and biotechnology companies, academic and research institutions and government and other publicly funded agencies.  We may not be able to successfully compete with current and future competitors.  Many of our competitors have substantially greater capital resources, research and development staffs, facilities, manufacturing and marketing experience, distribution channels and human resources than we do.  This may allow these competitors to discover or to develop products in advance of us or of our customers.
 
Some of our competitors, especially academic and research institutions and government and other publicly funded agencies, may provide for free services or data similar to the services and data that we provide for a fee.  Moreover, our competitors may obtain patent and other intellectual property protection that would limit our rights or our customers’ and partners’ ability to use or commercialize our discoveries, products and services.  If we are unable to compete successfully against existing or potential competitors, we may never achieve profitability.
 
Our management may be unable to address future growth.
 
19

 
We anticipate that if we experience a period of growth in the future, a period of significant expansion will be required to address potential growth in our customer base and market opportunities. This expansion will place a significant strain on our management, operational and financial resources. To manage future growth of our operations, if any, we will be required to improve existing and implement new operational systems, procedures and controls, and to expand, train and manage our employee base. There can be no assurance that our current and planned personnel, systems, procedures and controls will be adequate to support our future operations, that management will be able to hire, train, retain, motivate and manage the required personnel or that we will be able to identify, manage and exploit existing and potential strategic relationships and market opportunities. Our failure to manage growth effectively could have a material adverse effect on our business, results of operations and financial condition.
 
If our business does not keep up with rapid technological change or continue to introduce new products, we may be unable to maintain market share or recover investments in our technologies.
 
Technologies in the biomarker industry have undergone, and are expected to continue to undergo, rapid and significant change. We may not be able to keep pace with the rapid rate of change and introduce new products that will adequately meet the requirements of the marketplace or achieve market acceptance. If we fail to introduce new and innovative products, we could lose market share to our competitors and experience a reduction in our growth rate and damage to our reputation and business.
 
The future success of our business will depend in large part on our ability to maintain a competitive position with respect to these technologies. We believe that successful new product introductions provide a significant competitive advantage because customers make an investment of time in selecting and learning to use a new product, and are reluctant to switch to a competing product after making their initial selection. However, our business or others may make rapid technological developments, which could result in our technologies, products or services becoming obsolete before we are able to recover the expenses incurred to develop them.
 
If our business cannot enter into strategic alliances or licensing agreements, we may be unable to develop and commercialize our technologies into new products and services or continue to commercialize existing products or services.
 
We may be unable to maintain or expand existing strategic alliances or establish additional alliances or licensing arrangements necessary to continue to develop and commercialize products, and any of those arrangements may not be on terms favorable to the business. In addition, current or any future arrangements may be unsuccessful. If we are unable to obtain or maintain any third party license required to sell or develop our products or product enhancements, we may choose to obtain substitute technology either through licensing from another third party or by developing the necessary technology ourselves. Any substitute technology may be of lower quality or may involve increased cost, either of which could adversely affect our ability to provide our products competitively and harm our business.
 
We also depend on collaborators for the development and manufacture of complex instrument systems and chemicals and other materials that are used in laboratory experiments. We cannot control the amount and timing of resources our collaborators devote to our products. We may not be able to enter into or satisfactorily retain these research, development and manufacturing collaborations and licensing agreements, which could reduce our growth and harm our competitive position.
 
We may not be able to find business partners to develop and commercialize product candidates deriving from our discovery activities.
 
Our strategy for the development and commercialization of diagnostic markers and therapeutic proteins depends on the formation of collaborations or licensing relationships with third parties that have complementary capabilities in relevant fields. Potential third parties include pharmaceutical and biotechnology companies, diagnostic companies, academic institutions and other entities.  We cannot assure you that we will be able to form these collaborations or license our discoveries or that these collaborations and licenses will be successful.
 
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Our dependence on licensing and other collaboration agreements with third parties subjects us to a number of risks.
 
We may not be able to enter into licensing or other collaboration agreements on terms favorable to us.  Collaborators may typically be afforded significant discretion in electing whether to pursue any of the planned activities.  In most cases, our collaborators or licensees will have responsibility for formulating and implementing key strategic or operational plans. Decisions by our collaborators or licensees on these key plans, which may include development, clinical, regulatory, marketing (including pricing), inventory management and other issues, may prevent successful commercialization of the product or otherwise affect our profitability.
 
In addition, we may not be able to control the amount and timing of resources our collaborators devote to the product candidates, and collaborators may not perform their obligations as expected. Additionally, business combinations or changes in a collaborator’s or a licensee’s business strategy may negatively affect its willingness or ability to complete its obligations under the arrangement with us.  Furthermore, our rights in any intellectual property or products that may result from our collaborations may depend on additional investment of money that we may not be able or willing to make.
 
Potential or future collaborators may also pursue alternative technologies, including those of our competitors.  Disputes may arise with respect to the ownership of rights to any technology or product developed with any future collaborator. Lengthy negotiations with potential collaborators or disagreements between us and our collaborators may lead to delays or termination in the research, development or commercialization of product candidates or result in time-consuming and expensive litigation or arbitration. If our collaborators pursue alternative technologies or fail to develop or commercialize successfully any product candidate to which they have obtained rights from us, our business, financial condition and results of operations may be significantly harmed.
 
If we are unable to hire or retain key personnel or sufficient qualified employees, we may be unable to successfully operate our business.
 
Our business is highly dependent upon the continued services of our Chief Executive Officer, Board of Directors, and Scientific Advisory Board.  While members of our senior management are parties to employment or consulting agreements and non-competition and non-disclosure agreements, we cannot assure you that these key personnel and others will not leave us or compete with us, which could materially harm our financial results and our ability to compete.  The loss, incapacity or unavailability for any reason of any of these individuals could have a material adverse effect upon our business, as well as our relationships with our potential customers.  We do not carry key person life insurance on any member of our senior management.  Furthermore, competition for highly qualified personnel in our industry and geographic locations is intense.  Our business would be seriously harmed if we were unable to retain our key employees, or to attract, integrate or retain other highly qualified personnel in the future.
 
We may not be able to employ and retain experienced scientists, mathematicians and management.
 
Technologies in our industry have undergone, and are expected to continue to undergo, rapid and significant change. A highly skilled staff is integral to developing, marketing and supporting new products that will meet or exceed the expectations of the marketplace and achieve market acceptance. Without experienced staff, our business may be unable to maintain or grow market share, which could result in lower than expected revenues and earnings.
 
We may acquire or make strategic investments in other businesses and technologies in the future, and these could prove difficult to integrate, disrupt our business, dilute stockholder value and adversely affect our operating results.
 
If opportunities arise, we may consider making acquisitions of businesses, technologies, services or products.  Acquisitions may involve significant cash expenditures, debt incurrence, additional operating losses and expenses that may have a material adverse effect on the operating results of our business.  Moreover, even if we acquire complementary businesses or technologies, we may be unable to successfully integrate any additional personnel, operations or acquired technologies into our business.
 
21

 
Difficulties in integrating an acquired business could disrupt our business, distract our management and employees and increase our expenses.  Future acquisitions could expose us to unforeseen liabilities and result in significant charges relating to intangible assets.  Sizable acquisitions may also divert senior management from focusing on our existing business plan.  Finally, if we make acquisitions using convertible debt or equity securities, existing stockholders may be diluted, which could affect the market price of our stock.
 
If our access to tissue samples or to genomic data or other information is restricted, or if this data is faulty, our business may suffer.
 
To continue to build our technologies and related products and services, we need access to third parties’ scientific and other data and information.  We also need access to normal and diseased human and other tissue samples and biological materials.  We may not be able to obtain or maintain such access on commercially acceptable terms.  Some of our suppliers could become our competitors and discontinue selling supplies to us.  Information and data from these suppliers could contain errors or defects that could corrupt our databases or the results of our analysis of the information and data.  In addition, government regulation in the United States and other countries could result in restricted access to, or use of, human and other tissue samples.  Although currently we do not face significant problems in obtaining access to tissues, if we lose access to sufficient numbers or sources of tissue samples, or if tighter restrictions are imposed on our use of the information generated from tissue samples, our business may suffer.
 
The sales cycle for some of our products and services is lengthy.  We expend substantial funds and management effort with no assurance of successfully selling our products or services.
 
Our ability to obtain customers for our platforms, tools and services depends in large part upon the perception that our technologies can help accelerate their efforts in drug and diagnostics discovery.  Our ability to obtain customers for our therapeutic or diagnostic product candidates significantly depends on our ability to validate and prove that each such product candidate is suitable for our claimed therapeutic or diagnostic purposes.  Our ability to obtain customers will also depend on our ability to successfully negotiate terms and conditions for such arrangements. The sales cycle for our therapeutic and diagnostic product candidates is typically lengthy and may take more than 12 months.
 
An inability to protect our proprietary data, technology or products may harm our competitive position.
 
If we do not adequately protect the intellectual property underlying our products and services, competitors may be able to develop and market the same or similar products and services. This would erode our competitive advantage.  In addition, the laws of some countries do not protect or enable the enforcement of intellectual property to the same extent as the laws of the United States.
 
We use contractual obligations to protect a significant portion of our confidential and proprietary information and know-how.  This includes a substantial portion of the knowledge base from which we develop a large portion of our proprietary products and services.  However, these measures may not provide adequate protection for our trade secrets or other proprietary information and know-how.  Customers, employees, scientific advisors, collaborators or consultants may still disclose our proprietary information in violation of their agreements with us, and we may not be able to meaningfully protect our trade secrets against this disclosure.
 
In addition, we have applied for patents covering some aspects of some of our technologies and predicted genes and proteins we have discovered using these technologies.  We plan to continue to apply for patents covering parts of our technologies and discoveries as we deem appropriate, but cannot assure you that we will be able to obtain any patents.  The patent positions of biotechnology companies are generally uncertain and involve complex legal and factual questions.  Legislative changes and/or changes in the examination guidelines of governmental patents offices may negatively affect our ability to obtain patent protection for certain aspects of our intellectual property, especially with respect to genetic discoveries.
 
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Our success depends in large part on our ability to patent our discoveries.
 
Our success depends, in large part, on our ability to obtain patents on biomarkers and pathways that we have discovered and are attempting to commercialize.  We face intense competition from other biotechnology and pharmaceutical companies. These include customers who use our products and technologies and are pursuing patent protection for discoveries, which may be similar or identical to our discoveries.  We cannot assure you that other parties have not sought patent protection relating to the biomarkers and pathways that we discovered or may discover in the future.  Our patent applications may conflict with prior applications of third parties or with prior publications.  They may not result in issued patents and, even if issued, our patents could be invalidated or may not be sufficiently broad to provide us with any competitive advantages.  U.S. and other patent applications ordinarily remain confidential for 18 months from the date of filing.  As a result, patent applications that we file which we believe are novel at the time of filing, may be determined at a later stage to be inconsistent with earlier applications.  Any of these events could materially harm our business or financial results.
 
Litigation or other proceedings or third party claims of intellectual property infringement could prevent us, or our customers or collaborators, from using our discoveries or require us to spend time and money to modify our operations.
 
If we infringe patents or proprietary rights of third parties, or breach licenses that we have entered into with regard to our technologies and products, we could experience serious harm. If litigation is commenced against us for intellectual property rights infringement, we may incur significant costs in litigating, whether or not we prevail in such litigation.  These costs would also include diversion of management and technical personnel to defend us against third parties or to enforce our patents (once issued) or other rights against others.  In addition, parties making claims against us may be able to obtain injunctive or other equitable relief that could prevent us from being able to further develop or commercialize.  This could also result in the award of substantial damages against us.  In the event of a successful claim of infringement against us, we may be required to pay damages and obtain one or more licenses from third parties.  If we are not able to obtain these licenses at a reasonable cost, if at all, we could encounter delays in product introductions while we attempt to develop alternative methods or products. Defense of any lawsuit or failure to obtain any of these licenses could prevent us from commercializing available products.
 
The technology that we use to develop our products, and the technology that we incorporate in our products, may be subject to claims that they infringe the patents or proprietary rights of others. The risk of this occurring will tend to increase as the genomics, biotechnology and software industries expand, more patents are issued and other companies engage in other genomic-related businesses.
 
As is typical in the genomics, biotechnology and software industries, we will probably receive in the future notices from third parties alleging patent infringement.  We believe that we are not infringing the patent rights of any third parties.  No third party has filed a patent lawsuit against us.  We may, however, be involved in future lawsuits alleging patent infringement or other intellectual property rights violations.  In addition, litigation may be necessary to:
 
 
§
assert claims of infringement;
     
 
§
enforce our patents as they are granted;
     
 
§
protect our trade secrets or know-how; or
     
 
§
determine the enforceability, scope and validity of the proprietary rights of others.
 
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We may be unsuccessful in defending or pursuing these lawsuits.  Regardless of the outcome, litigation can be very costly and can divert management’s efforts.  An adverse determination may subject us to significant liabilities or require us to seek licenses to other parties’ patents or proprietary rights.  We may also be restricted or prevented from licensing or selling our products and services.  Further, we may not be able to obtain any necessary licenses on acceptable terms, if at all.
 
The scope of patents we receive may not provide us with adequate protection of our intellectual property, which would harm our competitive position.
 
Any issued patents that cover our proprietary technologies may not provide us with substantial protection or be commercially beneficial to the business.  The issuance of a patent is not conclusive as to its validity or its enforceability.  Federal courts may invalidate these patents or find them unenforceable.  Competitors may also be able to design around our patents.  If we are unable to protect our patented technologies, we may not be able to commercialize our technologies, products or services and our competitors could commercialize our technologies.
 
Our business also relies on a combination of trade secrets, copyrights and trademarks, non-disclosure agreements and other contractual provisions and technical measures to protect our intellectual property rights. While we generally require employees, collaborators, consultants and other third parties to enter into confidentiality agreements where appropriate, it is not always possible to enforce these arrangements.
 
Monitoring the unauthorized use of our technology is difficult, and the steps we have taken may not prevent unauthorized use of our technology. The disclosure or misappropriation of our intellectual property for any of the above reasons could harm our ability to protect our rights and our competitive position.
 
We may become involved in disputes regarding our patents and other intellectual property rights, which could result in the forfeiture of these rights, expose the business to significant liability and divert management’s focus.
 
In order to protect or enforce our patent rights, our business may need to initiate patent litigation against third parties.  In addition, we may be sued by third parties alleging that we are infringing their intellectual property rights.  These lawsuits are expensive, take significant time and divert management’s focus from other business concerns. These lawsuits could result in the invalidation or limitation of the scope of our patents, forfeiture of the rights associated with these patents or an injunction preventing Health Discovery from selling any allegedly infringing product. In addition, we may not prevail or a court may find damages or award other remedies in favor of the opposing party in any of these suits.  During the course of these suits, there may be public announcements of the results of hearings, motions and other interim proceedings or developments in the litigation. Securities analysts or investors may perceive these announcements to be negative, which could cause the market price of our common stock to decline.
 
Many of our services will be based on complex, rapidly developing technologies. Although we will try to identify all relevant third party patents, these products could be developed by the business without knowledge of published or unpublished patent applications that cover some aspect of these technologies. The biomarker industry has experienced intensive enforcement of intellectual property rights by litigation and licensing.  If we are found to be infringing the intellectual property of others, we could be required to stop the infringing activity, or we may be required to design around or license the intellectual property in question.  If we are unable to obtain a required license on acceptable terms, or are unable to design around any third party patent, we may be unable to sell some of our services, which could result in reduced revenue.
 
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Risks Related to Our Industry
 
There are many risks of failure in the development of drugs, therapies, diagnostic products and other life science products. These risks are inherent to the development and commercialization of these types of products.
 
Risks of failure are inseparable from the process of developing and commercializing drugs, therapies, diagnostic products and other life science products. These risks include the possibility that any of these products will:
 
 
§
be found to be toxic or ineffective;
     
 
§
fail to receive necessary regulatory approvals;
     
 
§
be difficult or impossible to manufacture on a large scale;
     
 
§
be uneconomical to market;
     
 
§
fail to be developed prior to the successful marketing of similar products by competitors; or
     
 
§
be impossible to market because they infringe on the proprietary rights of third parties or compete with superior products marketed by third parties.
 
We are dependent on our customers’ commercialization of our discoveries.  Any of these risks could materially harm our business and financial results.
 
The trend towards consolidation in the pharmaceutical and biotechnology industries may adversely affect us.
 
The trend towards consolidation in the pharmaceutical and biotechnology industries may negatively affect us in several ways.  These consolidations usually involve larger companies acquiring smaller companies, which results in the remaining companies having greater financial resources and technological capabilities, thus strengthening competition in the industry.  In addition, continued consolidation may result in fewer customers for our products and services.
 
We may be subject to product liability claims if products derived from our products or services harm people.
 
We may be held liable if any product that is made with the use, or incorporation of, any of our technologies or data causes harm or is found otherwise unsuitable.  These risks are inherent in the development of genomics, functional genomics and pharmaceutical products.  If we are sued for any harm or injury caused by products derived from our services or products, our liability could exceed our total assets.  In addition, such claims could cause us to incur substantial costs and subject us to negative publicity even if we prevail in our defense of such claims.
 
Our business and the products developed by our collaborators and licensees may be subject to governmental regulation.
 
Any new therapy or diagnostic product that may be developed by our collaborators or by our licensees will have to undergo a lengthy and expensive regulatory review process in the United States and other countries before it can be marketed.  It may be several years, or longer, before any therapy or diagnostic product that is developed by using our technologies, will be sold or will provide us with any revenues.  This may delay or prevent us from becoming profitable.  Changes in policies of regulatory bodies in the United States and in other countries could increase the delay for each new therapy and diagnostic product.
 
Even if regulatory approval is obtained, a product on the market and its manufacturer are subject to continuing review.  Discovery of previously unknown problems with a product may result in withdrawal of the product from the market.
 
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Although we intend to become involved in the clinical phases in the future, we still expect to rely mainly on collaborators or licensees of our discovery activities to file regulatory approval applications and generally direct the regulatory review process.  We cannot be certain whether they will be able to obtain marketing clearance for any product that may be developed on a timely basis, if at all.  If they fail to obtain required governmental clearances, it will prevent them from marketing therapeutic or diagnostic products until clearance can be obtained, if at all.  This will in turn reduce our chances of receiving various forms of payments, including those relating to sales of marketed therapeutic or diagnostic products by them.
 
The law applicable to us may change in a manner that negatively affects our prospects.
 
We must comply with various legal requirements, including requirements imposed by federal and state securities and tax laws. Should any of those laws change over the term of our existence, the legal requirements to which we may be subject could differ materially from current requirements, which could increase the cost of doing business or preclude us from undertaking certain parts of our business plan, would result in adverse consequences.
 
If ethical and other concerns surrounding the use of genetic information become widespread, there may be less demand for our products and services.
 
Genetic testing has raised ethical issues regarding confidentiality and the appropriate uses of the resulting information.  For these reasons, governmental authorities may call for limits on or regulation of the use of genetic testing or prohibit testing for genetic predisposition to various conditions, particularly for those that have no known cure.  Any of these scenarios could reduce the potential markets for our technologies in the field of predictive drug response, which could materially harm our business and financial results.
 
ITEM 1B. UNRESOLVED STAFF COMMENTS
 
None.
 
ITEM 2. DESCRIPTION OF PROPERTY
 
We do not own any real property.  We lease 908 square feet of office space in Savannah, Georgia, pursuant to a three year lease dated July 1, 2007 for a cost of $1,678 per month.  Our principal executive office is located at 2 East Bryan Street, Suite #601, Savannah, Georgia 31401, and our telephone number is (912) 443-1987.  Our principal executive office is well maintained and suitable for the business conducted in it.
 
ITEM 3. LEGAL PROCEEDINGS
 
None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
 
No matter was submitted during the fourth quarter of the fiscal year ended December 31, 2007 to a vote of our shareholders, through the solicitation of proxies or otherwise.
 
PART II
 
 
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES.
 
Our common stock is traded on the OTC Bulletin Board under the symbol HDVY.  The range of closing prices for our common stock, as reported on Bloomberg.com during each quarter of the last two fiscal years was as follows.  These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
 
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High
   
Low
 
First Quarter 2006
  $ 0.15     $ 0.10  
Second Quarter 2006
  $ 0.12     $ 0.06  
Third Quarter 2006
  $ 0.13     $ 0.07  
Fourth Quarter 2006
  $ 0.17     $ 0.08  
                 
First Quarter 2007
  $ 0.16     $ 0.09  
Second Quarter 2007
  $ 0.14     $ 0.09  
Third Quarter 2007
  $ 0.11     $ 0.07  
Fourth Quarter 2007
  $ 0.11     $ 0.07  
 
At December 31, 2007, there were approximately 362 holders of record of our common stock.
 
We have not paid any cash dividends since inception, and we do not anticipate paying any in the foreseeable future.  We intend to retain future earnings, if any, to support the development and growth or our business.  Payment of future dividends, if any, will be at the discretion of our board of directors and will depend upon our earnings, our financial condition, and opportunities for growth and expansion.
 
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Equity Compensation Plan Information
 
 
 
 
Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)
   
Weighted-average exercise price of outstanding options, warrants and rights (b)
   
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
 
Equity compensation plans approved by security holders
 
    0       0       0  
Equity compensation plans not approved by security holders
 
    9,800,000     $ 0.105       0  
Total
 
    9,800,000     $ 0.105       0  

 
Private Placements
 
On March 9, 2005, we completed the private sale of 30,703,125 shares of restricted common stock to certain institutional investors and individual accredited investors at an offering price of $0.16 per share for a total of $4,912,500.  For every share of common stock purchased, each investor received warrants to purchase one share of the Company’s common stock at $0.24 per share, exercisable until December 31, 2008. This could result in the issuance of up to 30,703,125 additional restricted common shares upon exercise.  We entered into purchase agreements with each of the investors.  Under each agreement, the Company agreed to use its best efforts to file a registration statement to register the shares of common stock and the shares underlying the warrants issued and sold to the investors by May 9, 2005, and to use its best efforts to cause the registration statement to be declared effective July 6, 2005.  Shares totaling 540,000 were issued in 2005 under the penalty provisions of the agreement.  The securities issued in the private placement were not registered under the Securities Act of 1933, as amended, and until they were registered the securities could not be offered or sold in the United States absent registration or the availability of an applicable exemption from registration.  The shares and the warrants were offered and sold in reliance upon exemptions from registration pursuant to Section 4(2) under the Securities Act of 1933, as amended, and Regulation D promulgated thereunder.  Based on the information provided by each of the investors, all investors qualify as accredited investors (as defined by Rule 501 under the Securities Act of 1933, as amended).  On March 10, 2005, we filed registration statement No. 333-124750 for 18,609,375 shares of restricted common stock and the equivalent number of warrants.  On December 14, 2005, the Company filed registration statement 333-124750 wherein 31,622,749 shares of stock and 32,638,436 warrants were registered with the Securities and Exchange Commission.  On July 12, 2007, we filed a Post-Effective Amendment to Form SB-2 to deregister the shares registered on registration statement No. 333-124750.
 
Effective September 7, 2007, the Company issued 31,937,500 shares of restricted common stock in return for $2.55 million in cash.  Each purchaser of common stock also received one warrant to acquire an equal number of shares at $0.14 (the “Tranche 1 Warrants”) and one warrant to acquire an equal number of shares at $0.19 (the “Tranche 2 Warrants”).  The holders must exercise fifty percent of the Tranche 1 Warrants if the market price for the Company’s common stock is $0.17 for a period of thirty consecutive calendar days.  The holders must exercise fifty percent of the Tranche 2 Warrants if the market price for the Company’s common stock is $0.24 for a period of thirty consecutive calendar days.  The common shares were valued at $0.07 each, and the warrants were valued at $0.005 each for a total of $0.08.  The securities issued in the private placement were not registered under the Securities Act of 1933, as amended, and until they are registered the securities could not be offered or sold in the United States absent registration or the availability of an applicable exemption from registration.
 
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The Company also issued 19,601,322 shares of common stock and 7,437,184 shares of Series A Preferred Stock in a conversion of secured debt to equity.  The amount of debt converted to common stock and warrants was approximately $1.6 million and the amount of debt converted to Series A Preferred Stock was $594,975.  Each share of common stock issued in the conversion was accompanied by one warrant to acquire an equal number of shares of common stock at $0.14 and one warrant to acquire an equal number of shares of common stock at $0.19.  The holders must exercise fifty percent of the Tranche 1 Warrants if the market price for the Company’s common stock is $0.17 for a period of thirty consecutive calendar days.  The holders must exercise fifty percent of the Tranche 2 Warrants if the market price for the Company’s common stock is $0.24 for a period of thirty consecutive calendar days.
 
The shares of Series A Preferred Stock may be converted into common stock of the Company at any time without the payment of additional consideration.  The Series A Preferred Stock must be converted into common stock of the Company when the trading value of the common stock of the Company exceeds $0.12 per share for a period of 30 consecutive calendar days.  The holder of the Series A Preferred Stock has the right to receive dividends, the right to vote on matters presented to the common stockholders, and a preference right in the event of liquidation in an amount equal to $594,975, which is the amount of debt converted, plus any declared but unpaid dividends.  The Company has a right to redeem the shares of Series A Preferred Stock upon the fifth anniversary of the issue date at a redemption price of $0.08 per share.
 
Additional Issuance of Securities
 
During the first quarter of 2006, Mr. David Cooper was issued 600,000 shares of the Company’s common stock in exchange for exercising his options, which had an exercise price of $0.01.  On March 31, 2006, Mr. William F. Quirk, Jr. purchased 1,000,000 shares of the Company’s common stock with accompanying warrants to acquire an equal number of shares.  The purchase price for the common shares was $0.10 per share, and the exercise price of the warrants is $0.15 per share.
 
During the second quarter of 2006, the Company issued 500,000 warrants to two members of its Scientific Advisory Board.  These warrants vest over a one-year period and have an exercise price of $0.11.  The Company also issued 200,000 warrants to a service provider in exchange for professional services.  These warrants vest over a two-year period and have an exercise price of $0.10. During the second quarter of 2006, the Company issued 200,000 shares of stock for warrants exercised at $0.01 each.  Proceeds of $2,000 were recorded in capital stock.
 
During the third quarter of 2006, the Company issued 10,000,000 warrants to purchase an equal number of shares of the Company’s common stock to Mr. Quirk in connection with the loan Mr. Quirk made to the Company.  These warrants vest over a period of nine months and have an exercise price of $0.16 per share.  During the third quarter of 2006, the Company also issued 300,000 warrants to purchase an equal number of shares of the Company’s common stock in exchange for legal services provided to the Company.  These warrants vest immediately and have an exercise price of $0.10 per share.
 
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In addition, during the third quarter of 2006, the Company issued a warrant to purchase 500,000 shares of the Company’s common stock to a member of the Company’s Scientific Advisory Board for providing advisory services to the Company beyond which was expected in his capacity as a Scientific Advisory Board member.  These warrants vest immediately and have an exercise price of $0.10 per share.
 
During the third quarter of 2006, the Company issued 230,000 shares of stock for warrants exercised at $0.08 each.  Proceeds of $18,400 were recorded in capital stock.
 
In January 2007, the Company issued 100,000 shares of stock for warrants exercised at $0.01 each.  Proceeds of $1,000 were recorded in capital stock.  In February 2007, the Company granted warrants to purchase 15,235,000 restricted shares of Company stock at a fixed price of $0.35 per share, exercisable until November 1, 2007.  These warrants expired in November 2007.  Also in February 2007, the Company issued warrants to purchase up to 500,000 shares of Company common stock to consultants, which vested immediately, and have an exercise price of $0.14.  Additionally, the Company issued a warrant to purchase up to 100,000 shares of Company common stock to a consultant, which vests over ten months, and has an exercise price of $0.14.
 
During the second quarter of 2007, the Company issued warrants to purchase up to 500,000 shares of Company common stock to consultants, which vested immediately and had an exercise price of $0.11.
 
  In July 2007, the Company issued 575,000 shares of common stock valued at $46,000 to a former employee as part of a termination agreement.  In connection with that termination agreement, the Company also issued to the former employee a warrant to purchase 300,000 shares of Company common stock with an exercise price of $0.08.  These warrants vested immediately and expire in three years.  The Company also issued 400,000 shares of common stock valued at $32,000 as part of a litigation settlement in July 2007.
 
During the third quarter of 2007, the Company issued warrants to purchase 60,750 shares of Company common stock to a vendor as payment for professional services.  These warrants expire on December 31, 2008, vested immediately, and have an exercise price of $0.10.
 
Two new directors were each awarded warrants to purchase 1,500,000 shares of Company common stock, which vest over three years and expire in six year.  These warrants have an exercise price of $0.08, and will be charged as directors’ fees over the vesting period.  One director subsequently forfeited his warrant upon his resignation as a director.
 
All of these issuances of equity securities in 2006 and 2007 were made in reliance upon exemptions from registration pursuant to Section 4(2) under the Securities Act of 1933, as amended.
 
ITEM 6.  Management’s Discussion and Analysis or Plan of Operation
 
Corporate Overview
 
Our Company is a pattern recognition company that uses advanced mathematical techniques to analyze large amounts of data to uncover patterns that might otherwise be undetectable.  Our Company operates primarily in the emerging field of molecular diagnostics where such tools are critical to scientific discovery.  Our primary business consists of licensing our intellectual property and working with prospective customers on the development of varied products that utilize pattern recognition tools.  We also endeavor to develop our own product line of newly discovered biomarkers and pathways that include human genes and genetic variations, as well as gene, protein, and metabolite expression differences.  In drug discovery, biomarkers can help elicit disease targets and pathways and validate mechanisms of drug action.  They may also be pharmacodynamic indicators of drug activity, response and toxicity for use in clinical development.
 
30

 
We intend to provide pharmaceutical and diagnostic companies with all aspects of diagnostic and drug discovery, from expert assessment of the clinical dilemma through proper selection and procurement of high quality specimens.  We will then apply our proprietary analytical evaluation methods and state-of-the-art computational analysis to derive relevant and accurate clinical data, producing accurate biomarker and pathway discoveries, resulting in patent protection of our biomarker discoveries for future development.
 
Our business is based on the belief that in order to discover the most clinically relevant biomarkers, the computational component must begin at the inception of the clinical dilemma to be solved.  This process includes several critical levels of decision-making - all of which are part of our business strategy.  We intend to produce more relevant and predictable biomarkers for drug discovery so that new and better medicines and diagnostic markers can be developed for patients worldwide.
 
Operational Activities
 
The Company actively markets its technology and related developmental expertise to several prospects in the healthcare field, including some of the world’s largest corporations in the pharmaceutical, biotech, and life sciences industries.  Given the scope of some of these prospects, the sales cycle can be quite long, but management believes that these marketing efforts will produce favorable results.
 
On July 31, 2007, we announced our alliance and licensing agreement with Clarient, Inc. for development of a new molecular diagnostic test for prostate cancer based on our discovered prostate cancer biomarker signature.  Under the terms of that agreement, Clarient, Inc. obtained an exclusive license to the biomarker signature in exchange for HDC’s 30% royalty interest from all reimbursements of the test once commercialized.  The commercialization efforts have progressed since the time of the announcement, including the completed implementation of necessary assays and specimen transfer from an internationally known cancer center required to validate the PCR based tests prior to commercial launch as a CLIA diagnostic test for prostate cancer.
 
In December 2007, we received our first royalty proceeds related to our licensing agreement with Bruker Daltonics, which was originally announced in August, 2006.  The royalties relate to Bruker Daltonics’ sales of its ClinProTools TM clinical proteomics product line for its mass spectrometers, which contains HDC’s SVM technology.  Bruker launched its ClinProTools TM at approximately the same time as the license with HDC.  While the initial royalty was relatively small, it represents HDC’s first royalty check from this relationship and offers the opportunity of future royalties for the life of the patents related to future sales of the Bruker product.
 
Management believes that our research agreement with a leading biotech company to develop an SVM-based diagnostic test to help interpret flow cell cytometry data for a particular medical condition has resulted in a successful proof of concept.  These findings were presented during the first quarter of 2008 and the due diligence process has accelerated to confirm our findings for that particular condition and determine other applications within flow cytometry.
 
We have advanced discussions with two large international healthcare companies with respect to diagnostic imaging opportunities.  Our objective is licensing and product development using SVMs and FGMs in diagnostic radiology, including mammography, PET scans, CT scans, MRI and other radiological images.  In addition, given the scope of these two prospects, we believe we can demonstrate the computational power of our SVM technology analyzing combined data from imaging, proteomics, and genomics.  We own a number of SVM and FGM patents in this field that we believe are very important.
 
Negotiations with a large European pharmaceutical company to develop a companion diagnostic test using our discovered biomarkers as surrogates in the last phase of a clinical trial for its new drug to treat BPH (enlarged prostate) remain delayed due to the prospect’s post-acquisition integration issues.  Based on the prospect’s representations, we believe that discussions regarding this prospective opportunity will resume sometime in 2008.
 
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We have advanced our dialogue with several other important industry players in the healthcare field and, in certain situations, related to the field of anatomic pathology imaging, including a proposed project with one of the world’s largest pharmaceutical companies, a marketing arrangement with one of the world’s largest generic drug manufacturers, and other prospective partnership opportunities with additional companies and research institutions.  We also continue to pursue development opportunities with our existing licensing customers.
 
We have also advanced discussions with a company regarding the use of the SVM patents, patent applications and all other technology that the Company has or has rights to, which can be used for breast cancer diagnosis and treatment.  We remain engaged in discussions related to this development effort with one of our directors.  If we reach an agreement, we anticipate that research and development will result in the creation and commercialization of tests that will be used in the diagnosis and treatment of breast cancer.

In January 2007, SVM Capital, LLC was formed as a joint venture between HDC and Atlantic Alpha Strategies, LLC (“Atlantic Alpha”) to explore and exploit the potential applicability of our SVM technology to quantitative investment management techniques.  Atlantic Alpha has over thirty years of experience in commodity and futures trading.  SVM Capital has made significant progress since the formation of the joint venture.  The SVM technology is now working well with dynamic time series for S&P data accumulated over the past fifty-eight years.  The latest SVM-derived models generated by SVM Capital have successfully outperformed the static buy-and-hold model both in increased returns as well as in reduced risk.  Once the stability of these models is confirmed, SVM Capital intends to apply the models to a wide range of financial asset classes such as interest rates, currencies, metals and petroleum products.  The joint venture partners plan to apply the investment model either in a single fund or a fund of funds.  SVM Capital will charge a management fee and a performance fee for managing client assets.  Depending on the level of its success, this venture can be profitable given its reliance on cost effective use of computer technology and ready access to efficient trading platforms.
 
Since December 2005, the total value of licenses and development contracts signed is approximately $1,250,000.
 
While we have a number of negotiations in process with potential licensing partners, there is a possibility that we will be unable to reach agreement with any party, that the negotiations continue but are not finalized, or that those that may be finalized do not provide the economic returns that we expect.
 
Year Ended December 31, 2007 Compared with Year Ended December 31, 2006
 
Revenue
 
For the year ended December 31, 2007, revenue was $57,905 compared with $203,889 in revenue for the year ended December 31, 2006.  Revenue is recognized for licensing and development fees over the period earned.  The decrease of revenue in 2007 was due largely to the fact that the contracts finalized in 2007 required recognition of the revenue generated be deferred and recognized over the contractual period rather than immediately recorded.  As of December 31, 2007, the Company had deferred revenue of $516,424.  This deferred revenue includes $291,424 of cash received but not yet recognized as revenue and $225,000 in accounts receivable.  Deferred revenue was $101,111 at December 31, 2006.
 
Cost of Revenue and Gross Margin
 
Cost of revenues for 2007 was $21,300.  Cost of revenues includes all direct costs associated with the acquisition and development of patents and processes sold.  All direct costs, primarily professional fees associated with licensing negotiations, are also included in cost of revenues.  Cost of revenues was $28,671 in 2006.
 
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Operating and Other Expenses
 
Amortization expense was $262,719 for the twelve months ended December 31, 2007 and 2006.
 
Professional and consulting fees totaled $980,833 for 2007 compared with $1,123,498 for 2006.  These fees, related to legal, accounting and scientific activities, were reduced because of fewer warrants issued to service providers and continued cost containment efforts.
 
Compensation of $783,721 for the twelve months ended December 31, 2007 was slightly higher than the $770,000 reported for the comparable period of 2006.
 
Other general and administrative expenses decreased from $542,710 in 2006 to $459,064 in 2007.  This decrease was largely due to expense reduction efforts throughout the fiscal year.
 
Loss from Operations
 
The loss from operations for the twelve months ended December 31, 2007 was $2,449,737 compared to $2,523,709 for the prior year.  The decreased loss was due to the factors enumerated above.
 
Other Income and Expense
 
Interest income was $39,614 for the twelve months ended December 31, 2007 compared to $21,008 in 2006.  Increased interest income was due to the higher average cash available to invest throughout 2007.
 
A gain on the restructuring of accounts payable of $44,594 was recorded in 2007 to reflect common stock warrants issued in payment of liabilities compared to $97,864 in 2006.
 
The Company also recognized a $5,000 loss related to its investment in SVM Capital LLC.
 
The Company recorded an expense of approximately $42,000, which was associated with the settlement of litigation.
 
Interest expense was $286,398 in 2007 compared with $190,922 in 2006.  This increase was due to the higher interest rate associated with the renegotiated promissory notes, and interest related to the promissory note executed in the third quarter of 2006.
 
Net Loss
 
The net loss for the twelve months ended December 31, 2007 was $2,698,927 compared to $2,595,759 for the twelve months ended December 31, 2006.  The increased loss was due to increased net other expense, which unfavorably offset the reduced 2007 loss from operations

Net loss per share was $0.02 for the twelve months ended December 31, 2007 and 2006.  A larger net loss in 2007 was favorably offset by increased number of average shares outstanding.

Liquidity and Capital Resources

At December 31, 2007, the Company had $1,648,439 in available cash.  Cash used by operating activities was $1,467,118.  This was due primarily to the net loss of $2,698,927; however, net non-cash charges and adjustments of $1,231,809 favorably impacted the computation of the net cash used.  Cash used by investment activities was $998 due to the acquisition of assets.  Net cash provided by financing activities was $2,442,189 due to the cash received from the sale of common stock and the exercise of warrants offset by the repayment of debt totaling $49,351.
 
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The following table summarizes the due dates of our contractual obligations.
 
   
Total
   
Less than
1 Year
   
1-3
Years
 
Deferred Compensation
    66,500       66,500       -  
Corporate Office Lease
    50,340       20,136       30,204  
Total
  $ 116,840     $ 86,636     $ 30,204  

 
The Company continues to expend capital to maintain its patent portfolio.
 
In January 2007, the Company issued 100,000 shares of stock for warrants exercised at $0.01 each.  Proceeds of $1,000 were recorded in capital stock.  In February 2007, the Company granted warrants to purchase 15,235,000 restricted shares of Company stock at a fixed price of $0.35 per share, exercisable until November 1, 2007.  These warrants expired in November 2007.  Also in February 2007, the Company issued warrants to purchase up to 500,000 shares of Company common stock to consultants, which vested immediately, and have an exercise price of $0.14.  Additionally, the Company issued a warrant to purchase up to 100,000 shares of Company common stock to a consultant, which vests over ten months, and has an exercise price of $0.14.
 
During the second quarter of 2007, the Company issued warrants to purchase up to 500,000 shares of Company common stock to consultants, which vested immediately and had an exercise price of $0.11.
 
In July 2007, the Company issued 575,000 shares of common stock valued at $46,000 to a former employee as part of a termination agreement.  In connection with that termination agreement, the Company also issued to the former employee a warrant to purchase 300,000 shares of Company common stock with an exercise price of $0.08.  These warrants vested immediately and expire in three years.  The Company also issued 400,000 shares of common stock valued at $32,000 as part of a litigation settlement in July 2007.
 
During the third quarter of 2007, the Company issued warrants to purchase 60,750 shares of Company common stock to a vendor as payment for professional services.  These warrants expire on December 31, 2008, vested immediately, and have an exercise price of $0.10.
 
Two new directors were each awarded warrants to purchase 1,500,000 shares of Company common stock, which vest over three years and expire in six year.  These warrants have an exercise price of $0.08, and will be charged as directors’ fees over the vesting period.  One director subsequently forfeited his warrant upon his resignation as a director.
 
Effective September 7, 2007, the Company issued 31,937,500 shares of restricted common stock in return for $2.55 million in cash.  The stock is restricted from resale as the stock has not been registered.  Each purchaser of common stock also received one warrant to acquire an equal number of shares at $0.14 and one warrant to acquire an equal number of shares at $0.19.  The common shares were valued at $0.07 each and the warrants were valued at $0.005 each for a total of $0.08.
 
The Company also issued 19,601,323 shares of common stock and 7,437,184 shares of Series A Preferred Stock in a conversion of secured debt to equity.  The amount of debt converted to common stock and warrants was $1.6 million and the amount of debt converted to Series A Preferred Stock was $594,975.  Each share of common stock issued in the conversion was accompanied by one warrant to acquire an equal number of shares of common stock at $0.14 and one warrant to acquire an equal number of shares of common stock at $0.19.
 
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The shares of Series A Preferred Stock may be converted into common stock of the Company at any time without the payment of additional consideration.  The Series A Preferred Stock must be converted into common stock of the Company when the trading value of the common stock of the Company exceeds $0.12 per share for a period of 30 consecutive calendar days.  The holder of the Series A Preferred Stock has the right to receive dividends, the right to vote on matters presented to the common stockholders, and a preference right in the event of liquidation in an amount equal to $594,975, which is the amount of debt converted, plus any declared but unpaid dividends.  The Company has a right to redeem the shares of Series A Preferred stock upon the fifth anniversary of the issue date at a redemption price of $0.08 per share.
 
The Company has relied primarily on equity funding plus debt financing for liquidity during its developmental phase that ended in 2004.  The Company produced sales, licensing, and developmental revenue since 2005 and must continue to do so in order to generate sufficient cash to continue operations.  The Company’s plan to have sufficient cash to support operations is comprised of generating revenue through licensing its significant patent portfolio, providing services related to those patents, and obtaining additional equity or debt financing.  The Company has been and continues to be in meaningful discussions with a variety of parties, which if successful, may result in significant revenue.  The Company has implemented a cash conservation plan that includes a reduction in consulting payments, negotiated settlements with creditors whereby the Company substituted equity instruments for amounts owed, and a heightened scrutiny of all potential expenditures.
 
Should it prove necessary, the Company may also consider such alternatives as raising additional equity through private placements and/or debt offerings.  Although this raises doubt with respect to our ability to operate as a going concern, the Company believes that it has sufficient capability to operate through the next twelve months.
 
Critical Accounting Policies, Estimates and Assumptions
 
We consider our accounting policies related to revenue recognition, impairment of intangible assets and stock based compensation to be critical accounting policies. A number of significant estimates, assumptions, and judgments are inherent in our determination of when to recognize revenue, how to evaluate our intangible assets, and stock-based compensation expense. These estimates, assumptions and judgments include deciding whether the elements required to recognize revenue from a particular arrangement are present, estimating the fair value of an intangible asset, which represents the future undiscounted cash flows to be derived from the intangible asset, and estimating the useful life and volatility of stock awards granted. We base our estimates and judgments on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates.
 
Valuation of intangible and other long-lived assets.
 
We assess the carrying value of intangible and other long-lived assets at least annually, which requires us to make assumptions and judgments regarding the future cash flows related to these assets. The assets are considered to be impaired if we determine that the carrying value may not be recoverable based upon our assessment of the following events or changes in circumstances such as:
 
 
§
the asset’s ability to continue to generate income from operations and positive cash flow in future periods;
     
 
§
loss of legal ownership or title to the asset;
     
 
§
significant changes in our strategic business objectives and utilization of the asset(s); and 
     
 
§
the impact of significant negative industry or economic trends.
 
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If the assets are considered to be impaired, the impairment we recognize is the amount by which the carrying value of the assets exceeds the fair value of the assets. In addition, we base the useful lives and related amortization or depreciation expense on our estimate of the period that the assets will generate revenues or otherwise be used by us. We also periodically review the lives assigned to our intangible assets to ensure that our initial estimates do not exceed any revised estimated periods from which we expect to realize cash flows from the technologies. If a change were to occur in any of the above-mentioned factors or estimates, the likelihood of a material change in our reported results would increase.
 
Revenue Recognition
 
We recognize revenue principally from license and royalty fees for intellectual property and from development agreements with research partners. Each element of revenue recognition requires a certain amount of judgment to determine if the following criteria have been met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the seller’s price to the buyer is fixed or determinable; (iv) collectibility is reasonably assured, and (v) both title and the risks and rewards of ownership are transferred to the buyer. We are required to make more significant estimates involving our recognition of revenue from license and royalty fees. Our license and royalty fees revenue estimates depend upon on our interpretation of the specific terms of each individual arrangement and our judgment to determine if the arrangement has more than one deliverable and how each of these deliverables should be measured and allocated to revenue. In addition, we have to make significant estimates about the useful life of the technology transferred to determine when the risk and rewards of ownership have transferred to the buyer to decide the period of time to recognize revenue. In certain circumstances we are required to make judgments about the reliability of third party sales information and recognition of royalty revenue before actual cash payments for these royalties have been received.
 
Share-Based Compensation
 
Share-based compensation expense is significant to our financial position and results of operations, even though no cash is used for such expense. In determining the period expense associated with unvested options, we estimate the fair value of each option at the date of grant. We believe it is important for investors to be aware of the high degree of subjectivity involved when using option pricing models to estimate share-based compensation under SFAS No. 123R. The determination of the fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, our valuation methodology, the expected term, expected stock price volatility over the term of the awards, the risk-free interest rate, expected dividends and pre-vesting forfeitures. If any one of these factors changes and we employ different assumptions in the application of SFAS No. 123R in future periods, the compensation expense that we record under SFAS No. 123R will differ significantly from what we have recorded in the current period.
 
For share-based awards issued during the year ended December 31, 2007, we estimated the expected term by considering various factors including the vesting period of options granted, employees’ historical exercise and post-employment termination behavior; however, due to the limited history of our Company, such data is limited.  We estimated the expected life will be substantially longer than the vesting period given the start-up nature of our operations and accordingly have used the contractual life as the expected term. Our estimated volatility was derived using our historical stock price volatility. We have never declared or paid any cash dividends on our common stock and currently do not anticipate paying such cash dividends. The risk-free interest rate is based upon U.S. Treasury securities with remaining terms similar to the expected term of the share-based awards.
 
Off-Balance Sheet Arrangements
 
We have no off-balance sheet arrangements that provide financing, liquidity, market or credit risk support or involve leasing, hedging or research and development services for our business or other similar arrangements that may expose us to liability that is not expressly reflected in the financial statements.
 
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ITEM 7. FINANCIAL STATEMENTS.
 
Financial statements appear beginning on page F1 of this Report.
 
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
 
We have had no disagreements with our former certifying accountants on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure.
 
ITEM 8A(T).  DISCLOSURE CONTROLS AND PROCEDURES.
 
As of the end of the period covered by this report (the “Evaluation Date”), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and President and our Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  Based upon this evaluation, our Chief Executive Officer and our Principal Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports that are filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms and that our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management including our Chief Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
 
Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that the Company’s disclosure controls and procedures will detect or uncover every situation involving the failure of persons within the company to disclose material information otherwise required to be set forth in the Company’s periodic reports.
 
The Company’s management is also responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.  Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In connection with the preparation of our annual financial statements, management has undertaken an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2007. Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of those controls.
 
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Based on this evaluation, management has concluded that our internal control over financial reporting was not effective as of December 31, 2007.  Our Chief Executive Officer and Principal Financial Officer concluded that we have material weaknesses in our internal control over financial reporting because we do not have an adequate segregation of duties due to a limited number of employees among whom duties can be allocated. The lack of segregation of duties is due to the limited nature and resources of the Company. 

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal controls over financial reporting.  Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.  As of the Evaluation Date, no changes in the Company’s internal control over financial reporting occurred, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
ITEM 8B.  OTHER INFORMATION
 
None.
 
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PART III
 
 
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, CORPORATE GOVERNANCE, COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
 
Our executive officers, directors and significant employees are:
 
Name
 
Age
 
Position
Stephen D. Barnhill, M.D.
 
49
 
Chief Executive Officer and Chairman of the Board
Daniel R. Furth
 
44
 
Principal Financial Officer, Executive Vice President
Hong Zhang, Ph.D.
 
46
 
Senior Vice President
Richard E. Caruso
 
64
 
Director
William M. Goldstein
 
72
 
Director
William F. Quirk, Jr.
 
65
 
Director
 
Stephen D. Barnhill, M.D.,   is currently our Chief Executive Officer and Chairman of the Board.  He has been a member of the Board of Directors since November 2003.  He is a physician trained in laboratory medicine and clinical pathology. He has developed and used artificial intelligence, pattern-recognition, and computational techniques in Medicine, Genomics, Proteomics, Diagnostics and Drug Discovery.
 
Dr. Barnhill is or has been a Fellow of the American College of Physician Inventors, the American College of International Physicians, the American Medical Association, the American College of Physician Executives, the American Association of Artificial Intelligence, the American College of Managed Care Medicine, the Association of Clinical Scientists, the American Society of Contemporary Medicine and Surgery, the American Society of Law, Medicine and Ethics, the Southern Medical   Society, the American Federation for Clinical Research, and the National Federation of Catholic Physicians.
 
Dr. Barnhill founded the Barnhill Clinical Laboratories in 1988 and served as Chairman, CEO, President and Medical Director. This laboratory was later acquired by Corning-Metpath in 1989 and after the acquisition he served as Medical Director of this clinical laboratory until 1992.  This clinical laboratory, now owned by Quest Diagnostics, continues to be the largest and busiest clinical laboratory in the Savannah, Georgia area.
 
In 1992, Dr. Barnhill founded National Medical Specialty Laboratories and served as Chairman, CEO, President, and Medical Director. This research laboratory was founded to utilize pattern-recognition mathematics and artificial intelligence techniques in cancer diagnosis.  Dr. Barnhill is an inventor on the very first patents issued by the United States Patent and Trademark Office for the use of neural networks in medicine. This company was acquired by Horus Therapeutics, a New York based pharmaceutical company.  Dr. Barnhill served as Executive Vice-President and Chairman of the Scientific Advisory Board for Horus Therapeutics until 1998. Johnson & Johnson later acquired the Horus patents invented by Dr. Barnhill.
 
In 1999, Dr. Barnhill founded and served as Chairman, President and CEO of Barnhill BioInformatics, Inc. Barnhill BioInformatics, Inc. later became Barnhill Genomics, Inc. and BioWulf Technologies, LLC and raised over $13.5 million in private placement funding.   The primary focus of these companies was to utilize the next generation of artificial intelligence and pattern-recognition techniques, known as support vector machines, to identify genes that cause cancer. Dr. Barnhill is the sole inventor on the very first patents issued by the United States Patent and Trademark Office for the use of support vector machines in medicine.  From the summer of 2000 until he organized The Barnhill Group L.L.C. in the summer of 2003, Dr. Barnhill was not engaged in any professional activities as the result of a non-compete agreement signed by Dr. Barnhill when he left the employment of Barnhill Genomics, Inc.
 
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Daniel R. Furth   is our Principal Financial Officer, Executive Vice President, Secretary and Treasurer.  Mr. Furth is an experienced executive with a proven track record in diverse industries for both private and public corporations.  Since October 2000, he served as a corporate communications consultant for several private clients.  During that same period, he also served as a managing member and equity partner of Purple Shamrock LLC, a privately held investment group.  From 1994 to 2000, he served as Senior Director of Marketing & Communications for Quality Distribution, Inc., North America’s largest bulk transportation services company, where he managed corporate communications, marketing communications, investor relations, and public affairs.  During that time, he was chief of staff to QD’s Chairman/CEO and played an instrumental role in the QD’s initial public offering in 1994 and its subsequent leveraged buyout in 1998.  From 1986 to 1994, Mr. Furth held varied executive positions in both the public and private sectors including particular experience with early stage ventures.  He earned his BA degree in government from Georgetown University in Washington, DC.
 
Hong Zhang, Ph.D. is our   Senior Vice President, Computational Medicine.  As visiting faculty at Johns Hopkins University, Dr. Zhang lectured at the Center for Biomarker Discovery on Bioinformatics: Peak Detection Methods for Mass Spectral Data.  Currently a Yamacraw Associate Professor at Armstrong Atlantic University, Dr. Zhang was the Vice President and CIO for a neural network and computer assisted medical diagnostic systems company that employs neural network and mathematical/statistical preprocessing techniques.  In this position, Dr. Zhang was involved in digital image processing and pattern recognition for medical image processing as well as software design and programming for support vector machine applications.  Dr. Zhang was a professor in the Department of Mathematical Sciences at Purdue University from 1989 to 1996.  He has held numerous academic positions, including Adjunct Associate Professor, Associate Professor with Tenure, and Assistant Professor.  He was a visiting Associate Professor in 1995 in the Department of Biometry at the Medical University of South Carolina.
 
Throughout his academic career, Dr. Zhang has consulted on many software and analytical development projects for Union Switch and Signal, Inc., General Electric Company, and the Department of Pharmacology at the University of Pittsburgh.  Dr. Zhang has published numerous articles on the use of neural networks in the detection of cancers.  He has been published in more than twenty medical and technical journals.  Dr. Zhang received a Ph.D., Mathematics at the University of Pittsburgh, 1989, M.A., Mathematics, University of Pittsburgh, 1986, M.S.E.E., Electrical Engineering, University of Pittsburgh, 1984, B.S., Computer Science, Fudan University, 1982.  Dr. Zhang’s numerous awards and honors include: National Cancer Institute SBIR Grant, 1999, 2000; Purdue Research Foundation Summer Faculty Grant, 1993; IPFW Summer Research Grant, 1992; Andrew Mellon Fellowship, 1986-1987; Andrew Mellon Fellowship, 1985-1986; First Place, Fudan University Mathematics Competition, 1979.
 
Richard E. Caruso, Ph.D. is a member of the Board of Directors and has been a director since August 27, 2007.  Dr. Caruso founded Integra LifeSciences Corporation in 1989 and he has served as the company’s Chairman since 1992.  Prior to December 1997, Dr. Caruso served as Integra’s Chief Executive Officer from March 1992 to December 1997 and as President from September 1995 to December 1997.  Integra is credited with the creation of a new branch of medicine now known as Regenerative Medicine where the body is enabled to re-create its own parts.  In 1978, he founded The Provco Group, a Villanova-based venture company that organizes and provides funding for a variety of entrepreneurs and complex business activities.  A widely-recognized and successful entrepreneur, Dr. Caruso holds more than 35 years of experience in entrepreneurial and finance type ventures including founding and leading several private and publicly-traded companies.  He currently serves on the board of Susquehanna University, The Baum School of Art and The Uncommon Individual Foundation (founder).  Dr. Caruso received his B.S. degree from Susquehanna University, M.S.B.A. degree from Bucknell University, and a Ph.D. degree from the London School of Economics, University of London (U.K.).  In 2006, Dr. Caruso was named the Ernst & Young Entrepreneur of the Year.
 
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William M. Goldstein, Esq. is a member of the Board of Directors and has been a director since January 28, 2006.  Since 1982, Mr. Goldstein has been a senior partner with Drinker Biddle & Reath LLP and has served the firm as a managing partner, chairman of the firm’s managing partners, and the chair of the Tax Practice Group.  In the mid-70’s, Mr. Goldstein served as Deputy Assistant Secretary for Tax Policy at the U.S. Treasury Department where he worked directly with Secretary William E. Simon in determining the Treasury’s position on various tax and economic issues.  He was also a finalist candidate for Commissioner of the Internal Revenue Service.  Mr. Goldstein earned his A.B. from Princeton University and his J.D. from Harvard Law School.
 
William F. Quirk, Jr. is a member of the Board of Directors and has been a director since October 25, 2005.  Mr. Quirk is a private investor who purchased a significant equity stake in the company in its successful private placement in July 2005. Prior to his retirement in 1996, he held a variety of senior executive positions in finance and management including: Fidelity Management & Research in the mutual fund industry; the investment banking firm Peterson, Diehl, Quirk & Company; leveraged buyout firm Kelso & Company; and auto parts supplier Inline Brake Manufacturing. Mr. Quirk earned his B.S. from the U.S. Naval Academy and an MBA from the Harvard Business School.
 
The directors named above will serve until the next annual meeting of our stockholders.  Absent an employment agreement, officers hold their positions at the pleasure of the Board of Directors.
 
Audit Committee
 
We do not have a separately designated standing audit committee.  The entire board of directors is acting as our audit committee, and no individual on our Board of Directors possesses all of the attributes of an “audit committee expert.”   Given the development stage and size of the Company and the difficulty in attracting additional directors, the Board does not have an audit committee financial expert.  In forming our Board of Directors, we sought out individuals   who would be able to guide our operations based on their business experience,   both past and present, or their education. Responsibility for our operations is   centralized within management.
 
Shareholder Nomination of Candidates for Board of Directors
 
Nominations of persons for election to the Board of Directors may be made by any shareholder who complies with the notice provisions set forth in Section 3.8 of the Bylaws, which provides that a shareholder’s notice must be delivered or mailed and received at the principal executive office of the Company not less than thirty days before the date of the meeting; provided, however, that in the event that less than forty days’ notice or prior public disclosure of the date is given, notice by the shareholder to be timely must be so received not later than the close of business on the tenth day following the day on which the public announcement of the meeting date was made.  Such shareholder's notice shall set forth (i) as to each person whom the shareholder proposes to nominate for election or reelection as a Director, all information relating to such person as required to be disclosed in solicitation of proxies for election of Directors made in compliance with Regulation 14A under the Securities and Exchange Act of 1934, as amended (including such person's written consent to being named in a proxy statement as a nominee and to serving as a Director if elected); and (ii) as to the shareholder giving the notice (A) the name and address, as they appear on the books of the Company, of such shareholder and (B) the class and number of shares of the Company's capital stock that are beneficially owned by such shareholder.  At the request of the Board of Directors, any person nominated by the Board of Directors for election as a Director shall furnish to the Secretary of the Company that information required to be set forth in a shareholder's notice of nomination which pertains to the nominee.  No person shall be eligible for election as a Director of the Company unless nominated in accordance with the provisions of Section 3.8 of the Company’s Bylaws.
 
41


Code of Ethics
 
The Company has adopted a Code of Ethics applicable to its Chief Executive Officer and Executive Vice President.  This Code of Ethics is posted on our website at www.HealthDiscoveryCorp.com.  These codes are also available without charge upon request directed to Investor Relations, Health Discovery Corporation, 2 East Bryan Street, Suite #601, Savannah, GA  31401.  The Company intends to disclose amendments or waivers of the Code of Ethics required to be disclosed by posting such information on its website.
 
ITEM 10. EXECUTIVE COMPENSATION.
 
Summary Compensation Table
 
The following table sets forth various elements of compensation for our Named Executive Officers for each of the last three calendar years:
 
Name and Principal
Position
Year
 
Salary ($)
   
Bonus ($)
 
Option
Awards
($)
 
All Other Compensation
($)
   
Total
 
Stephen D. Barnhill, M.D.
2007
  $ 196,875     $ 50,000  
  $ 3,719 (1)   $ 250,594  
Chief Executive Officer
2006
  $ 125,000          
  $ 6,000     $ 131,000  
                                     
Daniel R. Furth
2007
  $ 91,500          
  $ 5,969 (1)   $ 97,469  
Executive Vice President
2006
  $ 71,000          
  $ 5,069 (1)   $ 76,069  
                                     
 
(1) represents health insurance premiums.
 
42

 
Outstanding Equity Awards at Fiscal Year-end
 
   
Option Awards
Name
 
Number of Securities Underlying Unexercised Options (#) Exercisable
   
Number of Securities Underlying Unexercised Options (#) Unexercisable
   
Option
Exercise Price
 
Option Expiration Date
Daniel R. Furth
    1,000,000       500,000 (1)   $ 0.10  
December 5, 2015
 
  (1) 250,000 of these warrants will vest on May 14, 2008; 250,000 of these warrants will vest on November 14, 2008
 
Director Compensation

Outside directors are paid $1.00 each year.  Each outside director is awarded a warrant to purchase 1,500,000 shares of Company common stock, which vest over three years and expire in six year.

Name
 
Fees Earned or Paid in Cash
($)
   
Option Awards
($)
   
Total
($)
 
Stephen D. Barnhill, M.D.
  $ 0.00     $ 0.00     $ 0.00  
William F. Quirk, Jr.
  $ 1.00     $ 59,250     $ 59,251  
William M. Goldstein
  $ 1.00     $ 59,250     $ 59,251  
Richard E. Caruso
  $ 1.00     $ 10,967     $ 10,968  
 
 
Richard Caruso was awarded warrants to purchase 1,500,000 shares of Company common stock, which vest over three years and expire in six years.  These warrants have an exercise price of $0.08, and will be charged as directors’ fees over the vesting period.
 
Employment Agreements
 
We entered into a five-year employment agreement with Dr. Stephen Barnhill on September 15, 2003, regarding Dr. Barnhill’s employment as President and Medical Director. The agreement will automatically renew for successive one-year terms unless either party gives notice to the other party of its intent not to renew within a thirty-day period prior to the end of the then current term.  Under the terms of the agreement, as amended, Dr. Barnhill receives an annual base salary of $300,000.  Dr. Barnhill is eligible to be reimbursed monthly for reasonable and necessary business expenses, to participate in an Incentive Stock Option Plan (as defined in the agreement) and for other benefits maintained by us.  Dr. Barnhill will be entitled to ten paid vacation days during the calendar year.  Dr. Barnhill’s employment may be terminated without prior written notice for cause, in which case we will make a lump sum payment equal to the sum of (i) accrued unpaid wages, (ii) unreimbursed expenses properly incurred prior to the date of termination and (iii) the value of all accrued unpaid vacation pay, less any amounts he owes to us.  If Dr. Barnhill terminates the Barnhill Agreement, then he will receive the same benefits as if he was terminated for cause.  If Dr. Barnhill terminates the Barnhill Agreement, other than for cause, then we will give two (2) weeks notice of termination, or in our sole discretion, two (2) weeks wages in lieu of notice.  The agreement also generally provides that Dr. Barnhill will keep confidential information confidential and that he will not compete with us in our business nor solicit our customers or employees for a period of 12 months following termination of employment.  Effective December 30, 2005, we entered into an amendment to the employment agreement with Dr. Barnhill, under which Dr. Barnhill agreed to defer 60% of his gross annual pay until January 1, 2008, representing total deferred payments of $360,000.  The agreement with Dr. Barnhill was further amended on September 1, 2006, whereby Dr. Barnhill’s salary was changed to $10,000 per month, and he agreed to waive the receipt of his deferred compensation for a one-time payment of $6,000 plus the reimbursement for any negative tax consequences related to the amendment.
 
43

 
The Company also awarded Dr. Barnhill a bonus in the gross amount of $50,000 in recognition of his extraordinary efforts on behalf of the Company.
 
We entered into an employment agreement with Mr. Daniel R. Furth effective November 18, 2005 regarding Mr. Furth’s employment as Executive Vice President.  The term of the employment is for three years, with compensation of $60,000, reviewed each year for potential increase.  Effective as of September 10, 2007, Mr. Furth’s annual salary was increased to $108,000.  Mr. Furth received options to acquire 1,500,000 shares of our common stock.  Mr. Furth is eligible to be reimbursed monthly for reasonable and necessary business expenses and for other benefits maintained by us.  If the Company terminates the employment agreement for cause or if the agreement is terminated by Mr. Furth without cause, Mr. Furth will be entitled to receive his salary only through the date such termination is effective.  If Mr. Furth terminates the employment agreement for cause or, if the employment agreement is terminated without cause, he will be entitled to receive his salary for a period of three months from the date such termination is effective.  The agreement also generally provides that Mr. Furth will keep confidential information confidential and that he will not compete with us in our business nor solicit our customers or employees for a period of 12 months following termination of employment.
 
Scientific Advisory Board
 
The Company continues to perform under an oral agreement with two members of its Scientific Advisory Board wherein they are entitled to receive 100,000 shares each of the Company’s common stock upon satisfactory completion of one year of service.  The arrangement with the Scientific Advisory Board members can be terminated at any time by either party.
 
44

 
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
 
 
The following table sets forth information concerning the beneficial ownership of our common stock as of March 24, 2008 by (i) each of our directors, (ii) each of our executive officers, (iii) each person who is known to us to be the beneficial owner of more than five percent of our common stock, and (iv) all of our executive officers and directors as a group.  At March 24, 2008, there were 169,007,206 shares outstanding.
 
Title of Class
 
Name and Address of Beneficial Owner
Amount and Nature of
Beneficial Owner
Percent of
Class (1)
Common Stock
Dr. Stephen D. Barnhill
Chairman of the Board, Chief Executive Officer
and Chief Medical Officer, Director
2 East Bryan Street, Suite #601
Savannah, GA 31401
22,181,522  (2 )
13.12%
Common Stock
Daniel R. Furth
Executive Vice President
2 East Bryan Street, Suite #601
Savannah, GA 31401
1,250,000  (3 )
0.736%
Common Stock
William Quirk
Director
2 East Bryan Street, Suite #601
Savannah, GA 31401
69,611,664  ( 4 )
32.58%
Common Stock
William Goldstein
Director
One Logan Square
18th and Cherry Streets
Philadelphia, PA 19103-6996
1,500,000 (5)
0.88%
Common Stock
Dr. Richard Caruso
Director
795 East Lancaster Avenue, Suite #200
Villanova, PA 19085
9,625,000  ( 6 )
5.48%
Common Stock
Micro Capital Fund, LP
623 Fifth Avenue
Suite 2502
New York, NY 10022
13,687,500 ( 7 )
7.68%
Common Stock
Prime Mover Capital Partners
767 Third Avenue
New York, NY 10007
20,625,000 ( 8 )
11.29%
Common Stock
Curtis G. Anderson
44 Delegal Road
Savannah, GA 31411
14,201,577 ( 9 )
7.96%
Common Stock
Stephen M. Grosberg
201 East 20 th Street, #8C
New York, NY 10010
12,000,000 ( 10 )
6.78%
Common Stock
Frank T. Nickell
320 Park Ave.
24 th Floor
New York, NY 10027
9,375,000 ( 11 )
5.35%
Common Stock
All executive officers and directors as a group
(five persons)
104,168,186
46.80%

45

 
 
(1)
The percentage assumes the exercise by the stockholder or group named in each row of all options or warrants for the purchase of our common stock held by such stockholder or group and exercisable within 60 days as of March 29, 2008.
     
 
(2)
These shares are held by The Barnhill Group LLC, which is wholly owned by Dr. Barnhill.
     
 
(3)
Consists of vested options.
     
 
(4)
Includes 44,677,776 vested warrants.
     
 
(5)
Includes 1,125,000 vested warrants.
     
 
(6)
Consists of 3,125,000 shares and 6,250,000 vested warrants held by Athena Venture Partners LP, a limited partnership in which Dr. Caruso's children are limited partners, and 250,000 vested warrants held individually.
     
 
(7)
Includes 9,125,000 vested warrants.
     
 
(8)
Includes 13,750,000 vested warrants.
     
 
(9)
Includes 9,467,718 vested warrants.
     
 
(10)
Includes 8,000,000 vested warrants.
     
 
(11)
Includes 6,250,000 vested warrants.
 
ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
 
We previously sub-leased our principle executive office space from a company owned by the wife of Dr. Stephen D. Barnhill.  Our rent was $1,036.00 per month.  This lease was terminated June 30, 2007.
 
On September 1, 2006, we issued a note (the “Promissory Note”) to William F. Quirk, Jr., a director of the Company, for $1,000,000.  The Promissory Note contains a 5% annual interest rate and is due on September 1, 2008.  The proceeds of the Promissory Note will be used for general working capital purposes.  The Promissory Note is completely repayable by the Company at any time without any related fees or penalties. In connection with the issuance of the Promissory Note, Mr. Quirk was granted warrants to purchase 10,000,000 shares of Company common stock at $0.16 per share.  The promissory note was converted to common stock on September 7, 2007 in connection with the Private Placement.
 
The Company has adopted the independence standards promulgated by the New York Stock Exchange and has made a determination that, as of March 27, 2008, the following directors are independent according to those standards:  Richard Caruso, William M. Goldstein and William F. Quirk, Jr.
 
46

 
ITEM 13.  EXHIBITS.
 
The following exhibits are attached hereto or incorporated by reference herein (numbered to correspond to Item 601(a) of Regulation S-B, as promulgated by the Securities and Exchange Commission) and are filed as part of this Form 10-KSB:
 
3.1
Articles of Incorporation. Registrant incorporates by reference Exhibit 3.1 to Form 8-K filed July 18, 2007.
   
3.1(a)
Articles of Amendment to Articles of Incorporation.  Registrant incorporates by reference Exhibit 99.1 to Form 8-K filed October 10, 2007.
   
3.2
By-Laws. Registrant incorporates by reference Exhibit 3.2 to Form 8-K filed July 18, 2007.
   
4.1
Copy of Specimen Certificate for shares of common stock. Registrant incorporates by reference Exhibit 4.1 to Registration Statement on Form SB-2, filed June 4, 2001.
   
4.1(a)
Copy of Specimen Certificate for shares of common stock. Registrant incorporates by reference Exhibit 4.1 (b) to Form 10-KSB, filed March 30, 2004.
   
4.1(b)
Copy of Specimen Certificate for shares of Series A Preferred Stock.  Filed herewith.
   
10.1
Employment Agreement with Stephen Barnhill. Filed herewith.
   
10.1(a)
First Amendment to Employment Agreement with Stephen Barnhill.  Registrant incorporates by reference Exhibit 99.2 to Form 8-K, filed January 3, 2006.
   
10.1(b)
Second Amendment to Employment Agreement with Stephen Barnhill.  Registrant incorporates by reference Exhibit 99.3 to Form 8-K, filed September 1, 2006.
   
10.1(c)
Third Amendment to Employment Agreement with Stephen Barnhill.  Registrant incorporates by reference Exhibit 10.1(c) to Form 10-QSB filed August 16, 2007.
   
10.1(d)
Fourth Amendment to Employment Agreement with Stephen Barnhill.  Registrant incorporates by reference Exhibit 99.1 to Form 8-K filed September 10, 2007.
   
10.1(e)
Fifth Amendment to Employment Agreement with Stephen Barnhill.  Registrant incorporates by reference Exhibit 99.1 to Form 8-K filed November 6, 2007.
   
10.2
Employment Agreement with David Cooper. Registrant incorporates by reference Exhibit 10.4 to Form 10-KSB, filed April 19, 2005.
   
10.3
Form of Securities Purchase Agreement. Registrant incorporates by reference Exhibit 10.6 to Form 10-KSB, filed April 19, 2005.
   
10.4
Form of Warrant.  Registrant incorporates by reference Exhibit 10.7 to Form 10-KSB, filed April 19, 2005.
   
10.5
Form of Securities Purchase Agreement.  Registrant incorporates by reference Exhibit 10.8 to Form 10-KSB, filed April 19, 2005.
   
10.6
Form of Warrant.  Registrant incorporates by reference Exhibit 10.9 to Form 10-KSB, filed April 19, 2005.
   
10.7
Form of Amendment to Securities Purchase Agreement. Registrant incorporates by reference Exhibit 10.10 to Form SB-2/A, filed December 14, 2005.
   
10.8
Employment Agreement with Daniel R. Furth, dated as of December 5, 2005.  Registrant incorporates by reference Exhibit 10.11 to Form SB-2/A, filed December 14, 2005.
 
47

 
10.8(a)
First Amendment to Employment Agreement with Daniel R. Furth.  Registrant incorporates by reference Exhibit 10.4(a) to Form 10-QSB filed August 16, 2007.
   
10.8(b)
Second Amendment to Employment Agreement with Daniel R. Furth.  Registrant incorporates by reference Exhibit 99.2 to Form 8-K filed September 10, 2007.
   
10.9
Employment Agreement with Robert S. Braswell IV, dated as of January 1, 2006.  Registrant incorporates by reference Exhibit 99.1 to Form 8-K, filed February 2, 2006.
   
10.10
Warrant Agreement by and between Registrant and William F. Quirk, Jr., dated as of September 1, 2006.  Registrant incorporates by reference Exhibit 99.2 to Form 8-K, filed September 5, 2006.
   
10.11
License Agreement between the Company and Clarient, Inc. dated July 31, 2007.  Registrant incorporates by reference Exhibit 10.1 to Form 8-K filed August 3, 2007.
   
10.12
Patent License and Settlement Agreement with Ciphergen Biosystems, Inc.  Registrant incorporates by reference Exhibit 10.10 to Form 10-QSB filed August 16, 2007.
   
10.13
Securities Purchase Agreement by and among the Company, the Cash Purchasers and the Lender Purchasers.  Registrant incorporates by reference Exhibit 10.11 to Form 10-QSB filed August 16, 2007.
   
10.14
Form of Warrant to Cash and Lender Purchasers.  Filed herewith.
   
16.1
Letter from Porter Keadle Moore LLP regarding change in certifying accountant.  Registrant incorporates by reference Exhibit 16.1 to Form 8-K, filed September 27, 2006.
   
21.1
Subsidiaries of the Registrant.  Filed herewith.
   
31.1
Rule 13a-14(a)/15(d)-14(a) Certifications of Chief Executive Officer.
   
31.2
Rule 13a-14(a)/15(d)-14(a) Certifications of Principal Financial Officer.
   
32.1
Section 1350 Certification of Chief Executive Officer.
   
32.2
Section 1350 Certification of Principal Financial Officer.
 
48

 
ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES.
 
The Company changed its independent auditors from Porter Keadle Moore LLP to Hancock Askew & Co., LLP during 2006.  The following table sets forth the fees billed by Hancock Askew & Co. LLP for 2007 and 2006, along with fees billed by Porter Keadle Moore LLP for 2006.
 
   
200 7
   
200 6
 
Audit Fees
  $ 77,970     $ 67,810  
Audit-Related Fees
    ---       ---  
Tax Fees
    ---       ---  
     Sub-Total
  $ 77,970     $ 67,810  
All Other Fees
    ---       ---  
Total Fees
  $ 77,970     $ 67,810  
 
Audit Fees.   This category includes aggregate fees billed for professional services rendered by for the audit of the Company’s annual financial statements for the year ended December 31, 2007 and 2006, review for the annual report on Form 10-KSB and for the limited reviews of quarterly condensed financial statements (Forms 10-QSB) included in periodic reports filed with the SEC during 2007 and 2006, including out of pocket expenses.  Porter Keadle Moore LLP billed $29,153 for 2006.  Hancock Askew & Co. LLP billed $38,657 for 2006.
 
Audit-Related Fees.   This category includes fees billed for professional services associated with consultation concerning financial accounting and reporting standards.  No such fees were billed in 2007 or 2006.
 
Tax Fees.   This category includes the aggregate fees billed or to be billed for tax services for the years ended December 31, 2007 and 2006.  No such fees were billed in 2007 or 2006.
 
All Other Fees.   This category includes the aggregate fees billed for all other services, exclusive of the fees disclosed above, rendered to the Company.  No such services were provided.
 
The services provided by the independent auditors were pre-approved by the Board of Directors of the Company to the extent required under applicable law.  The Board of Directors of the company requires pre-approval of all audit and allowable non-audit services.
 
49

 
SIGNATURES
 
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
   
HEALTH DISCOVERY CORPORATION
 
       
     
   
By:   /s/ Stephen D. Barnhill, M.D., Chief Executive Officer
     
   
Date:  March 31, 2008
 

 
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
Name
Title
Date
 
 
/S/Stephen D. Barnhill M.D.
 
Stephen D. Barnhill M.D.
 
 
Chief Executive Officer, Chairman
 
March 31, 2008
 
/S/Daniel R. Furth
 
Daniel R. Furth
 
 
Principal Financial Officer
Executive Vice President
 
March 31, 2008
 
/S/William F. Quirk, Jr.
 
William F. Quirk, Jr.
 
 
Director
 
March 31, 2008
 
/S/William M. Goldstein
 
William M. Goldstein
 
 
Director
 
March 31, 2008
 
/S/Richard E. Caruso
 
Richard E. Caruso
 
 
Director
 
March 31, 2008
 
 
50

 

Hancock Askew & Co LLP
100 Riverview Drive
Savannah, GA 31404

Report of Independent Registered Public Accounting Firm


Board of Directors
Health Discovery Corporation
Savannah, Georgia


We have audited the accompanying balance sheets of Health Discovery Corporation as of December 31, 2007 and 2006, the related statements of operations, changes in stockholders' equity, and cash flows for each of the two years in the period ended December 31, 2007.  These financial statements are the responsibility of the management of Health Discovery Corporation.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we expressed no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Health Discovery Corporation as of December 31, 2007 and 2006 and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note N, the Company has had limited revenue since inception, has incurred recurring losses from operations, and has had to continually seek additional capital investment in order to fund operations.  These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern.  Management’s plans in regard to these matters are also described in Note N.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.   

/s/ Hancock Askew & Co., LLP

Savannah, Georgia
March 20, 2008

F-1

 
HEALTH DISCOVERY CORPORATION
 
 
Balance Sheets
 
 
December 31, 2007 and 2006
 

Assets
 
   
200 7
   
2006
 
             
Current Assets
           
Cash
  $ 1,648,439     $ 674,366  
Accounts Receivable
    112,500       20,000  
Prepaid Expense and Other Current Assets
    33,829       55,188  
                 
Total Current Assets
    1,794,768       749,554  
                 
Equipment, Less Accumulated Depreciation of $22,402 and $14,257
    7,596       14,743  
                 
Other Assets
               
Accounts Receivable – Long Term
    112,500       -  
Patents, Less Accumulated Amortization of $942,974 and $680,255
    3,042,820       3,305,540  
                 
Total Assets
  $ 4,957,684     $ 4,069,837  

Liabilities and Stockholders’ Equity

Current Liabilities
           
Accounts Payable – Trade
  $ 61,173     $ 237,928  
Accrued Liabilities
    239,589       150,520  
Deferred Revenue
    62,708       101,111  
                 
                 
Total Current Liabilities
    363,470       489,559  
                 
Accrued Interest Payable
    -       140,875  
Convertible Notes Payable
    -       665,643  
Long-Term Debt, Less Current Portion
    -       321,911  
Notes Payable (net of unamortized discount of $461,667 in 2006)
    -       538,333  
Deferred Revenue – Long Term
    453,715       -  
                 
Total Liabilities
    817,185       2,156,321  
                 
Commitments and Contingencies
               
                 
Stockholders’ Equity
               
Series A Preferred Stock, Convertible, Stated Value of $0.08 per Share
               
7,437,184 Shares Authorized, Issued and Outstanding
    594,975       -  
Common Stock, No Par Value, 300,000,000 Shares Authorized,
               
Issued and Outstanding 169,007,206 and 116,393,384 Shares, respectively
    15,390,609       11,059,674  
Accumulated Deficit
    ( 11,845,085 )     ( 9,146,158 )
                 
Total Stockholders' Equity
    4,140,499       1,913,516  
                 
Total Liabilities and Stockholders' Equity
  $ 4,957,684     $ 4,069,837  
 
See accompanying notes to financial statements.
F-2

 
HEALTH DISCOVERY CORPORATION
 
Statements of Operations
 
For the Years Ended December 31, 2007 and 2006
 

   
2007
   
2006
 
             
Revenues
           
Licensing and Development
  $ 57,905     $ 203,889  
                 
Cost of Revenues
               
Licensing and Development
    21,300       28,671  
Gross Profit
    36,605       175,218  
                 
Expenses:
 
 
   
 
 
Amortization
    262,719       262,719  
Professional and Consulting Fees
    980,833       1,123,498  
Compensation
    783,726       770,000  
Other General and Administrative Expenses
    459,064       542,710  
Total Expenses
    2,486,342       2,698,927  
Net Loss from Operations
    (2, 449,737 )     (2,523,709 )
                 
Other Income (Expense):
 
 
   
 
 
Interest Income
    39,614       21,008  
Gains on Restructuring of Accounts Payable
    44,594       97,864  
Loss from Unconsolidated Joint Venture
    (5,000 )     -  
Litigation Settlement
    (42,000 )     -  
Interest Expense
    (286,398 )     (190,922 )
Total Other (Expense) Income
    (249,190 )     (72,050 )
                 
Net Loss
  $ (2,698,927 )   $ (2,595,759 )
                 
Weighted Average Outstanding Shares
    132,718,789       115,895,692  
 
               
Loss Per Share
  $ (.02 )   $ (.02 )
 
               


See accompanying notes to financial statements.
F-3


HEALTH DISCOVERY CORPORATION
 
Statements of Changes in Stockholders’ Equity
 

For the Year Ended December 31, 2007 and 2006

   
Issued and Outstanding
         
Total
 
   
Preferred
   
Common
   
Preferred
   
Common
   
Accumulated
   
Stockholders'
 
   
Shares
   
Shares
   
Amount
   
Amount
   
Deficit
   
Equity
 
Balance – January 1, 2006
    -       114,363,384     $ -     $ 9,522,961     $ (6,550,399 )   $ 2,972,562  
Stock Issued for Cash
    -       1,000,000       -       100,000       .       100,000  
Stock Issued upon Exercise of Options and Warrants
    -       1,030,000       -       26,400        -       26,400  
Warrants Issued in Connection with Debt Agreement
    -       -       -       554,000       -       554,000  
Warrants Issued for Settlement of Liability
    -       -       -       72,326       -       72,326  
Warrants Issued for Services
    -       -       -       504,091       -       504,091  
Stock Compensation Expense for Compensatory Options and Warrants
    -       -       -       279,896       -       279,896  
Net Loss
    -       -       -       -       ( 2,595,759 )     ( 2,595,759 )
Balance - December 31, 2006
    -       116,393,384     $ -     $ 11,059,674     $ (9,146,158 )   $ 1,913,516  
Stock Issued for Cash
    -       31,937,500       -       2,490,540       -       2,490,540  
Stock Issued upon Exercise of Options and Warrants
    -       100,000       -       1,000       -       1,000  
Stock Issued in Connection with Debt Conversion
    7,437,184       19,601,322       594,975       1,298,800       -       1,893,775  
Stock Issued for Settlement of Litigation
    -       400,000       -       32,000       -       32,000  
Stock Issued in Severance Agreement
    -       575,000       -       46,000       -       46,000  
Warrants Issued for Services
    -       -       -       320,570       -       320,570  
Stock Compensation Expense for Compensatory Options and Warrants
    -       -       -       142,025       -       142,025  
Net Loss
    -       -       -       -       ( 2,698,927 )     ( 2,698,927 )
Balance - December 31, 2007
    7,437,184       169,007,206     $ 594,975     $ 15,390,609     $ (11,845,085 )   $ 4,140,499  


See accompanying notes to financial statements.
F-4

HEALTH DISCOVERY CORPORATION
 
Statements of Cash Flows
 

For the Years Ended December 31, 2007 and 2006
 
 
   
2007
   
200 6
 
Cash Flows From Operating Activities:
               
Net Loss
  $ (2,698,927 )   $ (2,595,759 )
Adjustments to Reconcile Net Loss to Net Cash
               
Used by Operating Activities:
               
Stock Issued in Settlement of Litigation
    32,000       -  
Non-cash Compensation
    188,025       279,896  
Accretion of Debt Discount
    192,361       92,333  
Services Exchanged for Common Stock or Warrants
    286,814       504,091  
Issuance of Warrants
    33,756       -  
Gain on Restructuring Accounts Payable
    (44,594 )     (97,864 )
Depreciation and Amortization
    270,865       270,316  
 
               
Changes in Assets and Liabilities:
               
Increase in Accounts Receivable
    (205,000 )     (20,000 )
(Increase) Decrease in Prepaid Expense & Other Assets
    21,358       (37,480 )
(Decrease) Increase in Accounts Payable – Trade
    (132,161 )     140,145  
Increase in Deferred Revenue
    415,312       101,111  
Increase in Accrued Liabilities
    173,073       228,077  
 
               
Net Cash Used by Operating Activities
    (1,467,118 )     (1,135,134 )
 
               
Cash Flows From Investing Activities:
               
Purchase of Equipment
    (998 )     (9,287 )
 
               
Net Cash Used by Investing Activities
    (998 )     (9,287 )
 
               
Cash Flows From Financing Activities:
               
Repayment of Notes Payable
    (49,351 )     (26,780 )
Proceeds from Issuance of Common Stock
    2,491,540       126,400  
Proceeds from Borrowing
    -       1,000,000  
 
               
Net Cash Provided by Financing Activities
    2,442,189       1,099,620  
 
               
Net Increase (Decrease) in Cash
    974,073       (44,801 )
 
               
Cash, at Beginning of Period
    674,366       719,167  
 
               
Cash, at End of Period
  $ 1,648,439     $ 674,366  
 
               
Stock-Based Investing and Financing Transactions:
               
Debt Discount in exchange for Warrants
  $ -     $ 554,000  
Common Stock, Series A Preferred Stock, and Warrants
               
Issued in Settlement of Promissory Notes
  $ 1,893,775     $ -  
 
               
Supplemental Disclosures of cash Flow Information:
               
Cash Paid for Interest
  $ 10,084     $ 3,242  
 
See accompanying notes to financial statements.
F-5

 
HEALTH DISCOVERY CORPORATION
 
Notes to Financial Statements
 

 
Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
DESCRIPTION OF BUSINESS
 
Health Discovery Corporation (the “Company”) is a biotechnology-oriented company that has acquired patents and has patent pending applications for certain machine learning tools, primarily pattern recognition techniques using advanced mathematical algorithms to analyze large amounts of data thereby uncovering patterns that might otherwise be undetectable.  Such machine learning tools are currently in use for diagnostics and drug discovery, but are also marketed for other applications.  The Company licenses the use of its patented protected technology or may develop specific learning tools to sell to third parties.
 
USE OF ESTIMATES
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period.  Accordingly, actual results could differ from those estimates.  Significant estimates that are particularly suspectible to change in the near-term include the valuation of non-cash consideration for services and the recoverability of the patents.
 
REVENUE RECOGNITION

Revenue is generated through the sale or license of patented technology and processes and from services provided through development agreements.  These arrangements are generally governed by contracts that dictate responsibilities and payment terms.  The Company recognizes revenues as they are earned over the duration of a license agreement or upon the sale of any owned patent once all contractual obligations have been fulfilled.  Revenue is recognized under development agreements in the period the services are performed.
 
COST OF REVENUE
 
Cost of revenue includes the acquisition cost less accumulated amortization of patents sold, plus internal development costs and fees directly associated with sales contracts.
 
Cost of revenue for licensing and development revenue includes fees directly asssociated with the contracts and salary expense based upon the estimated amount of time worked on the licensing or development contract.
 
CASH AND CASH EQUIVALENTS
 
Cash and cash equivalents include cash and monies invested in overnight funds with our bank.
 
ACCOUNTS RECEIVABLE
 
Trade accounts receivable for licensing fees and development services are recorded at net contract value based upon the written agreement with the customer. In certain cases, accounts receivable may include royalties receivable from our customers based upon those customers estimated sales of the products or diagnostic tests containing our patented processes and technologies. The Company considers amounts past due based on the related terms of the agreement and reviews its exposure to amounts receivable based upon collection history and specific customer credit analysis.  The Company provides an allowance for doubtful amounts if collectability is no longer reasonably assured.  As of December 31, 2007 and 2006, all amounts receivable were considered fully collectable.
 
PROPERTY AND EQUIPMENT
 
Property and equipment, which consists of office furniture, computer equipment and leasehold improvements, are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, which range from 3 to 10 years. Leasehold improvements are amortized using the straight-line method over the estimated useful lives of the assets or the term of the lease, whichever is shorter.
 
F-6


HEALTH DISCOVERY CORPORATION

Notes to Financial Statements, continued

Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
 
PATENTS
 
Initial costs paid to purchase patents are capitalized and amortized using the straight line method over the remaining license period. The Company capitalizes the external and in-house legal costs and filing fees associated with obtaining patents on its new discoveries and amortizes these costs using the straight-line method over the shorter of the legal life of the patent or its economic life, generally 17 years, beginning on the date the patent is issued.  If the applied for patents are abandoned or are not issued, the Company will expense the capitalized costs to date in the period of abandonment.  The carrying value of patents is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. As of December 31, 2007, the Company does not believe there has been any impairment of its intangible assets.
 
INCOME TAXES
 
The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for future tax benefits and expenses or consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income for the years in which those temporary differences are expected to be recovered or settled.
 
In the event the future tax consequences of differences between the financial reporting bases and tax bases of the Company’s assets and liabilities result in deferred tax assets, an evaluation of the probability of being able to realize the future benefits indicated by such assets is made. A valuation allowance is provided for the portion of the deferred tax asset when it is more likely than not that some portion or all of the deferred tax asset will not be realized. In assessing the realizabilty of the deferred tax assets, management considers the scheduled reversals of deferred tax liabilities, projected future taxable income and tax planning strategies.

STOCK-BASED COMPENSATION

Effective January 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share-Based Payment (“SFAS No. 123(R)”) using the modified prospective transition method provided for under the standard.  Under the Standard, stock-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized as expense over the employee’s requisite service period.

Stock-based expense included in the 2007 net loss consisted of $540,595 in compensatory warrants, options, and stock for professional consulting services, and compensation.  Stock-based expense included in the net loss for 2006 consisted of $783,987 for the issuance of common stock, warrants, and options.
 
DETERMINING FAIR VALUE UNDER SFAS 123R:
 
Valuation and Amortization Method – The Company estimates the fair value of stock options and warrants granted using the Black-Scholes option-pricing formula and a single option award approach. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period.
 
Expected Term – The expected term of the award represents the period that the Company’s stock-based awards are expected to be outstanding and was determined based on historical experience, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior.  Given the lack of historical data and start-up nature of the company's operations, the expected term is estimated as the contractual term.
 
Expected Volatility – Volatility is a measure of the amounts by which a financial variable such as stock price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. The Company uses the historical volatility to estimate expected volatility.
 
F-7

 
HEALTH DISCOVERY CORPORATION

Notes to Financial Statements, continued

Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
 
Risk-Free Interest Rate – The Company bases the risk-free interest rate used in the Black-Scholes valuation method on the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equivalent to the expected term of a stock award.
 
Estimated Forfeitures – When estimating forfeitures, the Company considers voluntary termination behavior as well as analysis of actual option forfeitures.
 
Estimated Dividend yield – The Company has not paid any dividends and has no current plans to do so therefore dividend rate is assumed to be zero.
 
The adoption of SFAS 123R also requires additional accounting related to income taxes.  Due to the full valuation allowance provided on its net deferred tax assets, the Company has not recorded any tax benefit attributable to stock-based compensation expense.
 
RESEARCH AND DEVELOPMENT EXPENSE
 
The Company’s past research and development costs have been minimal due to the unique relationships we have maintained with the members of our scientific team and their institutions.  Our total R&D costs have consisted solely of the consultant fees paid to members of our scientific advisory board.  These fees consisted of $46,432 in cash for 2007 and $70,734 in cash for 2006.
 
FAIR VALUE OF FINANCIAL INSTRUMENTS
 
The Company’s financial instruments consist of cash, accounts receivable, accounts payable and accrued expenses.  Pursuant to SFAS No. 107, Disclosures about Fair Value of Financial Instruments , the Company is required to estimate the fair value of all financial instruments at the balance sheet date.  The Company considers the carrying values of its financial instruments in the financial statements to approximate their fair value due to the short term nature of such items.

NET LOSS PER SHARE
 
Basic Earnings Per Share (“EPS”) includes no dilution and is computed by dividing income or loss available to common shareholders by the weighted average number of common shares outstanding for the period.  Diluted EPS reflects the potential dilution of securities that could share in the earnings or losses of the entity. Due to the net loss in all periods presented, the calculation of diluted per share amounts would cause an anti-dilutive result and therefore is not presented. Potentially dilutive shares at December 31, 2007 and 2006 include the following:
 
   
2007
   
2006
 
   
 
   
 
 
Stock options
    3,500,000       3,500,000  
Warrants
    159,099,644       68,796,250  
Convertible notes
    -       3,915,547  
      162,599,644       76,211,797  
 
CONCENTRATIONS OF CREDIT RISK
 
The Company maintains its cash balances at financial institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $100,000.  From time-to-time, the Company’s cash balances exceed the amount insured by the FDIC.  Management believes the risk of loss of cash balances in excess of the insured limit to be low.
 
RECENT ACCOUNTING PRONOUNCEMENTS
 
In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109 , (“FIN 48”).  FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  This pronouncement is effective for fiscal years beginning after December 15, 2006.  We adopted FIN 48 effective January 1, 2007.  This adoption has not had a material impact on our financial statements.
 
F-8

 
HEALTH DISCOVERY CORPORATION

Notes to Financial Statements, continued

Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
 
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements , (“Statement No. 157”).  This statement provides a single definition of fair value, a framework for measuring fair value, and expanded disclosures concerning fair value.  Previously, different definitions of fair value were contained in various accounting pronouncements creating inconsistencies in measurement and disclosures.  This pronouncement is effective for fiscal years beginning after November 15, 2007.  We do not expect the adoption of Statement No. 157 to have a material impact on our financial position, results of operations, or cash flows.
 
Note B – DEFERRED REVENUE
 
Deferred revenue represents the unearned portion of payments received in advance for licensing or service agreements.
 
The Company had total unearned revenue of $516,423 as of December 31, 2007.  Unearned revenue of $62,708 is recorded as current and $453,715 is classified as long-term.  The long term portion of unearned revenue is being amortized over the remaining term of the agreements or the remaining lives of the underlying patents, as appropriate, and ranges from one to sixteen years.
 
Deferred revenue was $101,111 as of December 31, 2006.  Of this amount, $40,000 was recognized as income in 2007. 
 
The expected future annual recognition of revenue is as follows (in thousands):
 
For the Year Ending December 31,                                               

2008
  $ 62,708  
2009
    57,153  
2010
    29,375  
2011
    29,375  
2012
    29,375  
Thereafter
    308,437  
Total expected future annual amortization
  $ 516,423  

 
Note C – PATENTS
 
The Company has acquired a group of patents related to biotechnology and certain machine learning tools used for diagnostic and drug discovery. Additionally, legal costs associated with patent acquisitions and the application process are also capitalized as patent costs.  The Company has recorded $3,042,820 and $3,305,540 in patents and patent related costs, net of accumulated amortization, at December 31, 2007 and 2006.
 
Amortization charged to operations for the years ended December 31, 2007 and 2006 was $262,719.  The weighted average amortization period for patents is 14 years.  Estimated amortization expense for the next five years is $262,719 per year.
 
Note D – INVESTMENTS
 
On March 27, 2007, the Company and an investment partner formed SVM Capital LLC as an equity investment for purposes of utilizing SVMs as a quantitative investment management technique.  The Company owns 45% of the membership interest and has significant influence with the operation of the entity but is not considered the primary beneficiary.  Accordingly, the investment is presented using the equity method of accounting.  The Company’s initial investment was $5,000.  Equity in the loss of SVM Capital LLC for 2007 was $5,000.  The resultant net value was of December 31, 2007 is zero.  The Company has no contractual obligation to fund this venture.
 
F-9

 
HEALTH DISCOVERY CORPORATION

Notes to Financial Statements, continued

Note E LITIGATION SETTLEMENT
 
Effective July 1, 2007, the Company entered into a patent license and settlement agreement with Ciphergen Biosystems, Inc. (“Ciphergen”) in connection with the pending litigation styled Health Discovery Corporation v. Ciphergen Biosystems, Inc. Case No. 07-00285-CRB before the United States District Court for the Northern District of California (“The Agreement”).  The Agreement provides Ciphergen a license to use certain patents.  In consideration for entering into the Agreement, Ciphergen agreed to pay the Company $600,000 over a two-year period.  The revenue associated with this settlement was recorded net of $130,000 in contingently payable attorney fees as deferred revenue in the amount of $470,000 and will be recognized over the sixteen year remaining life of the subject patents.
 
On June 19, 2007, the Company entered into a settlement agreement (the “Settlement Agreement”) among Bill G. Williams, Shirley K. Williams, and Automated Shrimp Corporation (collectively, the “Defendants”), Stephen Barnhill as Third-Party Defendant, and Baptist Community Services, Tim Holloway, Guadalupe Family Limited Partnership, and Gerald Easterling as Intervenors in connection with the pending litigation styled Health Discovery Corporation v. Williams et al. , filed in the District Court of McLennan County, State of Texas, Civil Action File No. 10-04-00012-CV.  Pursuant to the terms of the Settlement Agreement, each party agreed to voluntarily dismiss with prejudice any and all claims it has against each and every other party.  In consideration for entering into the Settlement Agreement, the Company agreed to issue in the aggregate 400,000 shares of Company common stock valued at $32,000 to the Defendants and pay the defendants an aggregate $10,000.
 
Note F – LICENSE FEES EXPENSE - LICENSE AGREEMENT
 
Effective September 26, 2004, the Company was assigned a patent license agreement with Lucent Technologies GRL Corporation (“Lucent”).  The patent license agreement was associated with the patents acquired July 30, 2004. The Company agreed to pay royalty fees to Lucent in the amount of the greater of an annual fee of $10,000 or at the rate of five percent (5%) on each licensed product which is sold, leased, or put into use by the Company, until cumulative royalties equal $40,000 and at the rate of one percent (1%) subsequently.  The license granted will continue for the entire unexpired term of Lucent’s patents.  During both 2007 and 2006, the Company paid approximately $10,000 in royalty fees to Lucent.

Note G – INCOME TAXES
 
The Company has incurred net losses since inception and, consequently, we have not recorded any U.S. federal or state income taxes.  We have no recorded income tax provision or benefit for the fiscal years ending December 31, 2007 or 2006.
 
The following items comprise the Company’s net deferred tax assets (liabilities) as of December 31, 2007.
 

 
 
2007
   
2006
 
Deferred tax assets:
 
 
   
 
 
Net operating loss carry-forward
  $ 2,975,861     $ 2,487,117  
Deferred revenue
    175,584       34,378  
Contributions
    2,474       1,794  
Depreciation and amortization
    1,724       901  
Warrants and options granted
    783,341       605,536  
 
    .          
Total
    3,938,984       3,129,726  
Less valuation allowance
    (3,938,984 )     (3,129,726 )
 
               
Net deferred asset
    -       -  
 
As of December 31, 2007, a valuation increase of $809,258 has been recorded for the deferred tax asset, as management has determined that it is more likely than not that the deferred tax asset will not be realized.
 
F-10

 
HEALTH DISCOVERY CORPORATION

Notes to Financial Statements, continued

Note G – INCOME TAXES, continued
 
Total income tax expense (benefit) differed from the amounts computed by applying the U.S. Federal statutory tax rates to pre-tax loss for the fiscal years ending December 31, 2007 and 2006 as follows:
 
 
   
2007
   
2006
 
Total expense (benefit) computed by:
 
 
   
 
 
Applying the U.S. Federal statutory rate
    (34.0 )%     (34.0 )%
State income taxes, net of federal tax benefit
    (3.0 )     (3.0 )
Valuation allowance
    37.0       37.0  
Effective tax rate (benefit)
    -       -  
 
               
 
The Company has unused net operating loss carry-forward of approximately $8.8 million that are available to offset future income taxes.  The net operating loss will expire beginning in 2021.
 
Note H – NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE
 
Notes payable consist of the following:
 
2007
   
2006
 
             
Term promissory notes payable to individuals and institutions. Principal and interest at 18% is payable in common stock on September 1, 2008.
  $ -     $ 321,911  
                 
Note payable to shareholder/director net of $461,667 unamortized discount due September 1, 2008 with interest payable at 5% due at maturity.
  $ -     $ 538,333  
    $ -     $ 860,244  
                 
Less current maturities
 
-
   
-
 
 
  $ -     $