Corporate Overview

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

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

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

Operational Activities

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

The U.S. Patent and Trademark Office issued one new patent to the Company in April 2008, which covers the use of FGM technology for visualization of data patterns. In May 2008, the U.S. Patent and Trademark Office issued two new patents to the Company, one of which claims a method for analysis of any type of data that has a structure. The second patent covers additional feature selection techniques that can be used to successfully identify the most important pieces of information needed to solve complex pattern-recognition problems. The U.S. Patent and Trademark Office issued one new patent to the Company in June 2008, which covers the use of SVMs for computer-aided analysis of medical images, with particular applications in cytology and pathology. Also in June 2008, the Company was issued a patent in Japan, which covers recursive feature elimination (RFE) using SVMs for selection and ranking of the most important features within large datasets. In October 2008, an Indian patent was issued to the Company covering the use of SVMs for knowledge discovery from multiple data sets. Also that month, the U.S. Patent and Trademark Office issued a new patent to the Company covering a data mining platform with multiple SVM modules for use in analyzing bioinformatics data. With the issuance of these patents, the Company now holds the exclusive rights to 34 issued U.S. and foreign patents covering uses of SVM and FGM technology for discovery of knowledge from large data sets.

In July 2008, the Company and DCL Medical Laboratories LLC, a full-service clinical laboratory focused on women's health, entered into a development and license agreement for the collaborative development and commercialization of SVM-based computer assisted diagnostic tests for the independent detection of ovarian, cervical and endometrial cancers. Through the application of the advanced technology of pattern recognition, this new SVM-based system is intended to further improve the sensitivity of the Pap test and augment the recent improvements of computer guided screening that have already significantly improved detection rates. In addition, images and interpretative data from this new SVM-based system may now be transmitted electronically, thus allowing remote review and collaborative interpretation. Pursuant to the development and license agreement, HDC will own any developed intellectual property and DCL will have a sole use license relating to applications and new mathematical tools developed during the course of the development and license agreement. Dr. Hanbury, one of our directors, is currently President, CEO and a shareholder of DCL.

As we disclosed in our Form 10-K for the fiscal year ended December 31, 2007, we were in discussions regarding the licensing of and product development using SVMs and FGMs in diagnostic radiology, including mammography, PET scans, CT scans, MRI and other radiological images. In August 2008, we entered into a licensing agreement with Smart Personalized Medicine, LLC, a company founded by our former director, Dr. Richard Caruso. Under the terms of this agreement, we will work to develop a superior breast cancer prognostic test using our SVM technology in collaboration with a prominent cancer research hospital. In exchange for a license to use our SVM technology, we received a 15% equity position in Smart Personalized Medicine, LLC (which will remain undiluted until there is at least $5 million in investment from investors in Smart Personalized Medicine, LLC) and a per test royalty up to 7.5% based on net proceeds received from the sale of the new breast cancer prognostic test.

In August 2008, we entered into an agreement with Patent Profit International ("PPI"), a Silicon Valley-based patent brokerage firm, with the goal of marketing our patent portfolio and exclusive rights to SVM techniques and applications beyond biomarker discovery and the healthcare field, to prospective buyers/licensees in a wide range of technologies, including, but not limited to, information technology such as Internet browsers and search engines, digital photography, spam mail detection, oil exploration, homeland security, and the automotive industry. As a requirement of any potential sale of the patent portfolio, HDC expects to retain a royalty-free, worldwide, exclusive license, with the right to grant sublicenses, in the entire field of healthcare to enable our continued research, development, licensing and commercialization activities in diagnostic and prognostic areas such as prostate cancer, ovarian cancer, breast cancer, endometrial cancer, colon cancer, leukemia and other healthcare arenas and to retain ownership of patents relating solely to biomarker discovery and healthcare. PPI's marketing of our patent portfolio is ongoing.

In August 2008, the U.S. Patent and Trademark Office granted a patent to us covering the use of SVMs in computer-aided image analysis of digitized microscopic images of medical specimens. This patent focuses on a method and computer system for analyzing medical images generated during microscopic evaluation of cytology specimens and tissue samples. SVM-aided image analysis using this patented method could permit automated and rapid analysis of a series of sample images that are typically examined visually by a technologist or pathologist, greatly increasing the sensitivity and accuracy of tests.

On September 24, 2008, our previously-filed registration statement on Form S-1, which was required by the terms of the private placement we completed in September, 2007 (the "Private Placement") and first disclosed on Form 8-K, dated September 10, 2007, was declared effective. The registration statement covers 35,274,934 shares of our common stock if warrants with an exercise price of $0.14 per share are exercised and 35,274,934 shares of our common stock if warrants with an exercise price of $0.19 per share are exercised. The registration statement also covers 352,746 shares of our common stock that were issued to the investors in September pursuant to the terms of the Private Placement. All of the Private Placement warrants are currently outstanding. We will not receive any proceeds from any shares ultimately sold pursuant to the registration statement. However, we will receive cash upon the exercise of the warrants of $11,640,728.22 if all of the warrants are exercised. The exercise price of the warrants is fixed, subject to adjustments for stock splits or combinations.

On December 31, 2008, the U.S. Patent and Trademark Office issued a notice of allowance for the Company's pending patent application entitled "Data Mining Platform for Bioinformatics and Other Knowledge Discovery." This application includes claims covering a web-based data mining system that utilizes multiple support vector machine models to analyze combinations of biological data of many different types, for example, genomic, proteomic, and clinical data, from many different sources, including measurement instruments, clinical databases, on-line databases and on-line journals to produce ranked lists of genes or proteins that may be used as biomarkers. Once the above identified application and those applications described in Subsequent Events below issue as patents, which is expected to occur in mid-2009, the Company will own exclusive rights in 37 issued U.S. and foreign patents covering SVM and FGM technologies and their uses.

On July 31, 2007, we announced our alliance and licensing agreement with Clarient, Inc. for development of a new molecular diagnostic test for prostate cancer based on our discovered prostate cancer biomarker signature. Under the terms of that agreement, as amended, Clarient obtained a non-exclusive license to make, use and sell any Licensed Product in the Field of Use within the Licensed Territory with respect to both the commercial reference laboratory field and the academic and research fields. In exchange for the non-exclusive license, Clarient will pay the Company 10% of Clarient's net proceeds with respect to all licensed laboratory tests performed during the term of the license. During 2008, we and Clarient successfully completed all phases of the clinical trial process with the hope of achieving the statistical significance necessary to validate the ability to commercialize a test. Results from both the Phase I, Phase II and Phase III double-blinded clinical validation studies now completed at Clarient demonstrated a very high success rate for identifying the presence of Grade 3 or higher prostate cancer cells (clinically significant cancer), as well as normal BPH (benign prostatic hyperplasia) cells. On November 6, 2008, we announced that the RT-PCR assay for the four genes comprising the Company's recently commercialized gene-based molecular diagnostic test for prostate cancer, which is currently available at Clarient's Clinical Laboratory, can be successfully used in urine samples for gene testing. The study, completed in collaboration with a prominent cancer research hospital, demonstrated that the gene expression of all four genes comprising the molecular signature for clinically significant prostate cancer could be detected in urine samples spiked with as few as 50 prostate cancer cells. On January 13, 2009, we announced the commercial launch of the new gene expression test for prostate cancer, which will be available through Clarient's PATHSiTETM virtual reporting tool and accessible to the Company's entire pathology network. The new prostate cancer test will be performed at Clarient's Clinical Laboratory in Aliso Viejo, CA. HDC will receive 10% royalty on each test performed.

In September 2008 and December 2007, we received royalty proceeds related to our licensing agreement with Bruker Daltonics, which was originally announced in August, 2006. The royalties relate to Bruker Daltonics' sales of its ClinProToolsTM clinical proteomics product line for its mass spectrometers, which contains HDC's SVM technology. Bruker launched its ClinProToolsTM at approximately the same time as the license with HDC. While these royalty payments were relatively small, it offers the opportunity of future royalties for the life of the patents related to future sales of the Bruker product.

Management believes that our research agreement with a leading biotech company to develop an SVM-based diagnostic test to help interpret flow cell cytometry data for a particular medical condition has resulted in a successful proof of concept. These findings were presented during the first quarter of 2008 and the due diligence process has accelerated to confirm our findings for that particular condition and determine other applications within flow cytometry.

We are in discussions with a large international pharmaceutical company to develop a diagnostic test using our discovered biomarkers during a clinical trial for its new drug to treat BPH (enlarged prostate).

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

In January 2007, SVM Capital, LLC was formed as a joint venture between HDC and Atlantic Alpha Strategies, LLC ("Atlantic Alpha") to explore and exploit the potential applicability of our SVM technology to quantitative investment management techniques. Atlantic Alpha has over thirty years of experience in commodity and futures trading. SVM Capital has made significant progress since the formation of the joint venture. The SVM technology is now working well with dynamic time series for S&P data accumulated over the past fifty-eight years as well as a limited pilot program of real-time trading activity. The latest SVM-derived models generated by SVM Capital have successfully outperformed the static buy-and-hold model both in increased returns as well as in reduced risk. Once the stability of these models is confirmed, SVM Capital intends to apply the models to a wide range of financial asset classes such as interest rates, currencies, metals and petroleum products. The joint venture partners plan to apply the investment model either in a single fund or a series of related funds. SVM Capital expects to charge a management fee and a performance fee related to its investment activities. Depending on the level of its success, this venture can be profitable given its reliance on cost effective use of computer technology and ready access to efficient trading platforms.

The Company has recorded revenue of $555,000 through December 31, 2008 and has deferred revenue yet to be recognized of $450,000 at December 31, 2008. In addition, the Company has received $150,000 in additional cash payments in 2009. The Company believes that the aggregate value created by its patent portfolio to date is therefore $1,055,000.

While we have a number of negotiations in process with potential licensing partners, there is a possibility that we will be unable to reach agreement with any party, that the negotiations continue but are not finalized, or that those that may be finalized do not provide the economic returns that we expect.

Subsequent Events

On March 31, 2009, we entered into the Purchase Agreement with certain individual investors for the private issuance of shares of our Series B Preferred Stock at an offering price of $ 0.08 per share (the "Private Placement") . We anticipate that, in connection with the Private Placement, we will receive up to $500,000 in cash in exchange for the issuance of up to 6,250,000 shares of Series B Preferred Stock. A copy of the form of Purchase Agreement is attached to this Annual Report on Form 10-K as Exhibit 10.15. The shares will be offered and sold in reliance upon exemptions from registration pursuant to Section 4(2) under the Securities Act of 1933, as amended, and Regulation D promulgated thereunder.

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

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

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

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

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

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

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

Year Ended December 31, 2008 Compared with Year Ended December 31, 2007

Revenue

For the year ended December 31, 2008, revenue was $65,731 compared with $57,905 in revenue for the year ended December 31, 2007. Revenue is recognized for licensing and development fees over the period earned and the revenue recognized in 2008 was primarily the amortization and recognition of prior deferred revenue items during the year. As of December 31, 2008, the Company had deferred revenue of $453,715. This deferred revenue includes $341,215 of cash received but not yet recognized as revenue and $112,500 in accounts receivable. Deferred revenue was $516,424 at December 31, 2007.

Cost of Revenue and Gross Margin

Cost of revenues for 2008 was $9,000. Cost of revenues includes all direct costs associated with the acquisition and development of patents and processes sold. All direct costs, primarily professional fees associated with licensing negotiations, are also included in cost of revenues. Cost of revenues was $21,300 in 2007.

Operating and Other Expenses

Amortization expense, which is the amortization of patents over their estimated useful lives, was $262,719 for the twelve months ended December 31, 2008 and 2007.

Professional and consulting fees totaled $748,748 for 2008 compared with $980,833 for 2007. These fees, related to legal, accounting, scientific and sundry activities, were reduced because of fewer outside services being required in the current year.

Compensation of $745,918 for the twelve months ended December 31, 2008 was slightly lower than the $783,721 reported for the comparable period of 2007 as compensation was held constant in an effort by the Company to control costs. The decrease was due to a smaller charge for employee stock, options and warrants.

Other general and administrative expenses increased from $459,064 in 2007 to $484,806 in 2008. This increase was due to additional costs related to the issuance of common stock.

Loss from Operations

The loss from operations for the twelve months ended December 31, 2008 was $2,185,460 compared to $2,449,737 for the prior year. The decreased loss was due to reduced expenses as previously discussed.

Other Income and Expense

Interest income was $39,160 for the twelve months ended December 31, 2008 compared to $39,614 in 2007. Decreased interest income was due to the higher average cash available to invest throughout 2008, offset by generally lower rates available.

A gain on the restructuring of accounts payable of $44,594 was recorded in 2007 to reflect common stock warrants issued in payment of liabilities. No corresponding event occurred in 2008.

The Company recognized a $5,000 loss related to its investment in SVM Capital LLC in 2007. No gain or loss relating to SVM Capital LLC was recorded in 2008.

The Company recorded an expense of approximately $42,000, which was associated with the settlement of litigation in 2007. No such charge applied to 2008.

Interest expense was $1,161 in 2008 compared with $286,398 in 2007. This decrease was due to the elimination of indebtedness during the third quarter of 2007.

Net Loss

The net loss for the twelve months ended December 31, 2008 was $2,147,461 compared to $2,698,927 for the twelve months ended December 31, 2007. The reduced loss was due to the overall reduction in expenses as previously discussed.

Net loss per share was $0.01 for the twelve months ended December 31, 2008 compared to a net loss per share of $0.02 for the prior year. The smaller net loss in 2008 and the increased number of average shares outstanding in 2008 favorably impacted the net loss per share.

Liquidity and Capital Resources

At December 31, 2008, the Company had $325,887 in available cash. Cash used by operating activities was $1,309,832. This was due primarily to the net loss of $2,147,461; however, net non-cash charges and adjustments of $837,629 favorably impacted the computation of the net cash used. Cash used by investment activities was $12,720 due to the acquisition of assets. Net cash provided by financing activities was zero because no such activities occurred.

On July 15, 2008, the Company received $112,500 due from Ciphergen Biosystems, Inc. in accordance with a patent license and settlement agreement.

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

                                                    Less than      1-3
                                         Total       1 Year       Years
               Deferred Compensation      54,500        54,500          -
               Corporate Office Lease     31,338        20,892     10,446
               Total                    $ 85,838   $    75,392   $ 10,446

The Company continues to incur maintenance fees for its patent portfolio and expects those fees to be approximately $29,500 during 2009.

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

In June 2008, a warrant to purchase 1,500,000 shares of Company common stock at an exercise price of $0.08, vesting over three years and expiring in six years, was granted by the Company to a new director. The value of $85,200 will be charged as directors' fees over the vesting period.

The Company granted 1,250,000 options to an advisor to the Company during the third quarter of 2008, at an exercise price of $0.08, vesting over two years and expiring in five years. The value of these options was $74,693 and this amount will be charged as expense over the two year vesting period.

Also during the third quarter of 2008, the Company granted 6,000,000 options to its Chief Executive Officer. The options have an exercise price of $0.08, with an aggregate value of $172,485 that will be charged to expense over the 1.4 year . . .