Summary of HEALTH DISCOVERY CORP

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

Corporate Overview

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

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

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

Operational Activities

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

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

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

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

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

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

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

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

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

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

As we disclosed in our Form 10-K for the fiscal year ended December 31, 2007, we were in discussions regarding the licensing of and product development using SVMs and FGMs in diagnostic radiology, including mammography, PET scans, CT scans, MRI and other radiological images. In August 2008, we entered into a licensing agreement with Smart Personalized Medicine, LLC, a company founded by our former director, Dr. Richard Caruso. Under the terms of this agreement, we will work to develop a superior breast cancer prognostic test using our SVM technology in collaboration with a prominent cancer research hospital. In exchange for a license to use our SVM technology, we received a 15% equity position in Smart Personalized Medicine, LLC (which will remain undiluted until there is at least $5 million in investment from investors in Smart Personalized Medicine, LLC) and a per test royalty up to 7.5% based on net proceeds received from the sale of the new breast cancer prognostic test. After months of negotiations, Smart Personalized Medicine, LLC is finalizing development and commercialization discussions with third parties, including one or more prestigious U.S. academic cancer centers as well as national clinical laboratories, for developing and commercializing a new state-of-the-art prognostic test for breast cancer. Once each of these negotiations are finalized and signed, of which we can make no assurance, Smart Personalized Medicine, LLC will immediately begin developing the SVM-based prognostic test for breast cancer on tissue biopsy specimens. Smart Personalized Medicine, LLC believes that there is a possibility the new breast cancer test can be ready for clinical laboratory commercialization within the next twelve months. An estimated 221,000 women are diagnosed with breast cancer in the United States each year, and one in eight U.S. women will have breast cancer in her lifetime. Breast cancer is the most common cancer among women and the second-largest cancer killer among women. Currently, the breast cancer prognostic market is projected to be about $300 to $400 million. Smart Personalized Medicine, LLC expects that its new SVM-based prognostic test for breast cancer can provide physicians and their patients a way to better determine the probability of relapse; allowing patients with good prognosis results an opportunity to avoid unnecessary expensive and traumatic chemotherapy treatments.

In July 2008, the Company and DCL Medical Laboratories LLC, a full-service clinical laboratory focused on women's health, entered into a development and license agreement for the collaborative development and commercialization of SVM-based computer assisted diagnostic tests for the independent detection of ovarian, cervical and endometrial cancers. Through the application of the advanced technology of pattern recognition, this new SVM-based system is intended to further improve the sensitivity of the Pap Smear test and augment the recent improvements of computer guided screening that have already significantly improved detection rates. In addition, images and interpretative data from this new SVM-based system may now be transmitted electronically, thus allowing remote review and collaborative interpretation. The Company has now completed development of most of the individual modules for the SVM-based computer assisted diagnostic test for the analysis of cervical cells in Pap Smears and has implemented a large number of image processing operations using various spatial, spectral, morphological, statistical, and other techniques. The Company is currently finalizing development of the interface software to read and interpret the Pap Smear scans. The Company has completed development of a suite of features and custom kernels, and additional methods are being developed to address the specific challenges in reading and interpreting Pap Smears. The Company has SVM software for final development and commercialization of HDC's Pap Smear Reader. The project is now entering the system integration phase, and the Company hopes to have this Automated Pap Smear Interpretation Diagnostic Test in pre-commercialization validation studies at DCL Laboratories by the third quarter of 2009. Cervical cancer is one of the most common cancers among women throughout the world, with more than 11,000 primary diagnoses and over 3,700 cancer related deaths annually. The Pap Smear, as cervical cancer screening, represents a market of more than 1.7 billion women worldwide with approximately 50 million Pap Smear tests currently being performed annually in the U.S. When completed, the HDC SVM-based computer assisted diagnostic test for the analysis of cervical cells in Pap Smears could be implemented via the Internet for automated interpretation worldwide. Pursuant to the development and license agreement, HDC will own any developed intellectual property and DCL will have a sole use license relating to applications and new mathematical tools developed during the course of the development and license agreement. Dr. Hanbury, one of our directors, is currently President, CEO and a shareholder of DCL.

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

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

In January 2007, SVM Capital, LLC was formed as a joint venture between HDC and Atlantic Alpha Strategies, LLC ("Atlantic Alpha") to explore and exploit the potential applicability of our SVM technology to quantitative investment management techniques. Atlantic Alpha has over thirty years of experience in commodity and futures trading. SVM Capital has made significant progress since the formation of the joint venture. SVM Capital has developed a machine learning based software system for analysis and prediction of stock market data. The system is completely data driven. It applies innovative technologies developed by SVM Capital that are capable of adapting advanced machine learning methods to the highly non-stationary systems commonly presented by the financial data. A preliminary software system was implemented for trading the four major indices. An analysis on the historical data was conducted for the period of January 1970 to December 2008. The SVM Capital system produced an average annual return of 19.81%, with an annualized alpha of 17.67% compared to the S&P 500 index rate of return of only 5.83% for the same time period. SVM Capital began a program of real-time live trading in November 2008, and since that time the SVM Capital system has yielded a return of 4.33%, which is a value-added return of 5.39%, compared to the -1.06% for the indices. Based on the success of these results, SVM Capital is now in final negotiations with a New York investment company to create and market an investment fund specifically utilizing the SVM Capital quantitative algorithm for making the investment decisions. SVM Capital expects to have the terms of the fund finalized in mid-2009, with the preparation of offering materials and fundraising to follow. SVM Capital expects to charge a management fee and a performance fee related to its investment activities. Depending on the level of its success, this venture can be profitable given its reliance on cost effective use of computer technology and ready access to efficient trading platforms.

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

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

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

The Company has recognized revenue of $568,485 through March 31, 2009 and has deferred revenue yet to be recognized of $474,525 as of March 31, 2009. The Company received cash payments in 2009 of $150,000 through May 15, resulting in aggregate receipts created by its patent portfolio to date of $1,043,010.

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

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

Revenue

For the three months ended March 31, 2009, revenue was $16,690 compared with $15,677 for the three months ended March 31, 2008. Revenue is recognized for licensing and development fees over the period earned. This revenue is primarily related to the amortization of deferred revenue resulting from prior licensing agreements.

Cost of Revenues and Gross Margin

Internal development costs of $3,287 were recorded as cost of sales for the first quarter 2009 compared with $3,600 for the first quarter of 2008. Cost of revenues includes all direct costs, primarily wages and research fees, associated with the acquisition and development of patents and processes sold. All direct costs, including some professional fees associated with licensing negotiations, are also included in cost of revenues.

Operating and Other Expenses

Amortization expense was $65,680 for the first quarter of 2009 compared to $65,679 for the comparable 2008 period. Amortization expense relates primarily to the costs associated with filing patent application and acquiring rights to the patents.

Professional and consulting fees totaled $277,554 for the first quarter of 2009 compared with $153,850 for the first quarter of 2008. The increase is due to increased legal fees, resulting from the resignation of the Company's Executive Vice President in June 2008, and the unfavorable impact of mark to market accounting related to stock grants earned by scientific advisory board members.

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

Other general and administrative expenses decreased to $61,188 for the first quarter of 2009 compared to $169,543 for the first quarter of 2008. The decrease was due primarily to a reduction in the charge for director's warrants.

Loss from Operations

The loss from operations for the first quarter of 2009 was $558,785 compared to $574,181 for the first quarter of 2008. This decreased loss was due to decreased costs as discussed previously.

Other Income and Expense

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

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

Net Loss

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

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

Liquidity and Capital Resources

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

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

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

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