**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
  **FORM
        10-QSB**
  
 **[X]**  Quarterly
        report under Section 13 or 15(d) of the Securities Exchange Act of
        1934
 For
        the
        quarterly period ended ****June 30,
        2006
 
 [   ]  Transition
        report under Section 13 or 15(d) of the Exchange Act
 For
        the
        transaction period from ______ to _______
  Commission
                  file number 333-62216
 
 **HEALTH
                  DISCOVERY CORPORATION**(Exact
                  name of small business issuer as specified in its charter)
   
 Texas
              
              74-3002154(State
                  or other jurisdiction of incorporation or organization)
              
              (IRS
                  Employer Identification No.)
  
 5501
                    1⁄2 Abercorn Street
                  Savannah,
                    Georgia
              
              31405(Address
                  of principal executive offices)
              
              (Zip
                  Code)
  912-352-7488(Issuer's
                  telephone number, including area
                  code)
   
 (Former
                  name, former address and former fiscal year,
                if
                  changed since the last report)
  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 [  ]
  Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).
 Yes
          [
 ] No [X]
   **APPLICABLE
        ONLY TO ISSUERS INVOLVED IN BANKRUPTCY**
 **PROCEEDINGS
        DURING THE PRECEDING FIVE YEARS**
   Check
        whether the registrant filed all documents and reports required to be filed
        by
        Section l2, 13 or 15(d) of the Exchange Act after the distribution of securities
        under a plan confirmed by a court. Yes [  ] No [  ]
   **APPLICABLE
        ONLY TO CORPORATE ISSUERS**
   State
        the
        number of shares outstanding of each of the issuer's classes of common equity,
        as of the latest practicable date: 116,163,384 shares of common stock, no
        par
        value, were issued and outstanding as of August 10, 2006.
   Transitional
        Small Business Disclosure Format (Check one): Yes [  ] No [X]







**TABLE
      OF CONTENTS**





PART
                I
            FINANCIAL
                INFORMATION
            PageItem
                1.
            Financial
                StatementsBalance
                Sheet
            1Statements
                of Operations
            2Statements
                of Cash Flows
            3Notes
                to Unaudited Financial Statements
            4-7Item
                2.
            Management’s
                Discussion andAnalysis or
                Plan of Operation
            7-11Item
                3.
            Controls
                and Procedures
            11PART
                II
            OTHER
                INFORMATIONItem
                1.
            Legal
                Proceedings
            11-12Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            12Item
                6.
            Exhibits
            12-13Signatures
            14

















**HEALTH
      DISCOVERY CORPORATION**





Balance
      Sheet


(unaudited)







AssetsJune
                  30,2006Current
                  AssetsCash
              
              $
              244,078Prepaid
                  Expenses and Other Assets
              
              
              37,020Total
                  Current Assets
              
              
              281,098Equipment,
                  Less Accumulated Depreciation of $10,168
              
              
              10,046Other
                  AssetsPatents,
                  Less Accumulated Amortization of $548,895
              
              
              3,436,900Total
                  Assets
              
              $
              3,728,044Liabilities
                  and Stockholders’ EquityCurrent
                  LiabilitiesAccounts
                  Payable - Trade
              
              $
              355,559Accrued
                  Liabilities
              
              
              227,036Total
                  Current Liabilities
              
              
              582,595Convertible
                  Notes Payable
              
              
              665,643Long-Term
                  Debt
              
              
              321,911Total
                  Liabilities
              
              
              1,570,149CommitmentsStockholders’
                  EquityCommon
                  Stock, No Par Value, 200,000,000 Shares Authorized116,163,384
                  Shares Issued and Outstanding
              
              
              10,272,316Accumulated
                  Deficit
              
              
              (8,114,421
              )Total
                  Stockholders' Equity
              
              
              2,157,895Total
                  Liabilities and Stockholders' Equity
              
              $
              3,728.044





See
        accompanying notes to unaudited financial statements.





1





**HEALTH
      DISCOVERY CORPORATION**


Statements
      of Operations


(unaudited)


For
      the Six Months Ended June 30, 2006 and 2005





Three
              
              Three
              
              Six
              
              SixMonths
              
              Months
              
              Months
              
              MonthsEnded
              
              Ended
              
              Ended
              
              EndedJune
                  30,
              
              June
                  30,
              
              June
                  30,
              
              June
                  30,2006
              
              2005
              
              2006
              
              2005Revenues:Licensing
              
              $
              70,000
              
              
              -
              
              
              175,000
              
              
              -Total
                  Revenues
              
              
              70,000
              
              
              -
              
              
              175,000
              
              
              -Cost
                  of Sales:Internal
                  Development
              
              
              9,654
              
              
              -
              
              
              9,654
              
              
              -Total
                  Cost of Sales
              
              
              9,654
              
              
              -
              
              
              9,654
              
              
              -Gross
                  Profit
              
              
              60,346
              
              
              -
              
              
              165,346
              
              
              -Operating
                  Expenses:Amortization
              
              
              65,679
              
              
              62,778
              
              
              131,359
              
              
              119,597Professional
                  and Consulting Fees
              
              
              174,036
              
              
              384,057
              
              
              747,265
              
              
              832,099Compensation
              
              
              200,724
              
              
              169,612
              
              
              560,022
              
              
              369,155Other
                  General and Administrative Expenses
              
              
              95,204
              
              
              198,166
              
              
              335,415
              
              
              404,531Total
                  Operating Expenses
              
              
              535,643
              
              
              814,613
              
              
              1,774,061
              
              
              1,725,382Loss
                  From Operations
              
              
              (475,297
              )
              
              (814,613
              )
              
              (1,608,715
              )
              
              (1,725,382
              )Other
                  Income (Expense)Interest
                  Income
              
              
              3,169
              
              
              -
              
              
              7,999
              
              
              -Gains
                  on Restructuring of Accounts Payable
              
              
              -
              
              
              -
              
              
              77,546
              
              
              -Interest
                  Expense
              
              
              (21,107
              )
              
              (14,391
              )
              
              (40,852
              )
              
              (31,542
              )Total
                  Other Income (Expense)
              
              
              (17,938
              )
              
              (14,391
              )
              
              44,693
              
              
              (31,542
              )Net
                  Loss
              
              $
              (493,235
              )
              
              (829,004
              )
              
              (1,564,022
              )
              
              (1,756,924
              )Weighted
                  Average Outstanding Shares
              
              
              116,113,384
              
              
              99,826,460
              
              
              115,534,813
              
              
              92,531,807Loss
                  Per Share
              
              $
              (.00
              )
              
              (.01
              )
              
              (.01
              )
              
              (.02
              )





See
      accompanying notes to unaudited financial statements.




2


**HEALTH
      DISCOVERY CORPORATION**





Statements
      of Cash Flows


(unaudited)


For
      the Six Months Ended June 30, 2006 and 2005






Six
                  Months
              
              
              
              Six
                  MonthsEnded
              
              
              
              EndedJune
                  30,
                2006
              
              
              
              June
                  30,
                2005Cash
                  Flows From Operating Activities:Net
                  Loss
              
              $
              (1,564,022
              )
              
              
              
              
              (1,756,924
              )Adjustments
                  to Reconcile Net Loss to Net CashUsed
                  by Operating Activities:Stock-based
                  compensation expense
              
              
              220,158
              
              
              
              
              
              -Stock
                  issued for professional and consulting services
              
              
              365,743
              
              
              
              
              
              -Services
                  Exchanged for Common Stock
              
              
              -
              
              
              
              
              
              178,876Gains
                  on Restructuring of Accounts Payable
              
              
              (77,546
              )
              
              
              
              
              -Depreciation
                  and Amortization
              
              
              134,868
              
              
              
              
              
              121,720Increase
                  in Employee Advances
              
              
              -
              
              
              
              
              
              (11,216
              )Increase
                  in Prepaid Expenses and Other Assets
              
              
              (19,312
              )
              
              
              
              
              (18,462
              )Increase
                  in Accounts Payable - Trade
              
              
              220,587
              
              
              
              
              
              43,042Increase
                  in Accrued Liabilities
              
              
              163,717
              
              
              
              
              
              28,510Net
                  Cash Used by Operating Activities
              
              
              (555,807
              )
              
              
              
              
              (1,414,454
              )Cash
                  Flows From Investing Activities:Purchase
                  of Equipment
              
              
              (502
              )
              
              
              
              
              (5,881
              )Amounts
                  Paid to Acquire Patents
              
              
              -
              
              
              
              
              
              (293,738
              )Net
                  Cash Used by Investing Activities
              
              
              (502
              )
              
              
              
              
              (299,619
              )Cash
                  Flows From Financing Activities:Repayments
                  of Notes Payable
              
              
              (26,780
              )
              
              
              
              
              (293,279
              )Proceeds
                  from Sales of Common Stock, Net
                Proceeds
                  from Exercise of Stock Options and Warrants
              
              
              100,000
                8,000
              
              
              
              
              
              2,358,500
                -Net
                  Cash Provided by Financing Activities
              
              
              81,220
              
              
              
              
              
              2,065,221Net
                  Increase (Decrease) in Cash
              
              
              (475,089
              )
              
              
              
              
              351,148Cash,
                  at Beginning of Period
              
              
              719,167
              
              
              
              
              
              163,477Cash,
                  at End of Period
              
              $
              244,078
              
              
              
              
              
              514,625Non-Cash
                  Investing and Financing Transactions:Patents
                  Purchased Using Debt
              
              $
              -
              
              
              
              
              
              185,272Stock
                  Issued for Professional and Consulting Services
              
              $
              365,743
              
              
              
              
              
              238,276Stock-based
                  compensation expense
              
              $
              220,158
              
              
              
              
              
              -Non-cash
                  Stock Issuance Costs
              
              $
              -
              
              
              
              
              
              166,451Warrants
                  Issued in Restructuring of Accounts Payable
              
              $
              55,454
              
              
              
              
              
              -Stock
                  Issued for Convertible Notes Payable
              
              $
              -
              
              
              
              
              
              409,616Supplemental
                  disclosures of cash flow information:Cash
                  Paid for Interest
              
              $
              1,056
              
              
              
              
              
              2,774




See
        accompanying notes to unaudited financial statements.






3








**HEALTH
      DISCOVERY CORPORATION**





**Notes
      to Unaudited Financial Statements**





**Note
      A - BASIS OF PRESENTATION**




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.
 
 The
        accounting principles followed by the Company and the methods of applying
        these
        principles conform with accounting principles generally accepted in the United
        States of America (GAAP). In preparing financial statements in conformity
        with
        GAAP, management is required to make estimates and assumptions that affect
        the
        reported amounts in the financial statements. Actual results could differ
        significantly from those estimates.
 
 The
        interim financial statements included in this report are unaudited but reflect
        all adjustments which, in the opinion of management, are necessary for a
        fair
        presentation of the financial position and results of operations for the
        interim
        periods presented. All such adjustments are of a normal recurring nature.
        The
        results of operations for the period ended June 30, 2006 are not necessarily
        indicative of the results of a full year’s operations. For further information,
        refer to the financial statements and footnotes included in the Company’s annual
        report on Form 10-KSB for the year ended December 31, 2005.
 
 **RECLASSIFICATIONS**
 
 Certain
        amounts from 2005 have been reclassified to conform to the presentation used
        in
        2006.
 
 **Note
        B - 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.
 
 **Note
        C -** **STOCK-BASED
        COMPENSATION**
  Effective
        January 1, 2006, we adopted the provisions of Statement of Financial Accounting
        Standards (“SFAS”) No. 123(R), *Share-Based
        Payment* (“SFAS
        No. 123(R)”) using the modified prospective transition method provided for under
        the standard. SFAS 123(R) establishes accounting for stock-based awards
        exchanged for employee services. Accordingly, stock-based compensation cost
        is
        measured at grant date, based on the fair value of the award, and is recognized
        as expense over the employee’s requisite service period. We had previously
        applied Accounting Principles Board (“APB”) Opinion No. 25, *Accounting
        for Stock Issued to Employees* ,
        and
        related interpretations and provided the required pro forma disclosures of
        SFAS
        No. 123.
  The
        following table illustrates the effect on net loss and loss per share if
        the
        Company had applied the fair value recognition provisions of SFAS No. 123, *Accounting
        for Stock-Based Compensation* ,
        to
        stock-based employee compensation for periods presented prior to the Company’s
        adoption of Statement 123(R):





4







**HEALTH
      DISCOVERY CORPORATION**





**Notes
      to Unaudited Financial Statements, continued**






**Note
        C -** **STOCK-BASED
        COMPENSATION, continued**
 
 Three
                  months ended
              
              Six
                  months endedJune
                  30, 2005
              
              June
                  30, 2005Net
                  loss as reported
              
              $
              (829,004
              )
              $
              (1,756,924
              )Deduct:
                  Stock-based Expense
                Determined
                  Under Fair Value Based
                Method
                  for Employee Stock Options
              
              
              -
              
              
              -Proforma
                  Net Loss
              
              $
              (829,004
              )
              $
              (1,756,924
              )Stock-based
                  Expense Included in Net Loss
              
              $
              163,276
              
              $
              238,276Loss
                  Per Share:Basic
                  - As Reported
              
              $
              (.01
              )
              $
              (.02
              )Basic
                  - Proforma
              
              $
              (.01
              )
              $
              (.02
              )
 
 Stock-based
        expense included in our net loss for the three and six months ended June
        30,
        2006 consisted of $90,314 and $585,901, respectively, in compensatory warrants
        and options for professional and consulting services and compensation.
        Stock-based expense included in our net loss for the three and six months
        ended
        June 30, 2005 consisted of $163,276 and $238,276, respectively, for the issuance
        of common stock to consultants for services.
 
 As
        of
        June 30, 2006, there was approximately $621,012 of unrecognized cost related
        to
        stock option and warrant grants. The cost is to be recognized over the remaining
        vesting periods that averages approximately 2 years.
 
 The
        Company granted 2,000,000 options during the first quarter of 2006. The fair
        value of each option granted in 2006 was $0.11 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 5.00%, an expected life
        of 10
        years, and volatility of 133%. Expected option lives and volatilities used
        in
        the fair valuation calculations are based on historical data of the Company
        and
        the related expense is recognized on a straight-line basis over the vesting
        period. No options were granted in the second quarter of 2006 or during the
        six
        month period ending June 30, 2005.
 
 The
        following schedule summarizes stock option activity for the six months ended
        June 30, 2006:
 
 Option
              
              Weighted
                AverageShares
              
              Exercise
                  PriceOutstanding,
                  December 31, 2005
              
              
              2,500,000
              
              $
              0.08Granted
              
              
              2,000,000
              
              
              0.11Exercised
              
              
              (600,000
              )
              
              0.01Forfeited
              
              
              (400,000
              )
              
              0.10Outstanding,
                  June 30, 2006
              
              
              3,500,000
              
              $
              0.11
 
 The
        weighted average remaining life of the outstanding options at June 30, 2006
        is
        10 years.
 
 There
        were 1,750,000 options exercisable at June 30, 2006. The exercisable options
        have a weighted average exercise price of $0.11 and a weighted average remaining
        life of 10 years.





5








**HEALTH
      DISCOVERY CORPORATION**





**Notes
      to Unaudited Financial Statements, continued**






**Note
        C -** **STOCK-BASED
        COMPENSATION, continued**
 
 Information
        about warrants outstanding at June 30, 2006 is summarized below:
 
 
 **Exercise
                  Prices**
              
              **Number**
                **Outstanding**
              
              **Weighted-**
                **Average**
                **Remaining**
                **Contractual
                  Life (years)**
              
              **Number**
                **Exercisable**
              
              **Weighted
                  Average Remaining Contractual Life (years) of**
                **Exercisable****Warrants**$0.01
              
              
              1,200,000
              
              
              1
              
              
              600,000
              
              
              1$0.08
              
              
              600,000
              
              
              1
              
              
              600,000
              
              
              1$0.10
              
              
              565,000
              
              
              3
              
              
              365,000
              
              
              3$0.11
              
              
              1,000,000
              
              
              3
              
              
              500,000
              
              
              3$0.12
              
              
              150,000
              
              
              3
              
              
              150,000
              
              
              3$0.13
              
              
              5,500,000
              
              
              5
              
              
              2,500,000
              
              
              3$0.15
              
              
              1,000,000
              
              
              3
              
              
              1,000,000
              
              
              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
              
              
              158,796,250
              
              
              
              
              
              54,496,250
  During
        2006, the Company issued 2,600,000 warrants to consultants and other service
        providers with a weighted-average exercise price of $0.13 per share. A total
        of
        $258,724 was recorded as Paid in Capital for Compensatory Warrants. The warrants
        became exercisable upon issuance.
  The
        Company issued 3,000,000 warrants to two directors with an exercise price
        of
        $0.13 per share. A total of $29,625 was recorded as Paid in Capital for
        Compensatory Warrants. The warrants vest at a rate of 500,000 warrants (250,000
        warrants for each director) after satisfactory completion of each 6 months
        of
        service until 3 years of service has been completed. The expense is being
        recorded over the service period.
  The
        Company issued 1,000,000 warrants to a director with an exercise price of
        $0.15
        per share in conjunction with a common stock sale. The Company has ascribed
        no
        value to the warrants associated with the common stock sale described in
        Note
        E.
  The
        Company issued 765,000 warrants to three of its service providers with a
        weighted-average exercise price of $0.11 in settlement of certain accounts
        payable due to the service providers. The Company recorded a total of $55,454
        as
        Paid in Capital for Compensatory Warrants and recognized total gains of $77,546
        as a result of the restructuring the accounts payable amounts.
  In
        addition, the Company recorded a total of $16,916 during 2006 as Paid in
        Capital
        for Compensatory Warrants associated with previous warrant grants that have
        not
        fully vested. The expense is being recorded over the service
        period.
  During
        the second quarter of 2006, the Company issued 500,000 warrants to two employee
        members of its Scientific Advisory Board. These warrants vest over a one-year
        period and have an exercise price of $0.11. The Company also issued 200,000
        warrants to a service provider in exchange for professional services. These
        warrants vest over a two-year period and have an exercise price of $0.10.
        The
        estimated value of these warrants is being recorded to expense over the
        respective service periods.
  **Note
        D - 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 as other
        assets
        $3,436,900 in patents and patent related costs, net of $548,895 in accumulated
        amortization, at June 30, 2006.


6


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


**Note
      D -****PATENTS,
      continued**


Amortization
          charged to operations for the six months ended June 30, 2006 and 2005 was
          $131,359 and $119,597, respectively. Amortization charged to operations
          for the
          three months ended June 30, 2006 and 2005 was $65,679 and $62,778, 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
          E - STOCKHOLDERS’ EQUITY**
 
 During
          the first quarter of 2006, the Company issued 600,000 shares of its common
          stock
          upon the exercise of stock options. Proceeds from the exercise totaled
          $6,000.
 
 In
          addition, the Company sold 1,000,000 shares of its common stock to one
          of its
          directors for $100,000. The shares were sold for $0.10 per share which
          was the
          closing price of the stock on the date of the sale. As part of the purchase,
          the
          director also received warrants to purchase an additional 100,000 shares
          of the
          Company’s common stock at a fixed price of $0.15 per share until December 2008.
          No portion of the proceeds was assigned to the value of the warrants because
          the
          exercise price of the warrants exceeded the market value of the underlying
          common stock on the date of purchase.
 
 During
          the second quarter of 2006, 200,000 warrants were exercised at $0.01 each.
          The
          Company issued 200,000 shares of its common stock and recorded the proceeds
          of
          $2,000.
 
 
 **Item
          2.**  **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, the Company
          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.
  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.





7




**Three
        Months Ended June 30, 2006 Compared with Three Months Ended June 30,
        2005**
  **Revenue**
  For
        the
        three months ended June 30, 2006, revenue was $70,000 compared with no revenue
        for the three months ended June 30, 2005, which was reported as a developmental
        stage company. Revenue was recognized for licensing and development
        fees.
  During
        most of the second quarter and first half of 2006, the Company was engaged
        in
        intensive negotiations with a U.S. medical diagnostic company for exclusive,
        worldwide licensing and product development agreements in the tissue- and
        serum-based cancer diagnostics field. The potential revenue was so significant
        and dependent in large part on the exclusive nature of the
        relationship  that
        the
        Company suspended and did not initiate new discussions with other parties
        in
        order to preserve the exclusivity feature for this company. Just prior to
        closing, this  prospective
        licensee  abruptly
        suspended final negotiations  pending
        the resolution of certain of its  internal
        issues unrelated to the transaction. As a result, because the Company generated
        no revenue from this company with respect to the contemplated transaction
        or
        from any new sources during such period,  and
        also
        expended significant cash resources, our cash position declined. The Company
        cannot say if this company's internal issues will be resolved or, if they
        are,
        whether this transaction will be completed  on
        terms
        favorable to the Company or at all. In any event, the Company’s management
        has now resumed its business development strategy and reduced certain expense
        categories  in
        an
        attempt to safeguard its financial viability.
 
 **Cost
        of Sales and Gross Margin**
  Internal
        development costs of $9,654 were recorded as cost of sales for the second
        quarter of 2006. 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 such direct costs were incurred during the
        second
        quarter of 2005.
  **Operating
        Expenses**
  Amortization
        expense was $65,679 for the second quarter of 2006 compared with $62,778
        for the
        second quarter of 2005. This increase was due to amortization being charged
        in
        2006 for intangibles acquired throughout 2005.
  Professional
        and consulting fees totaled $174,036 for the second quarter of 2006 compared
        with $384,057 for the second quarter of 2005. These fees, related to legal,
        accounting and scientific activities, were lower in 2006 because of efforts
        to
        control costs related to regulatory filing activity, patent protection efforts,
        and general corporate legal and accounting work.
  Compensation
        of $200,724 for the second quarter of 2006 was higher than the $169,612 reported
        for the second quarter of 2005. This increase was due to the implementation
        of
        SFAS 123(R) favorably offset by a reduction in salaries due to reduced
        headcount.
  Other
        general and administrative expenses decreased from $198,166 for the second
        quarter of 2005 to $95,204 for the second quarter of 2006. This decrease
        was
        largely due to increased cost containment efforts undertaken throughout the
        period.
  **Loss
        from Operations**
  The
        loss
        from operations for the second quarter of 2006 was $475,297 compared to $814,613
        for the second quarter of 2005. This reduction in loss was largely due to
        increased cost reduction efforts as enumerated above.
 
 **Other
        Income and Expense**
 
 Interest
        income was $3,169 for the second quarter of 2006. No interest income was
        earned
        in 2005.
  Interest
        expense was $21,107 in the second quarter of 2006 compared with $14,391 in
        the
        second quarter of 2005. This increase was due to interest being charged in
        2006
        for the debt assumed in 2005, as well as the higher interest rate associated
        with the renegotiated promissory notes.




8






**Net
      Loss**


The
        net
        loss for the second quarter of 2006 was $493,235 compared to $829,004 for
        the
        second quarter of 2005. The reduced loss was due to the diminished loss from
        operations, offset by the increased interest expense.
 
 Net
        loss
        per share was $0.00 for the second quarter of 2006 compared to the net loss
        per
        share of $0.01 for 2005. The smaller net loss per share in 2006 was due to
        the
        smaller net loss and the increased average number of shares outstanding in
        2006.
  **Six
        Months Ended June 30, 2006 Compared with Six Months Ended June 30,
        2005**
  **Revenue**
  For
        the
        six months ended June 30, 2006, revenue was $175,000 compared with no revenue
        for the six months ended June 30, 2005, which was reported as a developmental
        stage company. Revenue was recognized for licensing and development
        fees.
  **Cost
        of Sales and Gross Margin**
  Cost
        of
        sales for the 2006 period was $9,654. 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 such direct costs were
        incurred during the six month period ending June 30, 2005.
  **Operating
        Expenses**
  Amortization
        expense was $131,359 for the six months ended June 30, 2006 compared with
        $119,597 for the comparable period in 2005. This increase was due to
        amortization being charged in 2006 for intangibles acquired during
        2005.
  Professional
        and consulting fees totaled $747,265 for six months ended June 30, 2006 compared
        with $832,099 for the six months ended June 30, 2005. These fees, related
        to
        legal, accounting and scientific activities, were lower in 2006 because of
        continued efforts to control costs related to regulatory filing activity,
        patent
        protection efforts, and general corporate legal and accounting work. The
        amount
        for 2006 includes $421,198 in compensatory warrants issued to consultants
        for
        services. No compensatory warrants were issued to consultants for services
        during the six months ended June 30, 2005.
  Compensation
        of $560,022 for the six months ended June 30, 2006 was higher than the $369,155
        reported for the comparable period of 2005. This increase was due to the
        implementation of SFAS 123(R) favorably offset by a reduction in salaries
        due to
        reduced headcount.
  Other
        general and administrative expenses decreased from $404,531 in 2005 to $335,415
        in 2006. This decrease was largely due to expense reduction efforts throughout
        the entire 2006 period.
  **Loss
        from Operations**
  The
        loss
        from operations for the six months ended June 30, 2006 was $1,608,715 compared
        to $1,725,382 for the prior year. The decreased loss was due to the factors
        enumerated above.
  **Other
        Income and Expense**
  Interest
        income was $7,999 for the six months ended June 30, 2006. No interest income
        was
        earned in 2005.
  A
        gain on
        the restructuring of accounts payable of $77,546 was recorded in the first
        quarter of 2006 to reflect common stock warrants issued in payment of
        liabilities. No such amount was recorded in the comparable 2005
        period.
  Interest
        expense was $40,852 in 2006 compared with $31,542 in 2005. This increase
        was due
        to interest being charged in 2006 for the debt assumed in 2005, as well as
        the
        higher interest rate associated with the renegotiated promissory
        notes.


9






**Net
        Loss**
  The
        net
        loss for the six months ended June 30, 2006 was $1,564,022 compared to
        $1,756,924 for the six months ended June 30, 2005. The reduced loss was due
        to
        the smaller loss from operations and increased net other income.
 
 Net
        loss
        per share was $0.01 and $0.02 for the six months ended June 30, 2006 and
        2005,
        respectively. The smaller net loss in 2006 compared to that in 2005 was due
        to
        the smaller net loss and the increased average number of shares outstanding
        in
        2006.
 
 **Liquidity
        and Capital Resources**
  At
        June
        30, 2006, the Company had $244,078 in available cash. Cash used by operating
        activities was $555,807. This was due primarily to the net loss of $1,564,022;
        however net non-cash expenses and changes in balance sheet accounts of
        approximately $1,008,000, favorably impacted the computation of the net cash
        used. Cash used by investment activities was $502 due to the acquisition
        of
        assets. Net cash provided by financing activities was $81,220 due to the
        proceeds from the sale of common stock and the exercise of stock options
        and
        warrants, less repayment of debt totaling $26,780.
  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.
  The
        following table summarizes the due dates of our contractual obligations.
        The
        Company has no long term lease agreements in effect as of June 30,
        2006.
  Total
              
              Less
                  than
                1
                  Year
              
              1-3
                YearsConvertible
                  Notes Payable
              
              $
              665,643
              
              $
              -
              
              $
              665,643Term
                  Debt
              
              
              321,911
              
              
              -
              
              
              321,911Total
              
              $
              987,554
              
              $
              -
              
              $
              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 2006 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, reduction in consulting
        payments, negotiated settlements with creditors whereby we substituted equity
        instruments for amounts owed, and a heightened scrutiny of all potential
        expenditures.
  Should
        it
        prove necessary, the Company may also consider such alternatives as raising
        additional equity through private placements and/or debt offerings. Although
        this raises doubt with respect to our ability to operate as a going concern,
        the
        Company believes that it has sufficient capability to operate through the
        next
        twelve months.
  **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.
 
 **Subsequent
        Events and Developments**
 
 After
        final negotiations for exclusive licensing and development agreements with
        a
        U.S. medical diagnostics company were suspended late in the second quarter
        of
        2006, the Company immediately redirected its attention to other
        revenue-generating opportunities in licensing, product development and
        consulting. Below is a summary of the status of several of these
        undertakings.
  On
        June
        26, 2006, the Company filed lawsuits in the United States District Court
        for the
        Eastern District of Texas against Ciphergen Biosystems, Inc. and Equbits
        LLC for
        infringing certain of the Company’s patents
        related
        to SVM technology.  The Company granted a request by Equbits for an
        extension to respond, and is now in preliminary discussions with Equbits
        to
        resolve this matter.  Ciphergen has also requested an extension to respond,
        which the Company has granted.


10






On
              August
              1, 2006, the Company and Bruker Daltronics Inc. signed a non-exclusive
              licensing
              agreement for the use of the Company’s
 patented
              SVM technology for Bruker’s ClinProTool diagnostic equipment.
  On
              August
              3, 2006, the Company signed an agreement with IPotential, LLC, a San
              Mateo,
              California-based firm, to market for the first time the Company’s patented SVMs
              and other intellectual property within the information technology and
              communications field.
  On
              August 14, 2006, the Company delivered to a German
              biotechnology company a draft license agreement comporting with a previously
              agreed upon term sheet for a non-exclusive license for the use of the
              Company’s
              patented SVM technology in the field of methylation and genomic
              analysis.
  In
              the
              third quarter of 2006, the Company advanced to a substantive licensing
              and
              product development negotiations with five pharmaceutical and medical
              diagnostic companies domiciled variously in Canada, Holland and the
              U.S. with
              respect to the Company’s
 SVMs,
              prostate cancer biomarkets and BPH biomarkers.  While there is no assurance
              of any favorable outcome, management believes that reaching satisfactory
              agreements with one or more of these companies would positively affect
              the
              Company.
 
 **Forward-Looking
          Statement**
 
 This
          Report contains statements which constitute forward-looking statements
          within
          the meaning of Section 27A of the Securities Act of 1933 and Section 21E
          of the
          Securities Exchange Act of 1934. These statements appear in a number of
          places
          in this Report and include all statements regarding the intent, belief
          or
          current expectations of the Company, its directors or its officers with
          respect
          to, among other things: (i) the Company’s financing plans; (ii) trends affecting
          the Company’s financial condition or results of operations; (iii) the Company’s
          growth strategy and operating strategy; and (iv) the declaration and payment
          of
          dividends. Investors are cautioned that any such forward-looking statements
          are
          not guarantees of future performance and involve risks and uncertainties,
          and
          that actual results may differ materially from those projected in the
          forward-looking statements as a result of various factors discussed herein
          and
          those factors discussed in detail in the Company’s other filings with the
          Securities and Exchange Commission.
 
 **Item
          3. Controls and Procedures.**
 
 As
          of
          June 30, 2006 (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.
  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.
 
 **PART
          II—OTHER INFORMATION**
 
 **Item
          1. 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.


11






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
        2. Unregistered Sales of Equity Securities and Use of
        Proceeds.**
 
 During
        the second quarter of 2006, the Company issued 500,000 warrants to two employee
        members of its Scientific Advisory Board. These warrants vest over a one-year
        period and have an exercise price of $0.11. The Company also issued 200,000
        warrants to a service provider in exchange for professional services. These
        warrants vest over a two-year period and have an exercise price of $0.10. 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. Exhibits.**





The
      following exhibits are attached hereto or incorporated by reference herein
      (numbered to correspond to Item 601(a) of Regulation S-B, as promulgated by
      the
      Securities and Exchange Commission) and are filed as part of this Form
      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 Form 10-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, 2001.4.1
                  (b)
              Copy
                  of Specimen Certificate for shares of common stock. Registrant
                  incorporates by reference Exhibit 4.1 (b) to Form 10-KSB, filed March
                  30, 2004.4.2
              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, File No. 333-62216, 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. *
   12
  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, 2005.10.7
              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, 2006.31.1
              Rule
                  13a-14(a)/15(d)-14(a) Certifications of Chief Executive
                  Officer.31.2
              Rule
                  13a-14(a)/15(d)-14(a) Certifications of Principal Financial
                  Officer.32.1
              Section
                  1350 Certification of Chief Executive Officer.32.2
              Section
                  1350 Certification of Principal Financial
                  Officer.







13








SIGNATURES





In
      accordance with the requirement of the Exchange Act, the Registrant caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly
      authorized.





Health Discovery Corporation


Registrant





Date:
      August 14,
      2006    /s/
      Stephen D. Barnhill
      M.D.


Printed Name: Stephen D. Barnhill M.D.


Title: Chief Executive Officer





Date:
      August 14,
      2006    /s/
      Daniel R.
      Furth


Printed Name: Daniel R. Furth


Title: Chief Financial Officer / Secretary

















14