**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**








**FORM
      10-KSB**





**FOR
      ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(D) OF
      THE**


**SECURITIES
      AND EXCHANGE ACT OF 1934**


**(Mark
      One)**


x
              **ANNUAL REPORT PURSUANT TO
                SECTION 13
                OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934****For the fiscal year ended
                December
                31, 2005****OR**o
              **TRANSITION REPORT PURSUANT
                TO SECTION
                13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934****For the transition period
                from _____ t****o
                _____**




**Commission
      File No.** **333-62216**








**HEALTH
      DISCOVERY CORPORATION**


*(Exact
      Name of Registrant as Specified in its Charter)*




**Texas**
            **74-3002154***(State
                of
                Incorporation)*
            *(I.R.S.
                Employer Identification
                No.)***5501
1⁄2
Abercorn
                Street, Savannah,
                GA**
            **31405***(Address
                of principal executive
                offices)*
            *(Zip
                Code)*




**(912)
      352-7488**


*(Registrant’s
      telephone number, including area code)*




**Securities
      Registered Pursuant to Section 12 (b) of the 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. [   ]




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 [   ]




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). [ 
       ]




State
      issuer’s revenues for its most recent fiscal year. $226,998




The
      aggregate market value of the voting common stock held by non-affiliates as
      of
      March 29, 2006 was approximately $9,507,847. There were 114,963,384 shares
      of
      common stock outstanding as of March 29, 2006.




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 Barnhill Group 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.
      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 software, through the issuance of
      3,825,000 common shares of the Company. In addition to the common stock shares
      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. Fractal Genomics utilized its technology to find, link and model patterns
      of similarity hidden in large amounts of information, such as the clinical
      databases used for diagnostic and drug discovery. Fractal Genomics has applied
      its technology to protein and pathway discovery in leukemia and lung
      development, which could lead to the identification of novel proteins that
      could
      be used to develop diagnostic markers and drug targets. Our acquisition of
      Fractal Genomics was completed 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, the Company 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.




The
      SVM
      is a data-driven mathematical program that uses machine learning to find
      otherwise hidden relationships in data and has been successfully used for colon
      cancer gene selection, breast cancer diagnosis, leukemia classification, genomic
      analysis, proteomic research and drug discovery. The patents for the SVM also
      cover applications in a wide variety of research endeavors unrelated to drug
      discovery.














One
      of
      the issued patents includes a description of a set of colon cancer genes and
      prostate cancer genes which could be used for diagnostic testing and drug target
      identification. One of the genes represents a potential vaccine for colon
      cancer.




The
      acquisition of rights to the patent portfolio brought together Dr. Stephen
      Barnhill, our Chairman and CEO, and three members of our Scientific Advisory
      Board (“SAB”) who are pioneers of SVM: Prof. Dr. Vladimir Vapnik, and Drs.
      Isabelle Guyon and Bernhard Schoelk ö pf.
      Prof.
      Dr. Vapnik was recently awarded the Humboldt Prize for developing Statistical
      Learning Theory, the cornerstone behind the original SVM. Dr. Guyon was the
      co-inventor with Prof. Dr. Vapnik on the original SVM patent, which is currently
      owned by Lucent Technologies, Inc. - GRL Corp (and licensed to Health
      Discovery). Dr. Schoelk ö pf,
      who
      is the director of the Max Plank Institute for Biological Cybernetics in
      Tubingen, Germany, won the annual dissertation prize of the German Association
      for Computer Science for his work on Support Vector learning.




**Our
      Market**




We
      are
      positioning ourselves to provide pharmaceutical and diagnostic companies with
      all aspects of *First
      Phase Biomarker Discovery* ,
      from
      expert assessment of the clinical dilemma through proper selection and
      procurement of high quality specimens. In addition, we aim to provide
      proprietary analytical evaluation methods and state-of-the-art computational
      analysis to produce relevant and accurate clinical data, producing accurate
      biomarker and pathway discoveries, resulting in patent protection of our
      biomarker discoveries for future development and commercialization.




Developing
      and evaluating new drugs and medical therapies in less time and at lower cost
      is
      of enormous potential benefit for modern healthcare. Genuinely new products
      must
      pass a series of both in-vitro and in-vivo testing in order to demonstrate
      their
      safety and effectiveness for a specific clinical application. Historically,
      the
      endpoints of these trials were “traditional” ones tied to the actual disease
      being evaluated, such as a decrease in mortality or an objective/semi-objective
      decrease in clinical symptoms associated with the condition. In the last 10
      to
      15 years, there has been a move by the U.S. Food and Drug Administration (FDA)
      to incorporate other endpoints, including genes that are biomarkers for the
      existence or absence of a particular disease, which are nontraditional findings
      that are related to the presence or absence of disease. Examples of successful
      application of biomarker data to therapeutic evaluation include the drugs
      Betaseron for use against multiple sclerosis and Herceptin in the treatment
      of
      breast cancer.




The
      FDA
      began an initiative in 1987 designed to expedite approval for drugs. Initially
      utilized for drugs that would combat the devastating AIDS epidemic, these
      initiatives measured alternative factors such as biomarkers to essentially
      evaluate the effectiveness of new therapeutics for diseases such as
      AIDS.




Our
      goal
      is to leverage the FDA’s expedited approval process by producing more relevant
      and predictable biomarkers for drug discovery. By speeding up approval, new
      and
      better medicines and diagnostic markers can be developed for patients
      worldwide.




Biomarkers
      have long played a significant role in drug discovery and development, but
      recent advances have signaled the potential for significant deepening of their
      role in terms of both broader application within particular stages of the
      process and application across a broader spectrum of functions. Even before
      the
      recent resurgence of interest in the subject, single- analyte biomarkers had already made significant impacts on clinical studies as
      surrogates for clinical endpoints. Recent advances in discovery of
      multi-component biomarkers and single-molecule markers derived from them show
      promise of providing greatly improved clinical sensitivity and specificity
      over
      their pre-genomic forbearers.




One
      major
      difficulty with biomarker discovery relates to the accessibility of patient
      samples. Whereas tissues from animal models are usually readily available,
      human
      tumor specimens and human body fluid specimens are often unavailable or
      inaccessible for most common diseases of major commercial interest.







6






Another
      major difficulty is developing new mathematical tools capable of handling the
      analysis of the terabytes of information being generated by gene and protein analysis
      of clinical specimens that must be sifted through to identify the key biomarkers
      that will provide important clues leading to the identification of new
      diagnostic and drug targets, not only for cancer but for other medically and
      commercially important diseases as well.




An
      additional difficulty in commercialization of newly discovered biomarkers is
      establishing relationships at large U.S. medical and cancer centers to validate
      the results in a clinical setting. Validation studies are required to ensure
      that the markers are valid for a large population. The validation process is
      characterized by proving the efficacy of the newly discovered biomarkers in
      larger sample sets. Access to these prestigious institutions for validation
      studies can often be difficult to arrange.




Using
      our
      established relationships with top U.S. medical and cancer centers and our
      computational technologies, our goal is to overcome the difficulties encountered
      with biomarker discovery and become the first company, to our knowledge, to
      perform the total process of first-phase discovery by identifying a particular
      clinical problem to be solved and performing the entire process leading to
      the
      identification of the genes or proteins (called biomarkers), and the
      relationships among them (called pathways) that are relevant to the solution
      of
      the medical problem as described below.  This process will consist of an
      assessment of the clinical problem, the determination of the clinical trial
      set-up (the number of patients and what medical conditions they represent),
      the
      proper selection and procurement of high quality specimens for analysis, an
      analytical evaluation of the specimens through laboratory tests to produce
      the
      clinical data, and the mathematical evaluation of the data using our proprietary
      pattern recognition techniques such as fractal geometric modeling to produce
      an
      accurate determination of the relevant genes and proteins and the manners in
      which they interact. Once we discover these new biomarkers and pathways, we
      intend to immediately file patent applications to protect the
      discoveries such as
      with the patents filed for our Prostate cancer and Leukemia
      discovery .




These
      patent-protected biomarkers and pathways represent the products of our
      Company.  After our discovery is patent protected, the process of selling
      or licensing the newly discovered biomarkers and pathways will begin.  The
      information will then be sold or licensed to diagnostic companies for
      development into new state-of-the-art diagnostic assays and the same information
      will be sold or licensed to pharmaceutical companies for further development
      into the next generation of therapeutic targets or to solve drug safety
      issues.




Intellectual
      property is a key asset in diagnostic and drug discovery. Our products will
      be
      based on intellectual property, which includes the discovered biomarkers and
      pathways produced through our own internal research programs, as well as joint
      discovery efforts with academic institutions, diagnostic and pharmaceutical
      companies worldwide.




Our
      discovery process has already been shown to lead to the identification of
      biomarkers and pathways in leukemia and lung cancer development and we hope
      it
      will be instrumental in diagnosing and treating patients with devastating
      diseases like cancer, heart disease, obesity and AIDS.




**Our
      Technologies**




Our
      goal
      is to develop a product line of newly discovered biomarkers and pathways, which
      will 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
      will
      provide pharmaceutical and diagnostic companies with all aspects of first phase
      diagnostic and drug discovery, beginning with 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 produce relevant and accurate
      clinical data, producing







7






accurate
      biomarker and pathway discoveries, resulting in patent protection of our
      biomarker discoveries for future development.




**Support
      Vector Machines (SVMs)**




Since
      their introduction in 1995, 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 Vladimir Vapnik, a member of our
      Scientific Advisory Board, SVMs quickly gained attention from the pattern
      recognition community due to a number of theoretical and computational
      merits. ****




The
      capability of SVMs to discover hidden relationships in a dataset and to exploit
      them in order to make informed extrapolations about future or unseen data holds
      a tremendous potential for modern applications of computer technology,
      particularly as large amounts of data are generated faster than current analysis
      techniques can process them. The field of machine learning has traditionally
      been a branch of artificial intelligence, dealing with the problem of extracting
      relevant knowledge from data. Statistics has played a similar role within
      mathematics. Not surprisingly, both fields have encountered the same
      difficulties when analyzing complex datasets: nonlinear relations are hard
      to
      learn, high dimensional spaces carry a high risk of detecting spurious relations
      (relations that are just the effect of chance), and the computational cost
      is
      often prohibitive. Previous generation computational technologies such as neural
      networks, decision trees and other systems all try to deal with such limitations
      by introducing several approximations and therefore usually produce sub-optimal
      solutions.




Statistical
      Learning Theory, the backbone of SVMs, provides a new framework for modeling
      learning algorithms, merges the fields of machine learning and statistics,
      and
      inspires algorithms that overcome all of the above difficulties. A new
      generation of learning algorithms - or equivalently of statistical methods
      - has
      recently been developed, based on this theory. Such methods prove remarkably
      resistant to the problems imposed by “noisy” data and high dimensionality. They
      are computationally efficient. The optimal solution can always be found. These
      methods have an inherent modular design that simplifies their implementation
      and
      analysis and allows the insertion of domain knowledge. More importantly, they
      come with theoretical guarantees about their generalization
      ability.




**Creation
      of the Support Vector Machine**




In
      the
      mid-1990s, Vladimir Vapnik, together with Bernhard Boser and Isabelle Guyon,
      also a member of our SAB, discovered a new algorithm for implementing inductive
      inferences associated with Statistical Learning Theory: the Support Vector
      Machine. The key idea was to map input vectors into a high dimensional space
      and
      to construct in that space hyperplanes with a large margin (and hence with
      low
      capacity).




The
      seminal idea for the theory of statistical learning began in the 1960’s with the
      prominent work of Professors Vapnik and Chevronenkis with the discovery of
      the
      VC dimension. The technology for mapping input vectors into a high dimensional
      space was realized by the so-called kernel trick, which in many cases avoids
      the
      need to manipulate data in the high dimensional space. By 1995, these ideas
      had
      been extended to all of the main function estimation problems: pattern
      classification, regression estimation, density estimation, and finding solutions
      to equations. Statistical Learning Theory and SVMs are now widely accepted
      and
      described in international research journals and frequently presented at major
      scientific meetings around the world.






8







There
      are
      several reasons for this popularity:




§
            Most
                importantly, in*********all*********benchmark
                problems, SVM solutions were among the
                winners.




§
            These
                methods do not rely on heuristics, but rather on solid mathematical
                foundations. Therefore, one can use mathematical tools to understand
                the
                behavior of existing methods, to improve them, and to design new
                methods.




§****
            SVM
                methods are very well suited to the analysis of high dimensional
                (even
                infinite dimensional) spaces. It appears that high dimensional analysis
                will be crucial in the challenging problems that are emerging in
                areas
                such as bioinformatics, image analysis, and information
                retrieval.




**Significant
      Advantages of Support Vector Machines**




Bioinformatics
      is facing new challenges as the amount of available data increases
      exponentially. Data is valuable only if it can be understood and can help in
      making predictions, in the form, for instance, of early detection diagnostics
      or
      minimizing new drug failure in late stage trials. Computer algorithms have
      a
      critical role to play in annotating data, organizing it, drawing attention
      to
      entries of particular interest, and proposing tentative data explanations.
      It
      has always been tempting to seek a universal tool that, much like the brain,
      has
      very broad data processing capabilities.




Clearly,
      there is a need not only for data analysis tools that are powerful, but that
      can
      also be used effortlessly by a wider range of people who do not necessarily
      have
      a strong background in statistics or computer science. There is also a need
      for
      tools that can be used in a fast, flexible and evolving fashion, such that
      new
      problems can be treated with previously developed tools. The race to a real
      breakthrough is measured not only in accuracy, but also in development time,
      cost and ease of next generation improvements.




We
      believe that this is why SVMs represent a significant solution to the challenges
      of interpreting diagnostic and drug development data. They hold the promise
      that
      other techniques, including artificial neural networks, have failed to provide:
      optimal and reliable performance with easy implementation.




***Prediction
      accuracy*** *:* Given
      examples of inputs and outputs, a SVM takes a previously unseen input (e.g.
      measurements of a new patient) and predicts the output (e.g. disease state).
      Statistical learning theory provides estimates of the predictive accuracy,
      and
      SVMs work by directly optimizing these estimates. As well as having these
      performance guarantees, the predictions of SVMs are typically more accurate,
      in
      some cases very significantly, than those of other methods.




***High-dimensional
      data*** *:* SVMs can
      cope with very large numbers of input variables. In processing the output of
      a
      mass spectrometer, for example, SVMs can use the full spectrum directly, without
      having to first manually extract relevant peaks. Many other techniques (such
      as
      parametric statistics and neural networks) cannot cope with so many input
      variables.




***Data
      understanding*** *:* SVMs
      have the unique property that they automatically extract *support
      vectors* ,
      which
      are the borderline cases. Exhibiting such borderline cases allows us to identify
      outliers, to perform data cleaning, to find flaws in experimental design, and
      to
      detect confounding factors. In addition, the *margins* of
      training examples (how far they are from the decision boundary) provide useful
      information about the relevance of input variables and allow the selection
      of
      the most predictive variable.




***Computational
      efficiency*** *:* Unlike
      many other machine learning and statistical methods (such as neural networks,
      decision trees, and Bayesian methods), learning with SVMs involves a convex
      optimization, which is computationally efficient, and leads to a unique optimum
      solution. The predictions made by SVM algorithms are also easy to compute
      because they involve only the comparison of the novel pattern with a small
      subset of the training patterns (the support vectors).






9







***Decision
      understanding*** *:* Unlike
      other nonlinear multivariate techniques such as neural networks, the predictions
      made by SVMs are often easily understood since they involve comparisons with
      the
      support vectors.




***Modularity*** *:* Separate
      components of SVMs can be designed separately and can easily be combined with
      other techniques. For instance, the kernel in a SVM can be designed to
      incorporate expert knowledge about a problem domain, which often significantly
      improves performance.




***Robustness*** *:* SVMs are
      often successful even with sparse data (few examples), unbalanced data (more
      examples of one category), redundant data (many similar examples), and
      heterogeneous data (examples coming from different sources).




**Recursive
      Feature Elimination - Support Vector Machine
      (“RFE-SVM”)**




The
      RFE
      method was first reported in 2002 in an article entitled “Gene Selection for
      Cancer Classification Using Support Vector Machines”, co-authored by HDC
      scientific team members Dr. Isabelle Guyon, co-inventor of SVMs, Vladimir
      Vapnik, recent Humboldt prize winner for the development of the theory behind
      SVMs, and Dr. Stephen Barnhill. The article describing the initial discovery
      was
      published in the journal *Machine
      Learning* and is
      widely cited in subsequent publications recognizing the significance of the
      RFE
      method within the SVM field.




RFE
      is a
      powerful tool for achieving feature reduction because it takes into account
      dependencies between features and, therefore, is considered more sophisticated
      than other methods that evaluate and eliminate features independently. This
      technology has gained wide acceptance in both academia and commercial
      applications and is utilized by many top tier institutions and corporations.
      Some examples of academic success with the use of RFE include The University
      of
      California for diagnostic markers of cardiovascular illness, Columbia University
      for genomic analysis, MIT for epileptic seizure detection using EEG’s,
      University of Oviedo, Spain, for assessing beef quality, University of Trento,
      Italy, for molecular profiling of DNA microarray data, classification of heart
      arrhythmias and digital mammogram analysis, Vanderbilt University for mass
      spectroscopy data, Stanford University for gene microarray analysis and many
      others. Additionally, corporate scientists from Intel (INTC:NASDAQ), Microsoft
      (MSFT:NASDAQ), Hoffman LaRoche (ROG:SWX), and others have incorporated RFE
      into
      their research on data mining, gene expression, and other machine learning
      applications.




**Fractal
      Genomics Modeling**




Fractal
      Genomics Modeling (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. Fractal
      Genomics 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 self-similarity and scale
      free
      networks.




**Self-Similar
      (Fractal) Structure**




If
      it
      were possible to look at a section of a network in detail, it would be possible
      to find an even smaller section that resembles the entire network. This
      structural property, where the parts can resemble the whole, is referred to
      as
      self-similarity and structures of this sort are sometimes called fractals.
      Self-similar structures have been found to exist in many complex
      networks.




**Scale-Free
      Networks**




The
      structural property of self-similarity does not mean that hubs or nodes in
      networks will all look basically the same. Some nodes have a single branch
      leading to another node, while other nodes have branches into a large number
      of
      other nodes. Using the example of an airline routing network, many more links
      (branches) will connect to a large city that is a major hub than to a minor,
      small town airport. So, although there may be structural similarities between
      the parts and the whole, the individual nodes can be quite different. This
      has
      been found to be a common trait in many complex networks. Because of this
      feature, it is very difficult to measure or assign a “scale” to what a typical
      node looks like in these networks.





10








For
      the
      most part, this is not the case in the mathematical world of complex networks.
      There may be a few nodes with a thousand links, several with a hundred links,
      and many with only one. In comparison, if human height were distributed in
      a
      similar way, it would not be uncommon to see people over 100 feet tall in
      everyday life and people over a mile high would exist. Because it is difficult
      to assign a single scale to look at nodes with links distributed in this way,
      these kinds of networks they are called scale-free.




The acquisition
      of Fractal Genomics brought
      us a fully functional patent protected computational tool, now known as the
      Health Discovery Fractal Genomics
      Modeling (FGM)
      technology. This is designed to study complex biological networks such as
      genomic and proteomic pathways
      in disease. A complex network can be made up of genes or proteins inside a
      living organism. FGM uses this new approach toward modeling network behavior
      to
      rapidly generate diagrams and software simulations that facilitate prediction
      and analysis of genomic and proteomic data for
      diagnostic and drug discovery.




The
      FGM
      modeling process starts out by creating a special mathematical surface (the
      FGM
      surface) where every point on the surface can be used to generate a network
      model with varying degrees of scale-free and fractal properties. With
      user-supplied clinical data, models which best match the behavior of each node
      are selected and represented by a point on the FGM surface. These point-models
      are then linked, compared, and combined to generate diagrams, which reflect
      the
      behavior of genes or proteins in the entire network.




The
      end
      result of the FGM modeling process is biomarker and pathway discovery diagrams
      that represent nodes in the network and directions of causality or “flow”
through the network such as which genes or proteins are “turning-on” or
“turning-off” other precursor and successor genes or proteins in the biological
      system. FGM-derived diagrams expedite forecasting, analysis, and study of
      complex system behavior by clearly displaying all hubs, links, and flow in
      the
      network. With this knowledge, diagnostic companies can use the newly identified
      biomarkers to create state-of-the-art tests to identify key genes and proteins
      involved in certain diseases and pharmaceutical companies can explore new
      therapeutic drug targets designed to interrupt (“turn-off”) genes or proteins
      with undesirable effects or promote (“turn-on”) genes or proteins with desirable
      effects.




Therefore,
      as a result of our Fractal Genomics acquisition, we are preparing to begin validation studies, at M.D. Anderson
      Cancer Center, of the recently discovered and patent protected set of leukemia
      genes, discovered using the newly acquired FGM technique, which was shown to
      separate ALL-T-cell leukemia from ALL-B-cell leukemia with 100% accuracy. This
      gene set, now our intellectual property, was originally presented to the medical
      and scientific world by Dr. Herbert Fritsche ,
      Chairman of our Scientific Advisory Board, a world-renowned, expert in cancer
      markers and Professor at M.D. Anderson Cancer Center, at the 31st Meeting of
      the
      International Society for Oncodevelopmental Biology
      and Medicine (ISOBM) in Edinburgh, United Kingdom.




To
      date,
      our FGM technology has been successfully used to analyze databases from M.D.
      Anderson Cancer Center, St. Jude Children’s Hospital, Stanford University, the
      University of Miami and the Alvin J. Siteman Cancer
      Center at Washington University.




**Our
      Corporate Strategy**




Our
      goal
      is to develop a product line of newly discovered biomarkers and pathways, which
      will 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.







11






We
      intend
      to provide pharmaceutical and diagnostic companies with all aspects of first
      phase 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 produce relevant and accurate
      clinical data, producing accurate biomarker and pathway discoveries, resulting
      in patent protection of our biomarker discoveries for future
      development.




*First
      Phase Biomarker Discovery* is based
      on the proposition 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 pathway includes six critical levels of
      decision-making - all of which are part of our business strategy.




***1.
      First Level of Discovery - Assess the Clinical
      Dilemma***




Is
      the
      desired biomarker or pathway to be identified related to early diagnosis,
      metastasis, treatment response or some other aspect of a given disease process?
      Based on the clinical question to be answered along with the incidence,
      prevalence and nature of the particular disease, we will establish a clinical
      study with the appropriate number of necessary specimens.  We expect that
      these studies will provide statistically significant results once the biomarker
      and pathway discovery is completed.




***2.
      Second Level of Discovery - Properly Identify and Procure the Most Relevant
      and
      Professionally Collected Specimens***




Based
      on
      the clinical dilemma to be solved, does the appropriate clinical trial require
      blood, serum, aspirate fluid, tissue or some other clinically relevant
      specimen?  Once the correct decision is made, we will contractually procure
      the specimens necessary for the discovery from highly reputable institutions,
      where we believe proper collection and informed consent are completed under
      the
      strictest scientific protocol.




***3.
      Third Level of Discovery - Analyze the Specimens***




The
      clinical specimens must then be analyzed and converted into relevant clinical
      data. We will determine which analytical method is appropriate for the most
      successful biomarker and pathway discovery. The techniques we currently expect
      to use include mass spectroscopy, MALDI, SELDI, DNA methylation ,
      gene
      chip analysis, 2-D Gel Electrophoresis, as well as other proprietary techniques
      developed by companies and academic institutions with which we have
      relationships. We will constantly monitor improvements in these techniques
      worldwide.




***4.
      Fourth Level of Discovery - Analyze the Data***




The
      data
      generated from the analytical component must then be computationally analyzed
      for the discovery of new biomarkers, patterns among those biomarkers and
      causality pathways. We will decide which of the current leading computational
      algorithms, such as our FGM and SVM techniques, are best suited to solve the
      particular clinical dilemma in question. The data is then computationally
      analyzed, and the new biomarkers and pathways are discovered and patent
      protected.




***5.
      Fifth Level of Discovery - Protect the Discovery***




** When
      a
      biomarker is discovered, we will immediately file a provisional patent to
      protect the discovery for future licensing. Some of these discoveries will
      be
      licensed to diagnostic companies for use in the diagnosis of diseases or for
      measuring the state or status of a disease. Other discoveries will be licensed
      to pharmaceutical companies to be used for discovering or evaluating new drug
      targets.




***6.
      Sixth Level of Discovery - Evaluate the Clinical and Utility of Discovered
      Biomarkers***




Biomarkers
      uncovered through the first five stages of discovery will be subsequently
      validated independently in larger, clinically relevant populations. 
Clinical validity of a biomarker is confirmed by its
      presence in the clinical condition in question and its ability to differentiate
      one disease state from another, or a diseased state from a healthy state. We
      believe that markers validated by our processes will provide: vastly improved
      diagnostic capabilities; may identify potential therapeutic targets for
      pharmaceutical intervention (e.g. membrane signaling proteins and inhibitors);
      and markers suitable for monitoring disease progression following therapeutic
      intervention.  Application of clinically validated biomarkers in such a
      manner will result in improved individual patient care and the advancement
      of
      the field of personalized medicine.  This unique approach to biomarker
      discovery and its additional validation in relevant clinical samples advances
      the commercial potential of biomarkers we uncover to diagnostic and therapeutic
      partners.  Integration of the six levels of biomarker discovery results in
      improved efficiencies in translation of this information into commercial and
      medically valuable products.




12









**Our
      Strategic Agreements**




In
      keeping with our corporate goal of building strong partnerships for biomarker
      discovery, we have signed several biomarker discovery agreements with strong
      academic centers of excellence in the United States, including M.D. Anderson
      Cancer Center and Stanford University. All of these agreements include either
      joint ownership in any biomarker or pathway discovered or rights to an exclusive
      worldwide license to our discovery. Once we secure a contract with an academic
      institution for biomarker and pathway discovery with commercialization rights
      and/or generate preliminary results, we begin negotiating these
      commercialization rights to our discoveries with diagnostic and pharmaceutical
      companies worldwide.




In
      October 2003, we signed our first Agreement with M.D. Anderson Cancer Center.
      With this agreement we will analyze a gene expression database to identify
      new
      biomarkers and pathways involved in leukemia. Under the terms of the agreement,
      M.D. Anderson has granted us a first option to obtain an exclusive worldwide
      royalty-bearing commercial license to commercialize any discovered biomarkers
      or
      pathways we identify.




In
      January 2004, we entered into our second Biomarker and Pathway Discovery
      Agreement with the University of Texas, M.D. Anderson Cancer Center in Houston
      Texas. Under the terms of the agreement, the University of Texas, M.D. Anderson
      Cancer Center, has again granted us a first option to obtain an exclusive
      worldwide royalty-bearing commercial license to commercialize any discovered
      prostate cancer biomarkers or pathways identified by us utilizing our
      proprietary FGM computational techniques. This second collaboration with M.D.
      Anderson Cancer Center will give us access to a new systems biology approach
      for
      data analysis for new biomarker and pathway discovery in prostate cancer. We
      intend to use the findings of this study to develop new diagnostic approaches
      for prostate cancer and improve the clinical management of these patients. *U.S.
      Cancer Statistics: 2000*  *Incidence* recently
      released by the Department of Health and Human Services shows that prostate
      cancer is the leading cancer overall in men in the United States and according
      to the National Institutes of Health, in 1997, the estimated number of new
      cases
      of prostate cancer in the United States is 209,900, and the estimated number
      of
      deaths from the disease is 41,800. The current market for prostate cancer
      testing with PSA, the biomarker currently used to diagnose prostate cancer,
      is
      estimated to be approximately $350 million annually around the world.




In
      March
      2004, we entered into an agreement with Stanford University to use our
      proprietary and patent protected FGM computational techniques to identify new
      patterns of biomarkers in lymphatic insufficiency and its response to
      therapeutic lymphangiogenesis .
      According to the agreement, ownership of Research Program Inventions conceived,
      discovered or reduced to practice under the Research Program will be determined
      based on inventorship .
      As
      such, any invention discovered using our analytical tools on this Stanford
      database would be jointly owned by Stanford and us. According to the World
      Health Organization, lymphedema affects
      250 million people worldwide. Others estimate that one in every twenty-five
      will
      suffer from some form of lymphedema during
      their lifetime. The M.D. Anderson Cancer Center in Houston, Texas reports that
      approximately 15% of all women with breast cancer will develop lymphedema over the
      course of their lifetime and that lymphedema resulting from prostate cancer is on the rise.






13






In
      March
      2004, we signed an agreement with the University of Miami to use our
      patent-protected computational techniques to identify new patterns of biomarkers
      in AIDS Related Dementia. It is hoped that this newly discovered information
      will allow physicians to better understand the pathogenesis of AIDS Related
      Dementia and will assist in the diagnosis and treatment of this devastating
      disease. On November 16, 2005, we announced that t he
      University of Miami would acquire full ownership of the recent AIDS Biomarker
      Signature discovered by our scientists using the Company's patent-protected
      FGM
      Technology. The University of Miami agreed to an upfront cash payment and
      continuing royalty payments for any future commercial sales related to this
      new
      discovery.




In
      September of 2004, we entered into an agreement with Dr. Thomas Stamey of
      Stanford University Medical Center to analyze what is thought by Dr. Stamey
      to
      be the most comprehensive prostate cancer gene chip database in the world.
      This
      database consists of Affymetrix gene chips containing 25,000 prostate related
      genes. This data is from 92 patients representing 9 classes of prostate disease
      - from BPH through all grades of prostate cancer. Using this database, HDC
      hopes
      to identify new biomarkers for prostate cancer. We will also use our
      patent-protected computational techniques such as Support Vector Machine and
      Fractal Genomics Modeling to analyze this data to determine the most relevant
      proteins to be used for diagnostics and drug targets. All discoveries will
      be
      jointly owned by the Company and Dr. Stamey with HDC having a worldwide
      exclusive license for commercialization.




On
      November 22, 2005, we entered into a licensing agreement with Clarient, Inc.
      a
      technology and services resource for pathologists, oncologists and the
      pharmaceutical industry, in which Clarient will utilize our SVM intellectual
      property. Under the terms of the Agreement, Clarient paid us an upfront
      licensing fee, a monthly expert development fee, and future royalties for any
      Clarient product developed using the licensed SVM technology. We hope this
      will
      allow Clarient to develop applications to detect cancer cells in peripheral
      blood and bone marrow.




**Employees**




On December
      31, 2005, we had 5 full time employees. We do not expect any significant change
      in the number of employees over the next 12 months. We consider our employee
      relations to be good, and we have no collective bargaining agreements with
      any
      employees.




**Website
      Address**




Our
      corporate website address is www.HealthDiscoveryCorp.com .
      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 *First
      Phase Biomarker Discovery* .
      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.







14






**Intellectual
      Property** ****




In
      connection with the SVM Acquisition, we obtained rights to the intellectual
      property within the “SVM portfolio” that currently consists of seventeen patents
      which were or have since issued as well as 35 other patent applications that
      are
      pending in the U.S. and elsewhere in the world. The issued patents to date
      are:




U.S.
      Patent No. 6,128,608: Enhancing Knowledge Discovery Using Multiple Support
      Vector Machines.




U.S.
      Patent No. 6,157,921: Enhancing Knowledge Discovery Using Support Vector
      Machines in a Distributed Network Environment.




U.S.
      Patent No. 6,427,141: Enhancing Knowledge Discovery Using Multiple Support
      Vector Machines.




U.S.
      Patent No. 6,658,395: Enhancing Knowledge Discovery from Multiple Data Sets
      Using Multiple Support Vector Machines.




U.S.
      Patent No. 6,714,925: System for Identifying Patterns in Biological Data Using
      a
      Distributed Network.




U.S.
      Patent No. 6,760,715: Enhancing Biological Knowledge Discovery Using Multiple
      Support Vector Machines.




U.S.
      Patent No. 6,789,069: Method of Identifying Patterns in Biological Systems
      and
      Method of Uses.




U.S.
      Patent No. 6,882,990: Method of Identifying Biological Patterns Using Multiple
      Data Sets.




U.S.
      Patent No. 6,944,602: Spectral Kernels for Learning Machines




U.S.
      Patent No. 6,996,542: Computer-Aided Image Analysis




Australian
      Patent No. AU 764897: Pre-processing and Post-processing for Enhancing Knowledge
      Discovery Using Support Vector Machines.




South
      African Patent No. ZA 00/7122: Pre-processing and Post-processing for Enhancing
      Knowledge Discovery Using Support Vector Machines.




Australian
      Patent No. AU 780050: Enhancing Knowledge Discovery from Multiple Data Sets
      Using Multiple Support Vector Machines.




Chinese
      Patent No. ZL00808062.3: Enhancing Knowledge Discovery from Multiple Data Sets
      Using Multiple Support Vector Machines.




European
      Patent No. 1192595: Enhancing Knowledge Discovery from Multiple Data Sets Using
      Multiple Support Vector Machines.




Norwegian
      Patent No. 319,838: Enhancing Knowledge Discovery from Multiple Data Sets Using
      Multiple Support Vector Machines.




Australian
      Patent No. AU 779635: Method of Identifying Patterns in Biological Systems
      and
      Method of Uses.




Canadian
      Application No. 2,330,878: Pre-Processing and Post-Processing for Enhancing
      Knowledge Discovery Using Support Vector Machines




European
      Publication No. 1082646: Pre-Processing and Post-Processing for Enhancing
      Knowledge Discovery Using Support Vector Machines






15






Hong
      Kong
      Application No. 011065063: Pre-Processing and Post-Processing for Enhancing
      Knowledge Discovery Using Support Vector Machines




Indian
      Application No. 2000/00580: Pre-Processing and Post-Processing for Enhancing
      Knowledge Discovery Using Support Vector Machines




Canadian
      Application No. 2,371,240: Enhancing Knowledge Discovery from Multiple Data
      Sets
      Using Multiple Support Vector Machines




Indian
      Application No. 2001/01329: Enhancing Knowledge Discovery from Multiple Data
      Sets Using Multiple Support Vector Machines




Israeli
      Application No. 146746: Enhancing Knowledge Discovery from Multiple Data Sets
      Using Multiple Support Vector Machines




Japanese
      Application No. 2000-620577: Enhancing Knowledge Discovery from Multiple Data
      Sets Using Multiple Support Vector Machines




South
      Korean Application No. 7015064/2001: Enhancing Knowledge Discovery from Data
      Sets Using Multiple Support Vector Machines




Canadian
      Application No. 2,388,595: Method of Identifying Patterns in Biological Systems
      and Method of Uses




European
      Publication No. 1236173: Method of Identifying Patterns in Biological Systems
      and Method of Uses




Japanese
      Application No. 2001-534088: Method of Identifying Patterns in Biological
      Systems and Methods of Uses




U.S.
      Patent Publication No. 2005/0165556: Colon Cancer-Specific Markers




U.S.
      Patent Publication No. 2003/0172043: Methods of Identifying Patterns in
      Biological Systems and Uses Thereof




U.S.
      Application No. 11/274,931: Biomarkers
      for Screening, Predicting, and Monitoring Prostate Disease




PCT
      Application No. PCT/US2005/041442: Biomarkers
      for Screening, Predicting, and Monitoring Prostate Disease




Australian
      Application No. 2002253879: Methods of Identifying Patterns in Biological
      Systems and Uses Thereof




Canadian
      Application No. 2,435,254: Methods of Identifying Patterns in Biological Systems
      and Uses Thereof




European
      Publication No. 1459235: Methods of Identifying Patterns in Biological Systems
      and Uses Thereof




Japanese
      Application No. 2002-560076: Methods of Identifying Patterns in Biological
      Systems and Uses Thereof




U.S.
      Application No. 11/225,251: Spectral Kernels for Learning Machines




European
      Publication No. 1384155: Spectral Kernels for Learning Machines




U.S.
      Patent Publication No. 2005/0071300: Kernels and Methods for Selecting Kernels
      for Use in a Learning Machine






16






European
      Publication No. 1393196: Kernels and Methods for Selecting Kernels for Use
      in a
      Learning Machine




U.S.
      Application No. 11/349,542: Computer-Aided Image Analysis




Australian
      Application No. 2002243783: Computer Aided Image Analysis




Canadian
      Application No. 2,435,290: Computer Aided Image Analysis




European
      Publication No. 1356421: Computer Aided Image Analysis




Japanese
      Application No. 2002-560082: Computer Aided Image Analysis




U.S.
      Patent Publication No. 2005/0216426: Methods for Feature Selection in a Learning
      Machine




U.S.
      Patent Publication No. 2005/0071140: Model Selection for Cluster Data
      Analysis




U.S.
      Application No. 10/481,068: Data Mining Platform for Bioinformatics




U.S.
      Patent Publication No. 2005/0228591: Kernels and Kernel Methods for Spectral
      Data




U.S.
      Patent Publication No. 2005/0131847: Pre-Processed Feature Ranking for a Support
      Vector Machine




European
      Publication No. 1449108: Pre-Processed Feature Ranking for a Support Vector
      Machine




**Competition**




Health
      Discovery Corporation’s main service/product is *First-Phase
      Biomarker Discovery* .
      While
      there are numerous companies that perform individual steps in this process,
      we
      know of no other company that performs all steps in *First-Phase
      Biomarker Discovery* .
      Competing companies in the biomarker discovery arena have made numerous
      promising discoveries but have failed to bring fully validated biomarkers to
      market. We feel that by performing and controlling all steps of this process,
      we
      can eliminate the problems these companies have had in validating their
      findings, and thus, produce fully validated, marketable biomarkers.




Our
      SVM
      technology and FGM technology 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.




**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, Dr. Zhang, and Dr. Guyon. These fees
      consisted of $404,421 in cash for 2005 and $202,460 in cash and $100,000 in
      stock for a total 2004 R&D cost of $302,460. There were no R&D costs in
      2003.




**RISK
      FACTORS**




This
      document contains certain forward-looking statements within the meaning of
      the
      Private Securities Litigation Reform Act of 1995 including, without limitation,
      a ll
      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




17






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, w e
      have no
      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.




*Our
      business is difficult to evaluate because we have a limited history of
      operations.*




Since
      our
      reorganization in 2003, our focus and our business model have been continually
      evolving. Accordingly, we have a history of operations in which there is
      insufficient 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 n* *egative* *operating income and may never become profitable.*




Our
      operating expenses are expected to exceed our income for the next six to nine
      months 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.*




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






18






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.




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 its 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.




*We
      may fail to meet our debt obligations.*




If
      our
      cash flow and capital resources are insufficient to fund our debt obligations
      incurred in connection with recent acquisitions, we may be forced to sell
      assets, seek additional equity or debt capital or restructure our debt. In
      addition, any failure to make scheduled payment of interest and principal on
      our
      outstanding notes or any other indebtedness could result in our creditors
      exercising remedies on the notes and taking some or all of our assets or could
      otherwise harm our ability to incur additional indebtedness on acceptable terms.
      We cannot assure you that our cash flow and capital resources will be sufficient
      for payment of interest and principal on our debt in the future, including
      payments on any outstanding notes, or that any alternative methods would be
      successful or would permit us to meet our debt obligations.







19






*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 $0.06.
      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.*




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.






20






*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, w e
      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 our potential growth.*




We
      anticipate that once operations commence, 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 the expected growth of our
      operations, 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.






21







*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.




*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.







22






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 scientist, 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. 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.







23







*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 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.




*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






24







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.




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.






25






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 c ould
      result in reduced revenue.




**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.






26






*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.




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.






27






**ITEM
      2. DESCRIPTION OF PROPERTY.**




We
      do not
      own any real property. We do lease 1,554 square feet of office space in
      Savannah, Georgia, on a month-to-month basis for a cost of $1,036.00 per month.
      Our principal executive office is located at 5501 1⁄2 Abercorn Street, Savannah,
      Georgia 31405, telephone no. (912) 352-7488.




**ITEM
      3. LEGAL PROCEEDINGS.**




On
      May
      25, 2004, we filed suit in the District Court of McLennan County, Texas, against
      Bill G. Williams, Shirley K. Williams, W. Steven Walker, Jerry W. Petermann
      and
      a company controlled by Mr. Williams. In this action we allege that an aggregate
      of 700,000 shares of our common stock (4,900,000 after a 7-1 stock split) issued
      to Mr. Williams, Mr. Walker, Mr. Braswell and Mr. Petermann were not issued
      in
      compliance with Texas law and we sought to restrain the defendants and persons
      acting on their behalf or in concert with them from selling any shares of our
      stock. We also requested that the Court declare we were permitted to cancel
      the
      shares issued to the defendants and sought monetary damages, attorney’s fees and
      costs of the action.




In
      June
      2004, Jerry W. Petermann agreed to return to the Company 1,000,000 shares of
      the
      Company stock, which were canceled upon return to the company as full and final
      settlement of the claims brought in the aforementioned lawsuit. In addition,
      in
      June 2004, Robert S. Braswell IV agreed to return to the Company 2,100,000
      shares of the company stock, all of which were canceled upon return to the
      Company.




In
      July
      2004, W. Steven Walker Esq., former general counsel, an officer and director
      of
      the company, agreed to settle with the company and return 366,036 shares of
      our
      common stock, which was all of the shares then owned by him, and he will no
      longer be a party to the suit. Accordingly, only the shares originally issued
      to
      Mr. Williams are subject to the suit, and the Company believes he controls
      approximately 2.1 million shares of our common stock.




After
      several rulings at the District Court, on August 25, 2004 the Court of Appeals
      for the Tenth District of the State of Texas granted our appeal and entered
      an
      order, remanding the case to the original trial judge with instructions to
      issue
      a temporary injunction to preserve the status quo. The injunction will remain
      until a judgment in the case becomes final or the court otherwise instructs.
      The
      injunction requires the remaining defendants, their agents, employees,
      affiliates, any person or entity they control, and any person acting in concert
      with them to (i) stop and refrain from selling or otherwise disposing of any
      share of our common stock; and (ii) deposit into the registry of the District
      Court all shares of our common stock they now own or hold. Costs of the appeal
      were assessed against the Respondents. The defendants have asserted several
      counter claims against the company, including a derivative action, and have
      brought third-party claims against several current officers of the
      Company.




**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,
      2005 to a vote of shareholders of Health Discovery Corporation, through the
      solicitation of proxies or otherwise.






28






**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.OB.
      The
      range of bids 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.




**High
                  Bid**
              **Low
                  Bid**First Quarter 2004
              $0.48
              
              
              $0.15Second Quarter 2004
              $0.30
              
              
              $0.11Third Quarter 2004
              $0.22
              
              
              $0.145Fourth quarter 2004
              $0.40
              
              
              $0.17First Quarter 2005
              $0.40
              
              
              $0.20Second Quarter 2005
              $0.41
              
              
              $0.21Third Quarter 2005
              $0.25
              
              
              $0.145Fourth Quarter 2005
              $0.24
              
              
              $0.07




At
      December 31, 2005, there were approximately 474 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.




Drs.
      Vapnik and Stamey were each issued our common stock, no par value, equal to
      $10,000 per month beginning in August 2004. For 2005, Drs. Vapnik and Stamey
      were each contractually entitled to stock grants equivalent to $140,000. Drs.
      Vapnik and Stamey forfeited 1,580,532 shares
      in December 2005, and any shares issued pursuant to their agreements were
      rescinded.




On
      September 15, 2003 we completed the sale of 2,750,000 shares of restricted
      common stock to individual accredited investors at a price of $0.02 per share
      for a total of $55,000 .
      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
      may not be offered or sold in the United States absent registration or the
      availability of an applicable exemption from registration. The shares 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). The company filed a registration
      statement on September 15, 2003 and agreed that should the company, before
      September 15, 2005, propose for itself or any other person, the registration
      under the Act of any securities of the company on Form S-1, S-2 or S-3, the
      company shall include in any such Registration Statement and in any related
      underwriting agreements, if the investors so requests, such securities of the
      investors.




On
      July
      31, 2004, we completed the private sale of 15,235,000 shares of restricted
      common stock to individual accredited investors at an offering price of $ 0.10
      per share for a total of $1,523,500. Under the terms of the sale, the company
      issued 15,235,000 restricted common shares. In addition, each purchaser of
      common shares  was
      granted a warrant to acquire an equal number of restricted common shares at
      a
      fixed price of $0.35 per share, exercisable until February 2007. This could
      result in the issuance of up to 15,235,000 additional restricted common shares
      upon exercise. We entered into purchase agreements with each of the investors,
      the form of which is attached as Exhibit 10.6. Neither the shares sold pursuant
      to the private placement nor the shares issuable upon the exercise of the
      warrants will be registered under






29






either
      federal or state securities laws and must be held for at least one year from
      the
      time they are issued. 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 may 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, the form of which is attached as Exhibit 10.7,
      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
      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, the form of which is attached as Exhibit 10.8. 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 are registered
      the
      securities may 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, the form of which is attached as Exhibit 10.9, 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). Subsequently 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.




We
      paid a
      cash fee of approximately $356,250, agreed to issue warrants to acquire
      1,303,121 shares of common stock and agreed to issue 50,132 shares of common
      stock to placement agents for assisting us in these two private
      sales.




In
      the
      fourth quarter of 2003, the company issued 450,000 shares to consultants to
      the
      Company, including members of the Company’s scientific advisory board. In 2004,
      the Company issued 422,372 shares for services, including members of the
      Company’s scientific advisory board. In 2005, the Company issued 2,039,453
      shares to consultants and members of the scientific advisory board, 308,133
      shares in settlement of liabilities, 3,585,741 shares to noteholders who
      exchanged their notes for stock and 540,000 shares in accordance with the
      penalty provisions of the stock purchase agreement as amended February 25,
      2005.
      In December 2005, two consultants who had previously received shares for work
      performed rescinded 1,580,532 shares. All of these issuances 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 of Financial Condition and Results of
      Operations**




**Corporate
      Overview**




Our
      Company is uniquely positioned in the field of pattern recognition technology.
      Through the application of our patent protected technology, HDC is a
      biology-oriented biomarker and pathway discovery company providing all aspects
      of *First-Phase
      Biomarker Discovery* .
      Our
      primary business consists of licensing that 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 first
      phase 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.




*First
      Phase Biomarker Discovery* 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. With the completion of the acquisition of the SVM portfolio of
      patents the Company plans to begin to license the use of this technology.




**Year
      Ended December 31, 2005 Compared with Year Ended December 31,
      2004**




**Revenue**




For
      the
      year ended December 31, 2005, revenue was $226,998 compared with no revenue
      for
      the year ended December 31, 2004, which was the last year reported as a
      developmental stage company. Revenue was recognized for both licensing and
      sale
      of patent rights plus development fees.




**Cost
      of Sales and Gross Margin**




Cost
      of
      sales was $33,536 for the twelve months ended December 31, 2005 resulting in
      a
      gross profit of $193,462 or 85.23%. Cost of sales 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 sales. No cost of sales occurred
      in
      2004.




**Operating
      and Other Expenses**




Amortization
      expense was $251,097 in 2005 compared with $142,607 in 2004. This increase
      was
      due to a full year’s amortization being charged in 2005 for intangibles acquired
      during 2004.




Interest
      expense was $55,406 in 2005 compared with $46,691 in 2004. This increase was
      due
      to a full year’s interest being charged in 2005 for the debt obtained in 2004 as
      well as additional debt obtained in 2005.




Professional
      and consulting fees totaled $1,567,500 in 2005 compared with $830,835 in 2004.
      These fees, related to legal, accounting and scientific activities, were higher
      in 2005 because of increased regulatory filing activity, patent protection,
      and
      general corporate legal and accounting work.




Compensation
      of $822,261 in 2005 was slightly lower that the $862,560 reported for 2004.
      This
      decrease was due to the reduction in the number of employees that was part
      of an
      overall cost reduction program.




Other
      General and Administrative expense increased from $322,410 in 2004 to $656,214
      in 2005. This increase is largely due to the extensive sales, marketing, and
      promotional efforts throughout 2005.







31







**Net
      Loss**





The
      net
      loss for 2005 was $3,159,016 compared to a net loss of $2,205,088 for 2004.
      The
      increased net loss was due to the factors enumerated above. Net loss per share
      was $.03 for both 2005 and 2004. The larger net loss in 2005 was offset by
      the
      increased average number of shares outstanding in 2005.





**Liquidity
      and Capital Resources**




At
      December 31, 2005, the Company had $719,167 in available cash. Cash used by
      operating activities was $2,421,070. This was due primarily to the net loss
      of
      $3,159,016. Cash used by investment activities was $305,367 due to the
      acquisition of patents. Net cash provided by financing activities was $3,282,127
      due to the proceeds from the sale of common stock totaling $3,842,375 less
      debt
      retirement of $560,248.




A
      portion
      of our cash will be used to satisfy the Company’s outstanding debt obligations
      related to the acquisition of the SVM assets and fees due to professionals
      for
      services performed. Scheduled payments of $26,780 on notes resulting from the
      acquisition of the SVM Portfolio will be due on May 1, 2006.




The
      following table summarizes the due dates of our contractual obligations. The
      Company has no long term lease agreements in effect as of December 31,
      2005.




Total
            
            Less
                than
              1
                Year
            
            1-3
              YearsConvertible
                Notes Payable
            
            $
            665,643
            
            $
            0
            
            $
            665,643Term
                Debt
            
            
            348,691
            
            
            26,780
            
            
            321,911Total
            
            $
            1,014,334
            
            $
            26,780
            
            $
            987,554





The
      Company has relied primarily on equity funding plus debt financing for liquidity
      during its developmental phase that ended in 2005. The Company produced sales,
      licensing, and developmental revenue in 2005 and must continue to do so in
      order
      to generate sufficient cash to continue operations. Our plan to have sufficient
      cash to support operations is comprised of generating revenue through licensing
      our significant patent portfolio, providing services related to those patents,
      and obtaining additional equity or debt financing. We have been and continue
      to
      be in meaningful discussions with a variety of parties, which if successful,
      will result in significant revenue. We have implemented a cash conservation
      plan
      that includes salary deferrals and a reduction in consulting payments, along
      with heightened scrutiny of all potential expenditures.




Should
      it
      prove necessary, the Company may also consider such alternatives as raising
      additional equity through private placement, debt offerings, and/or negotiating
      with creditors to substitute an equity instrument for amounts owed. 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.




**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.






32






**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.**




On
      July
      12, 2005, the Company was informed by Clyde Bailey, P.C. (“Bailey”) that it was
      no longer providing audit services to any company in any capacity. Accordingly,
      Bailey resigned and withdrew its audit as the Company’s independent auditor for
      fiscal year 2003 and the related statements of operations, statements of
      stockholders’ equity, and the statements of cash flows for the years ended
      December 31, 2003 and 2002 and for the period from inception (April 6, 2001)
      to
      December 31, 2003. Thereby, the engagement of Bailey as the Company’s
      independent auditor has terminated.




Bailey
      submitted audit reports on the Company’s financial statements for fiscal year
      2003 and the related statements of operations, statements of stockholders’
equity, and the statements of cash flows for the years ended December 31, 2003
      and 2002 and for the period from inception (April 6, 2001) to December 31,
      2003.
      The submitted audit reports did not contain any adverse opinions, disclaimers
      of
      opinions or other modifications or qualifications. Bailey did not, during the
      applicable periods, advise the Company of any of the enumerated items described
      in Item 304(a)(1) of Regulation S-B.




On
      August
      2, 2004, the Company engaged Porter Keadle Moore, LLP, the current independent
      auditor (“Porter Keadle Moore”), to audit all successive periods beginning
      January 1, 2004. As a result, the Company’s financial statements covering
      periods beginning January 1, 2004 are not affected by Bailey’s withdrawal and
      were not re-audited. The decision to change accountants was recommended and
      approved by the Board of Directors of the Company.




There
      were no disagreements with Bailey on any matter of accounting principles or
      practices, financial statement disclosures, or auditing scope or procedure,
      which disagreements, if not resolved to the satisfaction of Bailey, would have
      caused Bailey to make reference thereto in, or in connection with, its reports
      on financial statements for the periods covered by Bailey’s audit.




On
      August
      11, 2005, the Company engaged Porter Keadle Moore to perform a re-audit of
      the
      Company’s financial statements for fiscal year 2003. Darilek & Butler, CPA
      (“Darilek & Butler”) issued its audit of the Company’s financial statements
      for fiscal year 2002, and for the period between the Company’s inception and
      December 31, 2002. Darilek & Butler is the Company’s original auditor for
      such time periods.




The
      Company did not consult Porter Keadle Moore or Darilek & Butler prior to
      their engagement regarding (i) the application of accounting principles to
      a
      specified transaction, either completed or proposed nor (ii) any matter that
      was
      either the subject of a disagreement (as defined in Item 304(a)(1)(iv) of
      Regulation S-B and the related instructions to that Item).




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. 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 under Rule 13a-15.




Because
      of the inherent limitations in all control systems, no evaluation of controls
      can provide absolute assurance that the company’s disclosure controls and
      procedures will detect or uncover every situation involving the failure of
      persons within the company to disclose material information otherwise required
      to be set forth in the Company’s periodic reports.






33






The
      Company’s management is also responsible for establishing and maintaining
      adequate internal control over financial reporting to provide reasonable
      assurance regarding the reliability of financial reporting and the preparation
      of financial statements for external purposes in accordance with generally
      accepted accounting principles. As of the Evaluation Date, no changes in the
      Company’s internal control over financial reporting occurred, that have
      materially affected, or are reasonably likely to materially affect, the
      Company’s internal control over financial reporting.




**ITEM
      8B. OTHER INFORMATION.**




None.




**PART
      III**






**ITEM
      9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.**




Our
      executive officers, directors and significant employees are:




**Name**
            
            **Age**
            
            **Position**Stephen
                D. Barnhill, M.D.
            
            47
            
            Chief
                Executive Officer and Chairman of the BoardDaniel
                R. Furth
            
            42
            
            Principal
                Financial Officer, Executive Vice PresidentRobert
                S. Braswell IV
            
            50
            
            Senior
                Vice PresidentHong
                Zhang, Ph.D.
            
            44
            
            Senior
                Vice PresidentWilliam
                F. Quirk, Jr.
            
            63
            
            DirectorWilliam
                M. Goldstein
            
            70
            
            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.






34






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.




***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 company’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.




***Robert
      S. Braswell IV*** is our
      Senior Vice President. Mr. Braswell served as our President from April 2001
      until the acquisition of The Barnhill Group LLC, when he assumed his current
      position. As its President, he guided the creation of Direct Wireless
      Communications Inc. (DWCI) and oversaw all administrative functions for both
      DWCI and Direct Wireless Corporation. Mr. Braswell served as President of Direct
      Wireless Corporation since December 1999 and a member of its Board of Directors
      since January 1999. Prior to holding these positions, Mr. Braswell was an
      independent businessman engaged in business evaluations, real estate
      development, and home construction while running a working ranch operation.
      His
      administrative experience comes from eighteen years experience in the common
      carrier freight business, working for Central Freight Lines, Inc. from
      1974-1992. Mr. Braswell graduated from the University of Houston in 1983 with
      a
      Bachelor of Business Administration in Organizational Behavior
      Management.




***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.






35






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.




***William
      F. Quirk, Jr.*** is
      a
      member of the Board of Directors. Mr. Quirk is the first outside director to
      join our board, succeeding Dr. David Cooper, the Company's former president
      and
      chief medical officer who recently resigned his positions to pursue other
      interests. 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.




***William
      M. Goldstein*** is
      a
      member of the Board of Directors. Mr. Goldstein is currently a partner
      with Philadelphia-based Drinker Biddle & Reath LLP. He succeeds Robert Braswell
      IV, who resigned his Board seat, but remains a senior executive with the
      Company. ** 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.




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.




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.” **** 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, which is comprised of five people.




The
      Board
      of Directors does not have a policy with regard to the consideration of
      candidates to the Board recommended by stockholders. The Board has made no
      determination as to whether or not such a policy should be adopted. The Board
      of
      Directors will consider candidates recommended by stockholders. To be considered
      for nomination by the Board of Directors at the next annual meeting of stockholders,
      Chairman of the Board must receive stockholder recommendations at least 120
      calendar days before the anniversary date of the company’s proxy statement for
      the previous year’s annual meeting. To recommend a candidate, a stockholder
      should send the candidate’s name, age, credentials (including principal
      occupation and employment), contact information and the candidate’s consent to
      be considered to the Chairman of the Board in care of the Company at its
      principal executive office address. The stockholder should also provide the
      stockholder’s contact information, describe the stockholder’s relationship with
      the candidate, and include a statement as to the number of Common Shares owned
      by the stockholder and the length of time such Common Shares have been owned.






36







**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
                ($)
            Securities
                Underlying Options (#)Stephen
                D. Barnhill, M.D.
              Chief
                Executive Officer
            2005
              2004
              2003
            $300,000
              $337,500
              $50,000Daniel
                R. Furth
              Executive
                Vice President
            2005
            $22,500
            1,500,000Robert
                S. Braswell, IV
              Senior
                Vice President
            2005
              2004
              2003
            $70,000
              $81,666
              $11,666David
                Cooper
              Former
                President and Chief Medical Officer
            2005
              2004
              2003
            $97,742
              $110,000
              ---
            3,000,000







**Director
      Compensation**




Outside
      Directors are compensated $1.00 per year and they are granted 150,000 warrants
      annually.




**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, Dr. Barnhill receives an initial base salary of $25,000
      per month, which is subject to adjustment at least annually. 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 10 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)






37






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.




We
      entered into an employment agreement with Dr. David Cooper on November 1, 2003
      regarding Dr. Cooper’s employment as President and Chief Medical Officer. The
      employment commenced at signing and terminated on October 24, 2005, when Dr.
      Cooper resigned. As compensation for his employment, Dr. Cooper was issued
      non-qualified stock options to acquire 3,000,000 shares of our common stock,
      of
      which options to acquired 600,000 shares of our common stock vested immediately
      while options to acquire the remaining 2,400,000 shares vested over time or
      upon
      certain accomplishments of Dr. Cooper. At the time of Dr. Cooper’s resignation,
      options to acquire 400,000 shares had vested and the remaining options
      terminated. Upon termination of his employment, Dr. Cooper agreed to observe
      all
      post-employment covenants set forth in his agreement. Dr. Cooper’s agreement
      also generally provided that he will not compete with us in our business nor
      solicit our customers or employees for a period of one year following
      termination of his employment.




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, which is
      to
      be reviewed after the first year for potential increase. Mr. Furth will also
      receive 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 we terminate the employment
      agreement for 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, he will be entitled to receive his salary for
      a
      period of three months from the date such termination is effective. If the
      employment agreement is terminated by us without cause, Mr. Furth will be
      entitled to receive his salary for a period of three months from the date such
      termination is effective. If the agreement is terminated by Mr. Furth without
      cause, he will be entitled to receive his salary only through 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.




We
      entered into an employment agreement with Mr. Robert Braswell IV effective
      as of
      January 1, 2006 regarding Mr. Braswell’s employment as Senior Vice President.
      Pursuant to his employment agreement, Mr. Braswell will be employed as Senior
      Vice President for a term of three years at an annual salary of $70,000, of
      which 50% of such amount will be deferred until January 1, 2008. In addition,
      we
      awarded Mr. Braswell options to acquire 1,500,000 shares of our common stock
      at
      an exercise price of $0.11 (which was the closing price of the common stock
      on
      the preceding day) that vested upon issuance, and options to acquire 500,000
      shares of our common stock at an exercise price of $0.11, which vest
      semi-annually over the next two years. Mr. Braswell’s compensation and all other
      rights under Mr. Braswell’s employment agreement will terminate (a) upon the
      death of Mr. Braswell, (b) upon the disability of Mr. Braswell, (c) for cause,
      or (d) without cause upon ninety days prior notice from either us or Mr.
      Braswell. If we or Mr. Braswell terminate his agreement for cause, Mr. Braswell
      will be entitled to receive his salary for a period of three months from the
      date such termination is effective, and all outstanding options to acquire
      shares of our common stock shall vest immediately. If the employment agreement
      is terminated as a result of Mr. Braswell’s disability, we will pay Mr.
      Braswell’s salary through the date on which such termination is effective and
      all outstanding options to acquire shares of our common stock shall vest
      immediately. If the employment agreement is terminated because of Mr. Braswell’s
      death, Mr. Braswell’s estate will be entitled to receive his salary though the
      date on which such termination is effective. If the employment agreement is
      terminated by us without cause, Mr. Braswell will be entitled






38







to
      receive, in a lump sum payment within 15 days of termination, his salary for
      the
      entire remaining term of the employment agreement. In addition, all outstanding
      options to acquire shares of our common stock shall vest immediately, and Mr.
      Braswell will be awarded options to purchase additional 300,000 shares of our
      common stock with an exercise price of $0.11, fully vested. If the employment
      agreement is terminated by Mr. Braswell without cause, Mr. Braswell will be
      entitled to receive his salary only through the date of such termination is
      effective, and all outstanding options to acquire shares of our common stock
      shall vest immediately.




**Scientific
      Advisory Board**




The
      Company has entered into agreement with three members of its Scientific Advisory
      Board wherein they are entitled to receive 100,000 shares each of the Company’s
      common stock. The members are entitled to receive the shares upon satisfactory
      completion of one year of service. The one year terms end in 2006.




**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 .




**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 29, 2006 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 29, 2006, there were
      114,963,384 shares outstanding.






39







**Name
                and Position**
            **Number
                of Shares**
              **Beneficially
                Owned**
            **Percent
                of Class****(1)**Dr.
                Stephen D. Barnhill
              Chairman
                of the Board,
              Chief
                Executive Officer and Chief Medical Officer, Director
              2
                Springfield Place
              Savannah,
                GA 37411
            28,575,564(2)
            24.86%Daniel
                R. Furth
              Executive
                Vice President
              101
                Bartram Road
              Savannah,
                GA 31411
            250,000
            *William
                Quirk
              Director
              10
                Water Witch Crossing
              Savannah,
                GA 31411
            12,000,000
            10.44%William
                Goldstein
              Director
              787
                Trephanny Lane
              Wayne,
                PA 19087
            625,000
            *All
                executive officers and directors as a group (four persons)
            44,543,827
            38.75%


__________________________________________________________________




(1)
            The
                percentage of our common stock beneficially owned was calculated
                based on
                114,963,384 shares of common stock issued and outstanding as of March
                29,
                2006. 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, 2006.




(2)
            These
                shares are held by Barnhill Group LLC, which is wholly owned by Dr.
                Barnhill.






40






**ITEM
      12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.**




On
      May 6,
      2005, we acquired the remaining 7% of the SVM Patent Portfolio for an aggregate
      cash payment of approximately $270,863, the issuance of the promissory notes
      totaling $37,872 and convertible notes totaling $147,401, which were converted
      by the holders immediately upon issuance in exchange for 867,065 shares of
      our
      common stock. Approximately $175,000 of the purchase price was used by the
      sellers to repay an outstanding obligation of a limited liability company of
      which our chief executive officer was a member.




We
      currently sub-lease our principle executive office space from a company owned
      by
      the wife of Dr. Stephen D. Barnhill. Our rent on this 1,554 sq ft office is
      $1,036.00 per month and is rented on a month-to-month basis.








41






**ITEM
      13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K.**




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
      SB-2:






3.1
            Articles
                of Incorporation. Registrant incorporates by reference Exhibit 3.1
                to
                Registration Statement on Form SB-2, filed June 4, 2001.  3.1(a)
            Articles
                of Amendment to Articles of Incorporation Registrant incorporates
                by
                reference Exhibit 2.2 to Form10-QSB, filed November 14, 2001.  3.1(b)
            Articles of Amendment to Articles of
              Incorporation changing Registrant name from Direct Wireless
              Communications, Inc., to Health Discovery Corporation. Registrant
              incorporates by reference Exhibit 3.1 (b) to form 10-KSB, filed March
              3,
              2004.  3.2
            By-Laws. Registrant incorporates by
              reference
              Exhibit 3.2 to Registration Statement on Form SB-2, filed June 4,
              2001.  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.  4.2
            Excerpt from By-Laws. Registrant incorporates
              by reference Exhibit 4.2 to Registration Statement on Form SB-2, filed
              June 4, 2001.  4.2(A)
            Corrected Article 3.02 of By-Laws.
              Registrant
              incorporates by reference Exhibit 4.2(A) to Amendment No. 2 to
              Registration Statement on Form SB-2, filed August 15,
              2001.  4.3(a)
            Non Qualified stock option agreements
              dated
              October 30, 2003 between registrant and David Cooper. Registrant
              incorporates by reference Exhibit 4.3(a) to form 10-KSB, filed March
              30,
              2004.  10.1
            Asset purchase agreement between registrant
              dated September 15, 2003 and Barnhill Group LLC. Registrant incorporates
              by reference Exhibit 10.2 to form 10-KSB, filed March 30,
              2004.  10.2
            Asset purchase agreement between registrant
              dated December 30, 2003 and Fractal Genomics LLC. Registrant incorporates
              by reference Exhibit 10.3 to form 10-KSB, filed March 30,
              2004.  10.3
            Employment Agreement with Stephen Barnhill.
              Registrant incorporates by reference Exhibit 10.3 to form 10-KSB, filed
              April 19, 2005. *  10.4
            Employment Agreement with David Cooper.
              Registrant incorporates by reference Exhibit 10.4 to form 10-KSB, filed
              April 19, 2005. *  10.5
            Form of Asset Purchase agreement between
              the
              registrant and the sellers of the SVM Portfolio and related assets.
              Registrant incorporates by reference Exhibit 10.5 to form 10-KSB, filed
              March 30, 2004.  10.6
            Form of Securities Purchase Agreement.
              Registrant incorporates by reference Exhibit 10.6 to form 10-KSB, filed
              April 19, 2005.






42






10.7
            Form of Warrant. Registrant incorporates
              by
              reference Exhibit 10.7 to form 10-KSB, filed April 19,
              2005.  10.8
            Form of Securities Purchase Agreement.
              Registrant incorporates by reference Exhibit 10.8 to form 10-KSB, filed
              April 19, 2005.  10.9
            Form of Warrant. Registrant incorporates
              by
              reference Exhibit 10.9 to form 10-KSB, filed April 19,
              2005.  10.10
            Form of Amendment to Securities Purchase
              Agreement. Registrant incorporates by reference Exhibit 10.10 to form
              SB-2/A, filed December 14, 2005.  10.11
            Employment
                Agreement with David R. Furth, dated as of December 5, 2005. Registrant
                incorporates by reference Exhibit 10.11 to form SB-2/A, filed December
                14,
                2005.  10.12
            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.  10.13
            Form
                of Amendment to Promissory Note. Registrant incorporates by reference
                Exhibit 99.1 to form 8-K, filed January 3,
                2006.  31
            Rule 13a-14(a)/15(d)-14(a) Certifications
              of
              Chief Executive Officer.  31.1
            Rule 13a-14(a)/15(d)-14(a) Certifications
              of
              Principal Financial Officer.  32
            Section 1350 Certification of Chief
              Executive
              Officer.  32.1
            Section 1350 Certification of Principal
              Financial Officer.






43






**ITEM
      14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.**




The
      following table sets forth fees for professional services rendered by Porter
      Keadle and Moore LLP, for the years ended December 31, 2005 and 2004.




2005
            
            2004Audit
                Fees
            
            $
            103,737
            
            $
            47,300Audit-Related
                Fees
            
            $
            ---
            
            
            ---Tax
                Fees
            
            
            ---
            
            
            ---Sub-Total
            
            $
            103,737
            
            $
            47,300All
                Other Fees
            
            
            ---
            
            
            ---Total
                Fees
            
            $
            103,737
            
            $
            47,300







**Audit
      Fees.** This
      category includes aggregate fees billed or to be billed for professional
      services rendered by Porter Keadle Moore, LLP for the audit of the Company’s
      annual financial statements for the year ended December 31, 2005 and 2004,
      review of 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 2005 and 2004, including out of pocket
      expenses. The amount for 2005 also includes fees totaling $30,900 for the
      re-audit of the Company’s 2003 financial statements performed during
      2005.




**Audit-Related
      Fees.** This
      category includes fees billed or to be billed for professional services rendered
      by Porter Keadle Moore, LLP associated with consultation concerning financial
      accounting and reporting standards. Porter Keadle Moore, LLP billed no such
      fees
      in 2004.




**Tax
      Fees.** This
      category includes the aggregate fees billed or to be billed for tax services
      rendered by Porter Keadle Moore, LLP for the years ended December 31, 2005
      and
      2004. Porter Keadle Moore, LLP billed no such fees in 2005 or 2004.




**All
      Other Fees.** This
      category includes the aggregate fees billed or to be billed for all other
      services, exclusive of the fees disclosed above, rendered to the Company by
      Porter Keadle Moore, LLP. For the years ended December 31, 2005 and 2004, Porter
      Keadle Moore, LLP did not provide any such services.




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.






44






SIGNATURES







Pursuant
      to the requirements of the Securities Act of 1933, the registrant has duly
      caused this registration statement to be signed on its behalf by the
      undersigned, thereunto duly authorized in the City of Savannah, State
      of
      Georgia, on  March
      31,
      2006.






HEALTH DISCOVERY CORPORATIONBy:  /s/
              Stephen D. Barnhill, M.D., Chief Executive OfficerStephen
                D. Barnhill, M.D., Chief Executive
                Officer






Pursuant
      to the requirements of the Securities Act of 1933, this registration statement
      has been signed by the following persons 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, 2006/S/Daniel
                R. Furth
              Daniel
                R. Furth
            Principal
                Financial Officer
              Executive
                Vice President
            March
                31, 2006/S/William
                F. Quirk, Jr.
              William
                F. Quirk, Jr.
            Director
            March
                31, 2006/S/William
                M. Goldstein
              William
                M. Goldstein
            Director
            March
                31, 2006









45





















**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




To
      the
      Board of Directors and Stockholders


Health
      Discovery Corporation





We
      have
      audited the accompanying balance sheets of Health Discovery Corporation as
      of
      December 31, 2005 and 2004, and the related statements of operations, changes
      in
      stockholders’ equity, and the cash flows for the years then ended. These
      financial statements are the responsibility of the Company’s management. 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 audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes 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 the Company as of December 31,
      2005
      and 2004 and the results of its operations and its cash flows for the years
      then
      ended in conformity with accounting principles generally accepted in the United
      States of America.





The
      accompanying financial statements have been prepared assuming the Company will
      continue as a going concern. The Company has suffered recurring losses from
      operations and negative working capital that raise substantial doubt about
      its
      ability to continue as a going concern. Management’s plans in regard to these
      matters are described in Note L. The financial statements do not include any
      adjustments relating to the recoverability of reported asset amounts or the
      amount of liabilities that might result from the outcome of this
      uncertainty.




/s/
      Porter Keadle Moore, LLP





Atlanta,
      Georgia


March
      30,
      2006






F-1








**HEALTH
      DISCOVERY CORPORATION**





**Balance
      Sheets**





**December
      31, 2005 and 2004**




Assets







2005
            
            2004Current
                Assets
            
            $
            719,167
            
            
            163,477Cash
            
            
            17,708
            
            
            -Prepaid
                Expense736,875
            
            
            163,477Total
                Current AssetsEquipment,
                Less Accumulated Depreciation of $6,660 and $1,719
            
            
            13,053
            
            
            6,371Other
                AssetsPatents,
                Less Accumulated Amortization of $417,535 and $166,438
            
            
            3,568,259
            
            
            3,340,339Total
                Assets
            
            $
            4,318,187
            
            
            3,510,187Liabilities
                and Stockholders’ EquityCurrent
                LiabilitiesAccounts
                Payable - Trade
            
            $
            267,972
            
            
            234,685Accrued
                Liabilities
            
            
            63,319
            
            
            183,797Current
                Portion of Long-Term Debt
            
            
            26,780
            
            
            697,491Total
                Current Liabilities
            
            
            358,071
            
            
            1,115,973Convertible
                Notes Payable
            
            
            665,643
            
            
            1,127,818Long-Term
                Debt, Less Current Portion
            
            
            321,911
            
            
            173,576Total
                Liabilities
            
            
            1,345,625
            
            
            2,417,367CommitmentsStockholders’
                EquityCommon
                Stock, No Par Value, 200,000,000 Shares AuthorizedIssued
                and Outstanding 114,363,384 and 78,767,464 Shares,
                Respectively
            
            
            9,522,961
            
            
            3,788,442Paid
                for but Not Issued - 5,434,375 shares for 2004
            
            
            -
            
            
            695,761Accumulated
                Deficit
            
            
            (6,550,399
            )
            
            (3,391,383
            )Total
                Stockholders' Equity
            
            
            2,972,562
            
            
            1,092,820Total
                Liabilities and Stockholders' Equity
            
            $
            4,318,187
            
            
            3,510,187








See
      accompanying notes to financial statements and independent auditors’
reports.






F-2






**HEALTH
      DISCOVERY CORPORATION**




**Statements
      of Operations**




**For
      the Years Ended December 31, 2005 and 2004**







2005
            
            2004Revenues:Licensing
            
            $
            135,000
            
            
            -Patent Sales
            
            
            89,000
            
            
            -Interest
                Income
            
            
            2,998
            
            
            15Total
                Revenues
            
            
            226,998
            
            
            15Cost
                of Sales:Licensing
            
            
            30,573
            
            
            -Patent
                Sales
            
            
            2,963
            
            
            -Total
                Cost of Sales
            
            
            33,536
            
            
            -Gross
                Profit
            
            
            193,462
            
            
            15Expenses:Amortization
            
            
            251,097
            
            
            142,607Interest
            
            
            55,406
            
            
            46,691Professional
                and Consulting Fees
            
            
            1,567,500
            
            
            830,835Compensation
            
            
            822,261
            
            
            862,560Other General and Administrative Expenses
            
            
            656,214
            
            
            322,410Total
                Expenses
            
            
            3,352,478
            
            
            2,205,103Net
                Loss
            
            $
            (3,159,016
            )
            
            (2,205,088
            )Weighted
                Average Outstanding Shares
            
            
            103,566,777
            
            
            73,950,073Loss
                Per Share
            
            $
            (.03
            )
            
            (.03
            )





See
      accompanying notes to financial statements and independent auditors’
reports.






F-3







**HEALTH
      DISCOVERY CORPORATION**





**Statements
      of Changes in Stockholders’ Equity**





**For
      the Years Ended December 31, 2005 and 2004**







Common
                Stock
            
            
            
            TotalIssued
                and Outstanding
            
            Paid
                for but Not Issued
            
            Accumulated
            
            Stockholders'Shares
            
            Amount
            
            Shares
            
            Amount
            
            Deficit
            
            EquityBalance
                - December 31, 2003
            
            
            66,576,128
            
            $
            2,092,742
            
            
            -
            
            $
            -
            
            
            (1,186,295
            )
            
            906,447Stock
                Issued for Cash
            
            
            15,235,000
            
            
            1,499,900
            
            
            -
            
            
            -
            
            
            -
            
            
            1,499,900Stock
                Issued for Services
            
            
            422,372
            
            
            78,800
            
            
            -
            
            
            -
            
            
            -
            
            
            78,800Cancellation
                of Common Stock
            
            
            (3,466,036
            )
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Paid
                  in Capital for Compensatory Warrants
            
            
            -
            
            
            117,000
            
            
            -
            
            
            -
            
            
            -
            
            
            117,000Stock
                Paid for but Not Issued
            
            
            -
            
            
            -
            
            
            5,434,375
            
            
            695,761
            
            
            -
            
            
            695,761Net
                Loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,205,088
            )
            
            (2,205,088
            )Balance
                - December 31, 2004
            
            
            78,767,464
            
            
            3,788,442
            
            
            5,434,375
            
            
            695,761
            
            
            (3,391,383
            )
            
            1,092,820Stock
                Issued for Cash
            
            
            25,268,750
            
            
            3,842,375
            
            
            -
            
            
            -
            
            
            -
            
            
            3,842,375Issuance
                  of Shares Previously Paid for but not Issues
            
            
            5,434,375
            
            
            695,761
            
            
            (5,434,375
            )
            
            (695,761
            )
            
            -
            
            
            -Stock
                Issued for Services
            
            
            2,039,453
            
            
            381,876
            
            
            -
            
            
            -
            
            
            -
            
            
            381,876Stock
                  Issued for Settlement of Liability
            
            
            308,133
            
            
            78,746
            
            
            -
            
            
            -
            
            
            -
            
            
            78,746Stock
                  Issued for Conversion of Debt
            
            
            3,585,741
            
            
            609,576
            
            
            -
            
            
            -
            
            
            -
            
            
            609,576Paid
                  in Capital for Compensatory Options and Warrants
            
            
            -
            
            
            426,185
            
            
            -
            
            
            -
            
            
            -
            
            
            426,185Stock
                  Issued for Delinquency Penalty
            
            
            540,000
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Cancellation
                of Common Stock
            
            
            (1,580,532
            )
            
            (300,000
            )
            
            -
            
            
            -
            
            
            -
            
            
            (300,000
            )Net
                Loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (3,159,016
            )
            
            (3,159,016
            )Balance
                - December 31, 2005
            
            
            114,363,384
            
            $
            9,522,961
            
            
            -
            
            $
            -
            
            
            (6,550,399
            )
            
            2,972,562








See
      accompanying notes to financial statements and independent auditors’
reports.






F-4




**HEALTH
        DISCOVERY CORPORATION**
 
 **Statements
        of Cash Flows**
 
 **For
        the Years Ended December 31, 2005 and 2004**


2005
              
              2004Cash
                  Flows From Operating Activities:Net
                  Loss
              
              $
              (3,159,016
              )
              
              (2,205,088
              )Adjustments
                  to Reconcile Net Loss to Net CashUsed
                  by Operating Activities:Noncash
                  Compensation
              
              
              426,185
              
              
              117,000Cancellation
                  of Common Stock
              
              
              (300,000
              )
              
              -Services
                  Exchanged for Common Stock or Warrants
              
              
              381,876
              
              
              78,800Depreciation
                  and Amortization
              
              
              256,038
              
              
              144,326Increase
                  in Prepaid Expense
              
              
              (17,708
              )
              
              -Increase
                  in Accounts Payable - Trade
              
              
              33,287
              
              
              229,098Increase
                  (Decrease) in Accrued Liabilities
              
              
              (41,732
              )
              
              132,313Net
                  Cash Used by Operating Activities
              
              
              (2,421,070
              )
              
              (1,503,551
              )Cash
                  Flows From Investing Activities:Purchase
                  of Equipment
              
              
              (11,623
              )
              
              (8,090
              )Amounts
                  Paid to Acquire Patents
              
              
              (293,744
              )
              
              (166,529
              )Net
                  Cash Used by Investing Activities
              
              
              (305,367
              )
              
              (174,619
              )Cash
                  Flows From Financing Activities:Repayments
                  of Notes Payable
              
              
              (560,248
              )
              
              (476,592
              )Proceeds
                  from Sales of Common Stock, Net
              
              
              3,842,375
              
              
              2,241,650Net
                  Cash Provided by Financing Activities
              
              
              3,282,127
              
              
              1,765,058Net
                  Increase in Cash
              
              
              555,690
              
              
              86,888Cash,
                  at Beginning of Period
              
              
              163,477
              
              
              76,589Cash,
                  at End of Period
              
              $
              719,167
              
              
              163,477Non-Cash
                  Investing and Financing Transactions:Patents
                  Purchased Using Debt
              
              $
              185,273
              
              
              1,975,477Stock
                  Issued for Professional and Consulting Services
              
              $
              381,876
              
              
              78,800Stock
                  Issued in Exchange for Convertible Notes
              
              $
              609,576
              
              
              -Non-cash
                  Compensation Warrants and Options
              
              $
              426,185
              
              
              117,000Rescission
                  of Stock Issued for Compensation
              
              $
              (300,000
              )
              
              -Issuance
                  of Shares Previously Paid For
              
              $
              695,761
              
              
              -Stock
                  Issued in Settlement of Liability
              
              $
              78,746
              
              
              -Supplemental
                  disclosures of cash flow information:Cash
                  Paid for Interest
              
              $
              20,024
              
              
              31,763







See
      accompanying notes to financial statements and independent auditors’
reports.






F-5






**HEALTH
      DISCOVERY CORPORATION**





**Notes
      to Financial Statements**





**Note
      A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**




**NATURE
      OF OPERATIONS**




Health
      Discovery Corporation (the “Company”) is a biotechnology oriented company that
      has acquired certain rights to patents and has patent pending applications
      for
      certain machine learning tools used for diagnostic and drug discovery. The
      Company licenses the use of its patented protected technology or may develop
      specific learning tools to sell to third parties. The
      Company was reported on as a development stage corporation through December
      31,
      2004.




**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
      fair value of the patents.





**REVENUE
      RECOGNITION**





Revenue
      is generated through the sale or license of patented processes. These
      arrangements are controlled 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.





**COST
      OF SALES**





Cost
      of
      patent sales includes the acquisition cost less accumulated amortization of
      patents sold, plus any internal development costs and fees directly associated
      with sales contracts.





Cost
      of
      sales for licensing revenue includes fees directly associated with sales
      contracts and salary expense allocated to cost of sales based upon the amount
      of
      estimated time worked on the licensing contract.





**PATENTS**




Patents
      are recorded at cost, less accumulated amortization. Patents are amortized
      over
      their remaining legal lives, that range from 15 to 20 years, from the date
      they
      are acquired or approved. Management believes the remaining legal lives
      approximates the patents economic lives. Legal costs directly associated with
      the patent acquisitions and the application process for new patents are
      capitalized when incurred and are being amortized over the remaining legal
      life
      of the related patent. If the applied for patents are abandoned, not issued,
      or
      otherwise impaired, the Company will expense the capitalized legal costs as
      an
      impairment charge.





The
      carrying value of patents is reviewed for impairment at least annually and
      whenever events or changes in circumstances indicate that the carrying amount
      may not be recoverable. As of December 31, 2005, the Company does not believe
      there has been any impairment of its patents.




**INCOME
      TAXES**




The
      Company accounts for income using the liability method. Deferred tax assets
      and
      liabilities are recognized for future tax benefits 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. A valuation allowance is provided for significant
      deferred tax assets when it is more likely than not that such assets will not
      be
      realized through future operations.






F-6






**HEALTH
        DISCOVERY CORPORATION**
 
 **Notes
          to Financial Statements, continued**







**Note
      A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED**





**INCOME
      TAXES, continued**




In
      the
      event the future tax consequences of differences between the financial reporting
      basis and tax basis 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 whenit 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**





The
      Company accounts for its stock based compensation under the intrinsic value
      method prescribed in Accounting Principles Board (APB) No. 25, “Accounting for
      Stock Issued to Employees.” Had the Company used the fair-value-based method of
      accounting for the stock option plan prescribed by SFAS No. 123 and charged
      compensation expense against income over the vesting period based on the fair
      value of options at the date of grant, net loss and loss per share for the
      years
      ended December 31, 2005 and 2004:





2005
            
            2004Net
                loss as reported
            
            $
            (3,159,016
            )
            
            (2,205,088
            )Deduct:
                Stock-based Expense Determined Under Fair Value Based Method for
                Employee
                Stock Options
            
            
            (7,723
            )
            
            (32,000
            )Proforma
                Net Loss
            
            $
            (3,166,739
            )
            
            (2,237,088
            )Stock-based
                Expense Included in Net Loss
            
            $
            508,061
            
            
            195,800Loss
                Per Share:Basic
                - As Reported
            
            $
            (.03
            )
            
            (.03
            )Basic
                - Proforma
            
            $
            (.03
            )
            
            (.03
            )





Stock-based
      expense included in the 2005 net loss consists of $426,185 in compensatory
      warrants and options and $81,876 in compensatory stock issued to consultants
      for
      services. Stock-based expense included in the 2004 net loss includes $117,000
      in
      compensatory warrants and $78,800 in stock issued to consultants for services.





The
      Company granted 1,500,000 options during 2005. The fair value of each option
      granted in 2005 was $0.19 and was estimated on the date of grant using the
      Black-Scholes pricing model with the following assumptions: dividend yield
      at
      0%, risk-free interest rate of 4.57%, an expected life of 10 years, and
      volatility of 128%. No options were granted in 2004.






F-7







**HEALTH
      DISCOVERY CORPORATION**




**Notes
      to Financial Statements, continued**





**Note
      A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
      CONTINUED**





**FAIR
      VALUE OF FINANCIAL INSTRUMENTS**





The
      Company’s financial instruments consist of cash, accounts payable, accrued
      expenses and long-term debt. 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.





**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 result in an anti-dilutive result and therefore is not
      presented. Potentially dilutive shares at December 31, 2005 and 2004 include
      the
      following:


2005
              
              2004Stock
                  options
              
              
              2,500,000
              
              
              3,000,000Warrants
              
              
              50,931,250
              
              
              21,369,375Convertible
                  notes
              
              
              3,915,547
              
              
              6,634,22457,346,797
              
              
              28,303,599




**ISSUANCE
      OF EQUITY INSTRUMENTS FOR NON-CASH CONSIDERATION**




All
      issuances of the Company’s equity instruments for non-cash consideration, which
      primarily pertain to services rendered by consultants and others, have been
      assigned a per share amount equaling the fair value of the shares issued, based
      upon quoted market prices. The fair value of warrants granted is estimated
      on
      the date of grant using the Black-Scholes pricing model.




**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
      December 2004, the FASB issued SFAS No. 153, “Exchanges of Non-Monetary Assets”,
      an amendment of APB Opinion 29, “ Accounting for Non-Monetary Transactions.” The
      amendments made by SFAS No. 153 are based on the principle that exchanges of
      non-monetary assets should be measured based on the fair value of the assets
      exchanged. Further, the amendments eliminate the narrow exception for
      non-monetary exchanges of similar productive assets and replaces it with a
      broader exception for exchanges of non-monetary assets that do not have
“commercial substance.” The provisions in SFAS No. 153 are effective for
      non-monetary asset exchanges occurring in fiscal periods beginning after June
      15, 2005. Early application is permitted, and companies must apply the standard
      prospectively. The Company adopted this statement on January 1, 2006. The
      adoption of the statement should not cause a significant change in the current
      manner in which the Company accounts for its exchanges of non-monetary
      assets.






F-8








**HEALTH
      DISCOVERY CORPORATION**





**Notes
      to Financial Statements, continued**





**Note
      A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
      CONTINUED**





**RECENT
      ACCOUNTING PRONOUNCEMENTS, continued**





The
      FASB
      has issued SFAS No. 123(R), “Share-Based Payment.” The new rule requires that
      the compensation cost relating to share-based payment transactions be recognized
      in the financial statements. That cost will be measured based on the fair value
      of the equity or liability instruments issued. This statement precludes the
      recognition of compensation expense under APB Opinion No. 25’s intrinsic value
      method. The Company will be required to apply SFAS No. 123(R) beginning January
      1, 2006. The Company does not believe that the impact of SFAS No. 123(R) will
      be
      materially different from the amounts presented in the pro forma
      disclosures.





In
      May
      2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”
(“SFAS 154”), which changes the requirements for the accounting for and
      reporting of a change in accounting principle. We are required to adopt the
      provisions of SFAS 154 effective January 1, 2006; however, early adoption is
      permitted. We will follow the provisions of this statement in the event of
      any
      future accounting changes.





**RECLASSIFICATIONS**





Certain
      amounts from 2004 have been reclassified to conform to the presentation used
      in
      2005.





**Note
      B - RELATED PARTY TRANSACTIONS**




As
      a
      result of the agreements between Barnhill, LLC and Fractal Genomics, LLC, the
      company’s Chief Executive Officer receives 49% of each note payment, or $30,625
      plus interest per payment, made to Fractal Genomics, LLC from Health Discovery
      Corporation that is more fully described in Note D. Total payments to the
      Company’s Chief Executive Officer were $91,875 and $153,125 in 2005 and 2004,
      respectively, as a result of these agreements.




The
      Company leases the location used as the principle executive office from a
      Company owned by the wife of the Company’s Chief Executive Officer. The term of
      the principle executive office space is month-to-month and the rent expense
      associated with this lease is $1,036 per month. Rent expense under this lease
      arrangement amounted to approximately $11,000 and $10,000 in 2005 and 2004,
      respectively.




**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 a part of patents. The Company has recorded $3,568,259
      and
      $3,340,339 in patents and patent related costs, net of accumulated amortization,
      at December 31, 2005 and 2004.





Amortization
      charged to operations for the years ended December 31, 2005 and 2004 was
      $251,097 and $142,607, respectively. The weighted average amortization period
      for patents is 14 years. Estimated amortization expense for the next five years
      is $262,575 per year.





**Note
      D - ACQUISITIONS**





On
      August
      26, 2003, the Company acquired the assets of Barnhill Group, LLC, which
      consisted of patents and related rights, through the issuance of 29,825,564
      common shares of the Company (then known as Direct Wireless Communications,
      Inc.). The purchase of Barnhill Group, LLC’s assets was recorded at $596,511,
      which was the market value of the shares issued at the date of acquisition.





On
      September 30, 2003, the Company acquired the patents, patent rights, all pending
      intellectual property of Fractal Genomics, LLC through the issuance of 3,825,000
      common shares of the Company (then known as Direct Wireless Communications,
      Inc.). The purchase of Fractal Genomics, LLC’s assets was recorded at $767,750,
      which was the market value of the shares issued at the date of acquisition
      plus
      the amount of the note.






F-9






**HEALTH
      DISCOVERY CORPORATION**





**Notes
      to Financial Statements, continued**





**Note
      D - ACQUISITIONS, CONTINUED**





On
      July
      30, 2004, the Company acquired certain
      rights to patents and patents pending applications for certain machine learning
      tools used for diagnostic and drug discovery. The
      rights to these assets were purchased from unrelated third parties for a
      combination of non-interest bearing notes payable and interest bearing notes
      payable that are convertible to common stock. Under the non-interest bearing
      note payable, an initial cash payment of $175,394 was paid to the sellers on
      December 30, 2004 and four additional payments of $175,394 will be made four
      months from the date of the initial payment and every fourth month thereafter
      until $876,970 has been paid. The Company has imputed interest on the
      non-interest bearing note payments using a rate of 3.16 %, which resulted in
      a
      liability that amounts to $847,659. For the interest bearing notes payable
      that
      are convertible to common stock, the sellers received notes payable amounting
      to
      $1,127,818 that bear interest at 3.16 % and are convertible into 6,634,221
      shares of common stock (at $.17 per share) until maturity on July 28, 2009.
      The
      agreements place certain limitations on the selling of the common stock shares
      during certain periods after conversion. The purchase of these patents and
      patents pending applications was recorded at $1,975,477, which was the estimated
      present value of the notes issued at the date of acquisition. During 2005,
      convertible notes totaling $462,175 were converted by holders in exchange for
      2,718,676 shares of common stock.





On
      May 6,
      2005 the Company acquired the remaining interest in a portfolio of patents
      from
      a group of unrelated third parties. The cost of the remaining interest consisted
      of a cash payment of $270,863, the issuance of promissory notes totaling $37,872
      and convertible notes totaling $147,401. The convertible notes were converted
      by
      the holders immediately upon issuance in exchange for 867,065 shares of common
      stock.





The
      entire purchase price of each of these acquisitions was assigned to the acquired
      patents since no other net assets were acquired and the patents were the sole
      interest of the Company.





During
      2005 and 2004, fees totaling $22,881 and $18,886, respectively, were capitalized
      as part of the cost of the patents acquired.





**Note
      E - 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 on 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 2005 and
      2004, the Company paid approximately $10,000 and $20,000, respectively, in
      royalty fees to Lucent.





**Note
      F - INCOME TAXES**





The
      Company’s effective tax rate differs from the federal and state statutory rates
      due primarily to the valuation allowance recorded for the deferred tax asset
      due. An allowance has been provided for by the Company which reduced the tax
      benefits accrued by the Company for its net operating losses and other deferred
      tax attributes to zero, as management cannot determine when, or if, the tax
      benefits derived from these operating losses and other deferred tax attributes
      will materialize. At December 31, 2005, the Company had net operating loss
      carryforwards totaling approximately $5,696,000 that will expire in various
      years beginning in 2021. The net operating loss carryforwards are the Company’s
      primary deferred tax attribute.






F-10






**HEALTH
      DISCOVERY CORPORATION**





**Notes
      to Financial Statements, continued**





**Note
      G - NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE**


Notes
                  payable consist of the following:
              
              2005
              
              2004Notes
                  payable to individuals, bearing interest at 6% payable in
                  quarterly
                installments
                  of $62,500. The final payment was made in 2005.
              
              $
              -
              
              
              187,500Term
                  promissory notes payable to individuals and institutions. The current
                  portion
                with
                  imputed interest at 3.16%. The long-term portion with interest
                  at 18%
                  is
                payable
                  in common stock maturing October 31, 2007.
              
              
              348,691
              
              
              683,567348,691
              
              
              871,067Less
                  current maturities
              
              
              (26,780
              )
              
              (697,491
              )$
              321,911
              
              
              173,576




Convertible
      notes outstanding at December 31, 2005 and 2004 totaled $665,643 and $1,127,818,
      respectively. The notes mature on July 28, 2009 and may be converted at the
      election of the noteholders until that time into shares of the Company’s common
      stock at $0.17 per share. A total of 3,915,547 shares may be issued upon the
      conversion of the notes. In addition, the noteholders are further limited to
      not
      sell more than 10% of such holder’s shares in any calendar quarter after the
      minimum holding period has expired. The convertible notes bare interest at
      a
      rate of 3.16%.





In
      2005,
      convertible notes totaling $609,576 were converted by the debt holders in
      exchange for the issuance of 3,585,741 shares of common stock.





All
      of
      the Company’s debt is collateralized by specific patents in the Company’s patent
      portfolio.





On
      December 28, 2005, certain holders of term promissory notes agreed to defer
      the
      balance due to them in 2006 until October 31, 2007. The deferred portion of
      the
      term notes will bear interest at a rate of 18%, payable with issuance of
      Company’s common stock. The Company was previously imputing interest on the
      unpaid amount at 3.16% annually. The principal payment deferred until 2007
      is
      $321,911.





**Note
      H - COMMITMENTS**





The
      Company entered into an employment agreement with its Chief Executive Officer.
      The employment agreement is for a term of five years beginning September 15,
      2003. The employment agreement will continue until terminated, which can occur
      at any time by notice, provided that the Company’s Chief Executive Officer will
      not terminate his employment upon less than sixty (60) days' prior written
      notice.  The
      employment agreement provides for a base salary and other perquisites
      commensurate with his employment.





On
      December 30, 2005, the Company and the Company’s Chief Executive Officer agreed
      to amend the employment agreement to defer a portion of his salary until January
      1, 2008 or upon a change in control.





The
      Company entered into an employment agreement with its Director of Operations.
      The employment agreement commenced on June 16, 2004 and ended on August 1,
      2005,
      when the parties elected to terminate the agreement.





The
      Company entered into an employment agreement with its Chief Financial Officer.
      The employment agreement is for a term of three years beginning November 14,
      2005. The employment agreement provides for a base salary, issuance of stock
      options and other perquisites commensurate with his employment.





The
      Company has also entered into agreements with three members of its Scientific
      Advisory Board wherein they are entitled to receive 100,000 shares each of
      the
      Company’s common stock. The members are entitled to receive the shares upon
      satisfactory completion of one year of service. The one-year terms end in 2006.
      The Company is accruing an expense for the anticipated issuance over the service
      period. At December 31, 2005, the Company has recorded $14,667 of consultant
      expense for anticipated issuances of the shares.






F-11






**HEALTH
      DISCOVERY CORPORATION**





**Notes
      to Financial Statements, continued**





**Note
      I - STOCK OPTIONS**





The
      Company approved 8,000,000 shares of common stock to be reserved solely for
      issuance and delivery upon the exercise of option grants.





At
      December 31, 2005 and 2004, the Company has options to purchase shares of common
      stock outstanding as follows:




**Number
                  of**
              **Exercise****2005**
              **Grant
                  Date**
              **Shares**
              **Price**
              **Vesting**October
                  2003
              600,000
              $0.01
              October
                  2003October
                  2003
              400,000
              $0.10
              November
                  2004December
                  2005
              1,500,000
              $0.10
              250,000
                  shares every six months**Number
                  of**
              **Exercise****2004**
              **Grant
                  Date**
              **Shares**
              **Price**
              **Vesting**October
                  2003
              600,000
              $
                  .01
              October
                  2003October
                  2003
              2,400,000
              $
                  .10
              400,000
                  shares each in November 2004, 2005 and 2006 with the remaining
                  balance
                  based on performance.




The
      2005
      options were awarded to an employee of the Company and expire in December
      2015.




The
      following schedule summarizes stock option activity for 2005 and
      2004:


2005
              
              2004Option
              
              Weighted
                Average
              
              Option
              
              Weighted
                Average.Shares
              
              Exercise
                  Price
              
              Shares
              
              Exercise
                  PriceOutstanding,
                  Beginning of Year
              
              
              3,000,000
              
              $
              0.08
              
              
              5,500,000
              
              $
              0.08Granted,
                  During the Year
              
              
              1,500,000
              
              
              0.10
              
              
              -
              
              
              -Forfeited,
                  During the Year
              
              
              (2,000,000
              )
              
              0.10
              
              
              (2,500,000
              )
              
              0.08Outstanding,
                  End of the Year
              
              
              2,500,000
              
              $
              0.08
              
              
              3,000,000
              
              $
              0.08






Two
      former employees forfeited 2,000,000 and 2,500,000 during 2005 and 2004,
      respectively. The weighted average remaining life of the outstanding options
      at
      December 31, 2005 is 9 years.





There
      were 1,000,000 and 1,250,000 options exercisable at December 31, 2005 and 2004,
      respectively. The weighted average exercise prices of those options are $0.05
      and $0.06 at December 31, 2005 and 2004 respectively. The weighted average
      remaining life of the exercisable options at December 31, 2005 is 8
      years.






F-12




**HEALTH
        DISCOVERY CORPORATION**
 
 **Notes
        to Financial Statements, continued**
 
 **Note
        J - WARRANTS**
 
 Information
        about warrants outstanding at December 31, 2005 and 2004 is summarized
        below:
 
 **December
                  31, 2005****Exercise
                  Prices**
              **Number**
                **Outstanding**
              **Weighted-Average**
                **Remaining**
                **Contractual******
                **Life
                  (years)**
              **Number**
                **Exercisable**
              **Weighted-Average**
                **Remaining**
                **Contractual
                  Life**
                **(years)
                  of**
                **Exercisable
                  Warrants**$0.01
              1,400,000
              2
              800,000
              1$0.08
              600,000
              1
              600,000
              1$0.12
              150,000
              3
              150,000
              3$0.20
              500,000
              2
              500,000
              2$0.22
              500,000
              3
              500,000
              3$0.24
              32,546,250
              3
              32,546,250
              3$0.35
              15,235,000
              1
              15,235,000
              1
 
 **December
                  31, 2004****Exercise
                  Prices**
              **Number**
                **Outstanding**
              **Weighted-Average**
                **Remaining**
                **Contractual******
                **Life
                  (years)**
              **Number**
                **Exercisable**
              **Weighted-Average**
                **Remaining**
                **Contractual
                  Life**
                **(years)
                  of**
                **Exercisable
                  Warrants**$0.01
              100,000
              3
              100,000
              3$0.08
              600,000
              2
              600,000
              2$0.24
              5,434,375
              4
              5,434,375
              4$0.35
              15,235,000
              2
              15,235,000
              2
 
 During
        2005, the Company issued 1,300,000 warrants to consultants and others for
        services with an exercise price of $0.01 per share. A total of $245,584 was
        recorded as Paid in Capital for Compensatory Warrants in the Statement of
        Stockholders’ Equity. The warrants vest after satisfactory completion of one
        year of service. The expense is being recorded over the service
        period.
  In
        addition, during 2005 the Company issued 1,000,000 warrants to consultants
        for
        services rendered on behalf of the Company at an exercise price of $0.20
        per
        share for 500,000 warrants and $0.22 per share for the remaining 500,000.
        A
        total of $164,560 was recorded as Paid in Capital for Compensatory Warrants
        in
        the Statement of Stockholders’ Equity.
   In
        December 2005, the Company issued 150,000 warrants to a director with an
        exercise price of $0.12 per share. The Company recorded $12,291 as Paid in
        Capital for Compensatory Warrants in the Statement of Stockholders’
Equity.
   The
        $0.35
        per share warrants were issued in conjunction with Round 1 Private Placement.
        The $0.24 per share warrants relate to the Round 2 Private Placement. The
        Company has ascribed no value to the warrants associated with the Private
        Placements that are described in Note K.
   During
        2004, the Company issued 100,000 warrants to consultants and others for services
        with an exercise price of $0.01 per share. A total of $39,000 was recorded
        as
        Paid in Capital for Compensatory Warrants in the Statement of Stockholders’
Equity.
  During
        2004, the Company issued 600,000 warrants to consultants and others for services
        with an exercise price of $0.01 per share. A total of $78,000 was recorded
        as
        Paid in Capital for Compensatory Warrants in the Statement of Stockholders’
Equity.
   F-13





**HEALTH
        DISCOVERY CORPORATION**
 
 **Notes
        to Financial Statements, continued**
 
 **Note
        K - STOCKHOLDERS’ EQUITY**
 
 ***Private
        Placement - Round 1***
 From
        February through July 2004, the Company offered for sale shares of restricted
        stock to accredited investors through a private offering. The price of the
        restricted stock was $.10 per share. A total of 15,235,000 restricted common
        shares were issued to accredited investors for $1,499,900, net of issuance
        cost
        of $23,600. The issuance cost consisted of $22,400 in cash and 3,429 in common
        shares valued at $1,200, paid to consultants for assistance in selling the
        Company’s common stock. The value of Company stock was based on a contractual
        agreement of $.35 per share. In addition, each purchaser of shares of common
        stock was granted a warrant to acquire an equal number of restricted common
        shares at a fixed price of $0.35 per share until February 2007. No portion
        of
        the proceeds was assigned to the value of the warrants because the exercise
        price of the warrant exceeded the market value of the underlying common stock
        on
        the date of purchase.
 
 ***Private
        Placement - Round 2***
 From
        November 2004 through March 2005, the Company offered for sale shares of
        restricted stock to accredited investors through a private offering. The
        price
        of the restricted stock was $.16 per share. In addition, each purchaser of
        shares of common stock was granted a warrant to acquire an equal number of
        restricted common shares at a fixed price of $0.24 per share until December
        2008. No portion of the proceeds was assigned to the value of the warrants
        because the exercise price of the warrant exceeded the market value of the
        underlying common stock on the date of purchase. As of December 31, 2004,
        a
        total of 5,434,375 restricted common shares were sold to accredited investors
        for $695,761, net of issuance costs of $173,739. The issuance cost consisted
        of
        $128,950 in cash, 218,746 warrants, each entitling the holder to buy one
        share
        of the Company’s common stock for $0.24 valued at $32,812 and 34,277 shares of
        common stock valued at $11,977 which was paid or accrued to consultants for
        assistance in selling the Company’s common stock As of December 31, 2004, the
        common shares and related warrants had not been issued to the purchasers
        and are
        recorded as common shares purchased and not issued on the Company’s balance
        sheet. As of December 31, 2005, all shares previously paid for and not issued
        had been issued. The
        value
        of Company stock was derived based on a contractual arrangement of $.35 per
        share. The values of the warrants were calculated using the Black-Scholes
        option-pricing model.
 
 On
        March
        10, 2005, the Company finalized a sale of shares of restricted common stock
        to
        accredited investors through a private offering. The price of the restricted
        stock was $.16 per share. In addition, each purchaser of the shares of common
        stock received a warrant to acquire an equal number of common shares at a
        fixed
        price of $0.24 per share until December 2008. No portion of the proceeds
        was
        assigned to the value of the warrants because the exercise price of the warrant
        exceeded the market value of the underlying common stock on the date of
        purchase. A total of 13,018,750 restricted common shares were sold to accredited
        investors for $1,952,675, net of issuance costs of $162,569. The issuance
        cost
        consisted of $157,000 in cash and 15,855 shares of common stock valued at
        $5,569
        which was paid or accrued to consultants for assistance in selling the Company’s
        common stock. The
        value
        of Company stock was derived based on a contractual arrangement of $.35 per
        share. In addition, the Company issued 806,250 warrants, each entitling the
        holder to buy one share of the Company’s common stock for $0.24 per share. The
        value of the warrants totaled $120,938 and had no net impact on common stock.
        The values of the warrants were calculated using the Black-Scholes
        option-pricing model.
  During
        2005, the Company extended its fundraising efforts through the sale of common
        stock to accredited investors through a private placement. The price of the
        restricted stock was $.16 per share. In addition, each purchaser of stock
        shares
        was granted a warrant to acquire an equal number of restricted common shares
        at
        a fixed price of $0.24 per share until December 2008. No portion of the proceeds
        was assigned to the value of the warrants because the exercise price of the
        warrant exceeded the market value of the underlying common stock on the date
        of
        purchase. A total of 12,250,000 restricted common shares were sold to accredited
        investors for $1,889,700, net of cash issuance cost of $70,300. In addition,
        the
        Company issued 278,125 in warrants, each entitling the holder to buy one
        share
        of the Company’s common stock for $0.24 per share. The value of the warrants
        totaled $41,719 and had no net impact on common stock.
   F-14






**HEALTH
        DISCOVERY CORPORATION**
 
 **Notes
        to Financial Statements, continued**
 
 **Note
        K - STOCKHOLDERS’ EQUITY, CONTINUED**
 
 ***Private
        Placement - Round 2, continued***
 Under
        the
        Round 2 Private Placements, 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 within 120 days of March 10, 2005. As a result of provisions in
        certain of the Round 2 Private Placement documents, on August 7 and September
        6,
        2005, 68,125 shares of the Company’s common stock and 68,125 warrants to
        purchase the Company’s common stock were issued to certain shareholders who
        acquired in the aggregate 6,812,500 shares in Round 2 Private Placement for
        each
        date as a result of the registration statement not becoming effective by
        such
        date. The additional number of shares and warrants is based upon one percent
        of
        the number of shares and warrants purchased by such participants for each
        30-day
        period beginning on the 121 st day
        until the registration statement was declared effective. Beginning September
        7,
        2005, the number of shares and warrants to be issued increased from one percent
        to two percent for each 30-day period until the registration statement is
        declared effective. On October 6, 2005, November 9, 2005, and December 9,
        2005,
        an additional 136,250, 136,250, and 131,250, respectively, in penalty shares
        and
        warrants were issued. In addition, certain shareholders who purchased 6,812,500
        shares of the Company’s common stock have anti-dilution rights until the
        registration statement has been effective for 365 days. If the Company sells
        shares of the Company’s common stock at a price less than $.16 per share or
        issues warrants to purchase the Company’s common stock at an exercise price less
        than $.24 per share, certain shareholders will receive an amount of shares
        or
        warrants at no cost so that those shareholders have no diluted effect from
        the
        sales of common stock or warrant issuances. Shares, options or warrants issued
        to employees, consultants and directors are excluded from the anti-dilutive
        clause. No expense has been recorded upon the issuance of the additional
        shares.
 
 ***Shares
        Issued in Exchange for Services***
 During
        2004, the Company issued 222,372 common stock shares to consultants for services
        and 53,561 shares to settle accrued liabilities for services. The shares
        were
        granted at the fair market value of the services provided. Total consultant
        expense of $41,800 was recorded for the issuance. In addition, under a
        consulting agreement, the Company was obligated to issue an additional $60,000
        of shares (amounting to 254,572 shares) to consultants at December 31, 2004.
        The
        expense is accrued for at December 31, 2004 in accrued expenses on the Company’s
        balance sheet and a corresponding charge to consultant expense in the statement
        of operations. Warrants with a fair value of $117,000 were issued to consultants
        and others for services performed on behalf of the Company, and are included
        in
        the Statement of Changes in Stockholders’ Equity.
 
 The
        Company issued 200,000 shares of the Company’s common stock in 2004 to two
        individuals who have agreed to serve on the Company’s Scientific Advisory
        Committee. The market value of the shares at the time of issuance was $37,000
        and was recorded as compensation expense in the statement of operations.
 
 During
        2005, the Company issued 2,039,453 common stock shares to consultants for
        services and 308,133 shares to settle accrued liabilities for services totaling
        $78,746. The shares were granted at the fair market value of the services
        provided as determined by the consultants. Total consultant expense of $381,876
        was recorded for the issuances in 2005.
 
 ***Stock
        Cancellation***
 During
        2004, certain officers and former officers and former directors of the Company
        surrendered 3,466,036 shares of the Company’s common stock because the issuance
        of the shares was not properly authorized. The shares were immediately
        cancelled, and the Company gave no consideration for these shares.
 
 In
        2005,
        consultants who had previously been issued shares of stock in return for
        services provided rescinded 1,580,532 of these shares. The Company recorded
        a
        $300,000 credit to consulting expense as a result of this action.
   F-15
   **HEALTH
        DISCOVERY CORPORATION**
 
 **Notes
        to Financial Statements, continued**
 
 **Note
        L - GOING CONCERN**
 
 The
        accompanying financial statements have been prepared in conformity with
        principles of accounting applicable to a going concern, which contemplates
        the
        realization of assets and the liquidation of liabilities in the normal course
        of
        business. Limited revenue has been derived since inception, and the Company
        has
        not yet generated sufficient working capital to support its operations. The
        Company’s ability to continue as a going concern is dependent, among other
        things, on its ability to reduce certain costs and obtain new contracts to
        eventually attain a profitable level of operations.
 
 The
        Company has begun licensing the technology underlying several of its patents
        and
        providing supporting services related to the application of such technology
        that
        is resulting in ongoing revenue. In addition, management has successfully
        negotiated with its debt holders, which resulted in the deferment of cash
        payments on debt until October 2007. In late 2005, management has instituted
        a
        cost reduction program whereby the salaries of company employees, including
        senior management, have been reduced or deferred. Based on these developments,
        management believes revenue generation will continue, additional licensing
        agreements will be obtained in the near-term and non-revenue generating costs
        will be controlled.
      F-16