UNITED
STATES


SECURITIES AND EXCHANGE
COMMISSION


WASHINGTON,
D.C. 20549


FORM
10-K


(Mark
One)


[X]
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934


For the
fiscal year ended December 31, 2008





[  ]
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934


For the
transition period
from        to





Commission
File Number 001-13835





APPLIED NEUROSOLUTIONS,
INC.


(Name of
small business issuer in its Charter)





Delaware
            39-1661164(State
      of Other Jurisdiction of Incorporation or Organization)
            (IRS
      Employer Identification No.)





50 Lakeview Parkway, Suite
111,                                                                           Vernon Hills,
IL  60061


(Address
of Principal Executive Offices and Zip Code)





(847)
573-8000


(Issuer’s
Telephone Number, Including Area Code)





Securities
registered under Section 12 (b) of the Act:   None





Securities
registered under Section 12 (g) of the Act:





Common
Stock, $0.0025 par value


(Title of
Class)





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities
Act.    Yes   [   ]No
[X]





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act.    Yes   [   ]No
[X]





Indicate
by check mark whether the registrant:  (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.[X]





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a small reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.





Large accelerated
filer                                           [   ]                                Accelerated
filer                                                        [   ]


Non-accelerated
filer                                            
[   ]                                Smaller
reporting
company                                      [X]





i


Indicate
      by check mark whether the registrant is a shell company (as defined in
      Rule 12b-2 of the Exchange Act).


Yes   [   ]
            No
      [X]





As of
June 30, 2008, the aggregate market value of voting common stock held by
non-affiliates of the Registrant (99,769,426 shares) was approximately
$5,986,166.  The aggregate market value was computed by reference to
the last sale price of such common equity as of that date.





As of
March 26, 2009, the issuer had 130,217,808 shares of Common Stock
outstanding.





Documents
Incorporated by
Reference:                                                                           None





ii





INDEX





PagePART
      IItem
      1.
            Business
            1Item
      1A.
            Risk
      factors
            12Item
      2.
            Properties
            23Item
      3.
            Legal
      proceedings
            23Item
      4.
            Submission
      of matters to a vote of security holders
            23PART
      IIItem
      5.
            Market
      for registrant’s common equity, related stockholder matters and issuer
      purchases of equity securities
            24Item
      6.
            Selected
      financial data
            24Item
      7.
            Management’s
      discussion and analysis of financial condition and results
      of  operations
            25Item
      7A.
            Quantitative
      and qualitative disclosures about market risk
            34Item
      8.
            Financial
      statements and supplementary data
            35Item
      9.
            Changes
      in and disagreements with accountants on accounting and financial
      disclosure
            63Item
      9A.
            Controls
      and procedures
            63Item
      9B.
            Other
      information
            64PART
      IIIItem
      10.
            Directors,
      executive officers and corporate governance
            64Item
      11.
            Executive
      compensation
            68Item
      12.
            Security
      ownership of certain beneficial owners and management and related
      stockholder matters
            72Item
      13.
            Certain
      relationships and related transactions, and director
      independence
            74Item
      14.
            Principal
      accounting fees and services
            74PART
      IVItem
      15.
            Exhibits,
      financial statement schedules
            75SIGNATURES
            
            79CERTIFICATIONS
            
            80


ii


PART
I





This Form 10-K contains forward-looking
statements.  For this purpose, any statements contained in this Form
10-K that are not statements of historical fact may be deemed to be
forward-looking statements.  You can identify forward-looking
statements by those that are not historical in nature, particularly those that
use terminology such as “may,” “will,” “should,” “could,” “expects,”
“anticipates,” “contemplates,” “estimates,” “believes,” “plans,” “projected,”
“predicts,” “potential,” or “continue” or the negative of these similar
terms.  In evaluating these forward-looking statements, you should
consider various factors, including those listed below under the heading “Item
1A.  Risk factors”.  The Company’s actual results may differ
significantly from the results projected in the forward-looking
statements.  The Company assumes no obligation to update
forward-looking statements.





As used in this Form 10-K, references
to “APNS,” the “Company,” the “Registrant,” “we,” “our,” or “us” refer to
Applied NeuroSolutions, Inc. unless the context otherwise
indicates.





ITEM
1.                      BUSINESS





Applied NeuroSolutions, Inc. (“APNS” or
“the Company”) is a development stage biotechnology company focused on the
development of products for the early diagnosis and treatment of Alzheimer's
disease (“AD”).





Alzheimer’s disease is the most common
cause of dementia among people age 65 and older.  Dementia is the loss
of memory, reason, judgment and language to such an extent that it interferes
with a person’s daily life and activities.  Currently it is estimated
that over five million people in the U.S., and almost 30 million worldwide, have
Alzheimer’s disease and the national cost of caring for people with Alzheimer’s
is estimated to exceed $148 billion annually.  By 2050, it is
estimated that 16 million people in the U.S. will have Alzheimer’s, and the
global prevalence of Alzheimer’s is expected to be greater than 100
million.





Our core technology in the AD field is
based on exclusive licenses with Albert Einstein College of Medicine (“AECOM”)
covering all diagnostic and therapeutic applications in the field of
neurodegenerative disease discovered in the AECOM laboratories
of  Peter Davies, Ph.D.  Dr. Davies, the Company’s founding
scientist, is the Burton P. and Judith Resnick Professor of Alzheimer’s Disease
Research at AECOM, and was the recipient of the Lifetime Achievement Award in
Alzheimer’s Disease at the Alzheimer’s Association’s 11th
International Conference on Alzheimer’s Disease (“ICAD”) held in Chicago in July
2008.  Dr. Davies has focused his research primarily on Alzheimer’s
disease and the roll of certain proteins, primarily hyperphosphorylated tau,
which are involved in the formation of neurofibrillary tangles within neurons
(nerve cells).  Excessive phosphorylation of tau (the addition of one
or more phosphate groups, which are comprised of phosphorous and oxygen)
prevents it from stabilizing microtubules, thereby causing the breakdown of the
transit system of the nerve cell.  This internal neuronal damage leads
to the development of the paired helical filaments and neurofibrillary tangles
which are contributing factors to the eventual death of the neurons related to
Alzheimer’s disease.  Tau in this abnormally phosphorylated form is
the building block for the paired helical filaments and the neurofibrillary
tangles (“NFTs”); one of the hallmark pathologies associated with
AD.  There is a high correlation among the presence of
hyperphosphorylated tau, NFTs and AD.  Thus, it is believed that the
hyperphosphorylated tau represents an early abnormality in the progression of
Alzheimer’s disease.  Research described in numerous articles
published in peer-reviewed scientific journals demonstrates that abnormal tau
represents an appropriate target for research on neurodegenerative diseases,
such as Alzheimer’s disease.  Dr. Davies has been applying his
expertise in research directed towards abnormal tau for many years and, together
with Applied NeuroSolutions scientists, has developed a large number of
proprietary antibodies and tools which are being used in the development of
APNS’s diagnostic pipeline to detect AD, and targets directed at AD therapeutic
solutions.





In November 2006, we entered into a
collaboration agreement with Eli Lilly and Company (“Lilly”).  APNS
and Lilly are engaged in the discovery and development of novel therapeutics for
the development of treatments for Alzheimer’s disease based upon an approach
developed by Dr. Davies.  As a result of Dr. Davies’ research, APNS
and Lilly are focused on discovery of unique therapeutics that may be involved
in a common intracellular phosphorylation pathway leading to the development of
the abnormal, destructive brain structures, amyloid plaques and neurofibrillary
tangles, that are characteristic of Alzheimer’s disease.  APNS has
identified various biomarkers that we believe will aid in the development of
diagnostics and drug specific diagnostic markers that could also play a role in
the development of new AD treatments.





1


Pursuant to the collaboration
agreement, Lilly received the exclusive worldwide rights to the intellectual
property related to our expertise in understanding the molecular neuropathology
of AD as it pertains to the formation of neurofibrillary tangles in the
development of AD therapeutics.  We received $2 million in cash,
including an equity investment of $500,000, from Lilly, plus we are receiving
annual research and development support for the duration of the collaboration
agreement.  In addition, Lilly will, based on the achievement of
certain defined milestones, provide us over time with up to a total sum of $20
million in milestone payments for advancing the APNS proprietary target to a
therapeutic compound.  The collaboration has also made progress on
other targets that are part of the collaboration that could provide milestone
payments to us over time of up to a total sum of $10 million for advancing each
of these other targets to a therapeutic compound.  There is no limit
to the number of targets for which we could receive milestone payments from
Lilly.  Royalties are to be paid to us for AD drug compounds brought
to market that result from the collaboration.  There is no limit on
the number of drug compounds for which royalty payments may be due to
us.  Lilly will fund the vast majority of all pre-clinical research
and development and will fully finance the clinical testing, manufacturing,
sales and marketing of AD therapeutics developed from this
collaboration.





Since the start of our collaboration
with Eli Lilly & Company, the collaboration management structure, working
teams and external resources have become fully operational.  The key
assets and proprietary tools have been appropriately transferred to support work
being undertaken by each of Dr. Davies, Lilly and APNS.  Key in-vivo
models have been established with the goal to validate our proprietary tau-based
target.  The collaboration with Lilly has established criteria that
provide the team with a clearly mandated and coordinated work plan that will
enable them to generate the data to validate the proprietary APNS
target.  The APNS proprietary tau-based target has already achieved
two significant unpaid program milestones: the first one in the second quarter
of 2007 and the second one in the first quarter of 2008.  The next
milestone, if achieved, would be the first milestone for which we receive a cash
payment from Lilly.  The achievement of the first paid milestone was
targeted for review by Lilly’s program management team in late March
2009.  Prior to the review by Lilly’s program management team, the
joint Lilly/APNS collaboration management team deferred formal review pending
the completion of the milestone requirements.  Lilly remains fully
committed to the collaboration with resources focused on program progress and
milestone achievement.  The collaboration continues to make progress
toward additional tau-based targets with various screens established and studies
underway for identifying other tau-based targets.  We anticipate providing
an update on the progress of the collaboration with Lilly late second quarter
2009.





We have also been developing both
cerebrospinal fluid (“CSF”)-based and serum-based tests to detect AD at an early
stage.  In a research setting, our CSF-based test, which detects a
certain AD associated protein found in the CSF of AD patients (“P-Tau 231”), has
demonstrated an ability to differentiate AD patients from those with other
diseases that have similar symptoms. This test is based on extensive testing in
the APNS lab, utilizing in excess of 2,000 CSF samples to differentiate patients
diagnosed with AD from patients diagnosed with other forms of dementia and
relevant neurological diseases, including major depression, as well as
age-matched healthy controls.  The data generated from the broad range
of studies performed by both U.S. and international academic researchers have
been published in 22 peer-reviewed articles in leading neurology and other
scientific journals.  The CSF-based P-Tau 231 test has demonstrated,
based on published research validation studies, overall sensitivity and
specificity in the range of 85% to 95%.  Our most recent research has
sought to further substantiate the utility of the test in the mild cognitive
impairment (“MCI”) population, as evidenced by reports published in Neurobiology of Aging in
September 2007, Neurology in December 2007
and Journal of Alzheimer’s Disease in February 2009.





Given the strong body of scientific
data available for APNS’s P-Tau 231 test as a viable biomarker for Alzheimer’s
disease, coupled with the growing number of clinical trials directed at creating
improved therapeutic solutions for AD patients, we initiated a business
development program to offer to pharmaceutical, biotechnology, imaging and other
clinical trial support companies the opportunity to use its CSF-based P-Tau 231
test as a cost-effective tool to help optimize their programs.  APNS
and Dr. Davies met with companies that had expressed an interest in utilizing
the P-Tau 231 diagnostic test.  The meetings took place at the July
2008 International Conference on Alzheimer’s Disease (“ICAD”) meeting in
Chicago.  We have performed initial studies for two major
pharmaceutical companies and have had discussions with other interested
parties.  Net revenue that may be generated by performing this test
for interested customers could be deployed to continue progress toward our goal
of developing a serum-based test for the early diagnosis of AD.  We
are actively continuing our efforts and are in discussions with companies that
may utilize our CSF-based diagnostic test.





2


We are utilizing the knowledge gained
during the development of our CSF-based diagnostic test to develop two types of
serum-based tests to detect Alzheimer’s disease: one to “rule out” AD and one,
utilizing the Company’s P-Tau 231 biomarker, to support the diagnosis of
AD.  Throughout 2006, APNS scientists, working with external technical
expertise, developed an important understanding of the tools necessary to
advance the development of a serum-based AD diagnostic test with scientifically
accepted tau-based biomarkers.  This resulted in our creation of a
robust project plan.  We began developing these key tools in early
2007 and established 2008 milestones for the development of serum-based
diagnostic tests.





As part of our project plan, in 2007,
we secured additional expertise and resources by conducting a scientific
advisory board meeting that brought together APNS scientists, Dr. Davies and
three outside diagnostic experts to assist us in assessing the most effective
approaches and resources to advance our diagnostic development
programs.  Through 2007, we followed our work plans to develop program
related tools, primarily antibodies, that met our scientific
criteria.  We achieved a key milestone in the first quarter of 2008 by
identifying several antibodies that met our requirements.  These
antibodies support advancing development of a “rule out” serum based test for
AD.  We successfully met our next key milestone in the second quarter
of 2008 through the creation of proprietary tau-based  antibodies
required for the development of a serum-based test to support the early
diagnosis of AD, utilizing our P-Tau 231 biomarker (the “P-Tau
test”).   These new P-Tau related antibodies may also support
enhancing the commercial viability of our CSF-based test.





Throughout the antibody development
process we have been assessing specialized technologies that we believe are
necessary to advance our serum diagnostic development programs.  The
goal of collaboration is to bring together a company’s proprietary technology
and related know-how with APNS’ new proprietary antibodies and extensive
knowledge of the protein tau, and determine the opportunity for a joint effort
to develop a serum-based diagnostic test.  Technology assessments and
discussions with companies for initial collaborations led to the establishment
of key working arrangements with several specialized technology
companies.  We began working with these specialized technology
companies throughout the second half of 2008.  The primary focus of
the initial work was to determine feasibility of our proprietary P-Tau test in
serum with a supportive technology.  The results to date from one of
these technology companies have produced variable data that do not provide
clear-cut feasibility for our P-Tau serum-based diagnostic test in development
with their proprietary technology.  Additional antibodies were
developed in the fourth quarter of 2008 and the first quarter of 2009 that
potentially could be utilized to address the issues connected with the
development of the P-Tau test with this specialized technology
company.  Our work to establish feasibility for a P-Tau test is
ongoing with the other companies.





Additional antibodies to support a
serum-based “rule out” test were developed in the fourth quarter of 2008 and the
first quarter of 2009.  In early 2009, we expanded on our initial work
with the specialized technology companies to determine feasibility for a “rule
out” test.   In addition, we began work in-house on a total tau
“rule out” serum-based test, to support the external efforts.  Our
current plans target the feasibility of both the P-Tau test and the “rule out”
test in the middle of the second quarter of 2009.





We are currently focused on
establishing feasibility for our serum-diagnostic tests in
development.  In order to maximize the value, and minimize the time to
commercialization, of our diagnostic programs, we are exploring additional
partnerships, including collaborations, strategic and technical alliances,
and/or licensing arrangements.





History


On September 10, 2002, Hemoxymed, Inc.
and Molecular Geriatrics Corporation (“MGC”) established a strategic alliance
through the closing of a merger (the “Merger”).  The Merger Agreement
provided that the management team and Board of Directors of MGC took over
control of the merged company.  The transaction was tax-free to the
shareholders of both companies.  In October 2003, we changed our name
to Applied NeuroSolutions, Inc.  The Merger transaction has been
accounted for as a reverse merger.  For financial reporting purposes,
MGC (now APNS) is continuing as the primary operating entity under the Company’s
name, and its historical financial statements have replaced those of the
Company.  Thus, all financial information prior to the Merger date is
the financial information of MGC only.





3


After the Merger, we had two
wholly-owned operating subsidiaries, which were dissolved during
2004.  The assets of these dissolved subsidiaries were transferred to
us.





One of the wholly-owned operating
subsidiaries dissolved was MGC, a development stage biopharmaceutical company
incorporated in November 1991, with operations commencing in March 1992, to
develop diagnostics to detect AD, and therapeutic targets directed at AD
solutions.





The other wholly-owned operating
subsidiary we dissolved was Hemoxymed Europe, SAS, a development stage
biopharmaceutical company incorporated in February 1995 to develop therapies
aimed at improving tissue oxygenation by increasing oxygen release from
hemoglobin to provide therapeutic value to patients with serious, medical
needs.  We are not currently funding the development of this
technology.





We are subject to risks and
uncertainties common to small-cap and micro-cap biotech companies, including
competition from larger, well capitalized entities, patent protection issues,
availability of funding and government regulations.  We have
experienced significant operating losses since our inception.  As of
December 31, 2008, we had an accumulated deficit of approximately $50.3
million.  Notwithstanding payments that we may receive under our
collaboration agreement with Eli Lilly and Company, we expect to incur operating
losses over the next several years as our research and development efforts
continue.  At our current level of operations, our funds will last
into the middle of the third quarter 2009.  We need to raise
additional capital prior to the middle of the third quarter 2009 to continue our
operations.





We currently have no regulatory
approved therapeutic or diagnostic products on the market and have not received
any commercial revenues from the sale or license of any such
products.





Alzheimer's
Disease Background





Alzheimer’s disease is the most common
cause of dementia among people age 65 and older.  Dementia is the loss
of memory, reason, judgment and language to such an extent that it interferes
with a person’s daily life and activities.  Currently it is estimated
that over five million people in the U.S., and almost 30 million worldwide, have
Alzheimer’s disease and the national cost of caring for people with Alzheimer’s
is estimated to exceed $148 billion annually.  By 2050, it is
estimated that 16 million people in the U.S. will have Alzheimer’s, and the
global prevalence of Alzheimer’s is expected to be greater than 100
million.  The market for AD therapy is expected to grow, based on the
aging demographic of the seven major pharmaceutical markets (USA, France,
Germany, Italy, Spain, U.K. and Japan).  Currently there are only five
drugs approved in the U.S. to treat AD.  Four are primarily
acetylcholinesterase inhibitors; and one is an NMDA antagonist.  All
are only beneficial in treating symptoms associated with AD in a minority of AD
patients for a very limited time period.





Alzheimer’s disease is an intractable,
chronic and progressively incapacitating disease characterized by the
degeneration and death of several types of neurons in certain regions of the
brain.  Patients affected by the disease initially suffer loss of
memory, then a decline of intellectual abilities severe enough to interfere with
work and activities of daily living, followed by severe dementia and, finally,
death.  This illness, currently estimated to affect over five million
people in the United States, and almost 30 million people worldwide, is a
leading cause of death behind cardiovascular disease and
cancer.  While the disease is most common in the elderly, affecting
nearly 10% of people age 65 and older and up to 50% of people age 85 and older,
it has been diagnosed in patients in their 40’s and 50’s.  Alzheimer’s
disease, at present, can be conclusively diagnosed only by histological
examination of the brain by biopsy or autopsy.  The diagnosis of
patients suspected of having AD is therefore typically made through a process of
elimination, by conducting neurological and psychiatric examinations, extensive
laboratory tests and brain imaging to rule out other conditions (such as stroke,
brain tumor, or depression) that may exhibit similar symptoms.





Alzheimer’s disease was first described
in 1907 by Dr. Alois Alzheimer, a German psychiatrist who discovered large
numbers of unusual microscopic deposits in the brain of a demented patient upon
autopsy.  These deposits, called amyloid plaques and neurofibrillary
tangles, are highly insoluble protein aggregates that form in the brains of AD
patients in particular regions, including those involved with memory and
cognition.  Generally, amyloid plaques are deposited on the surface of
neurons, whereas neurofibrillary tangles are formed within
neurons.  The plaques and tangles are associated with degeneration and
loss of neurons.  The actual loss of neurons, as well as the impaired
function of surviving neurons, is generally believed to be the key
neuropathological contributors to the memory loss and dementia that
characterizes Alzheimer’s disease.





4





Therapeutic
Program





We are working to discover and develop
novel therapeutic targets for the development of treatments for
AD.  The basis for this work is Dr. Davies discovery of a novel
initiation point that we believe is common to the ultimate development of both
the neurofibrillary tangles and amyloid plaques.  A patent application
was filed in 2006 covering Dr. Davies work relative to this area.  In
November 2006, we entered into an agreement with Eli Lilly and Company to
develop therapeutics to treat AD.  In conjunction with Lilly, we are
developing novel therapeutics for the treatment of Alzheimer’s disease based
upon a concept developed by Dr. Davies.  The agreement forms a
collaboration that will combine the expertise, research tools and tau-based
approach advanced by Dr. Davies and our team at APNS with the scientists,
therapeutic development expertise and financial resources at Eli Lilly and
Company.  Lilly has an exclusive world-wide license to manufacture,
market and sell any AD therapeutic that comes to market from our collaboration
agreement.





The market potential for a drug to
effectively treat Alzheimer’s disease is extremely large.  Currently
there are only five drugs approved in the U.S. to treat AD.  Four are
primarily acetylcholinesterase inhibitors; and one is an NMDA
antagonist.  All are only beneficial in treating symptoms associated
with AD in a minority of AD patients.  Despite the cost, and problems
with the currently approved therapeutics, market research data indicate that
these drugs sold nearly $4.5 billion in the U.S during 2007.  The
therapeutic market has been estimated to be in excess of $6 billion for
effective therapeutics by 2010 in the U.S.








Diagnostic
Program





Alzheimer’s disease, at present, can be
conclusively diagnosed only by histological examination of the brain by biopsy
or autopsy.  The diagnosis of patients suspected of having AD is
therefore typically made through a process of elimination, by conducting
neurological and psychiatric examinations, extensive laboratory tests and brain
imaging to rule out other conditions (such as stroke, brain tumor, or
depression) with similar symptoms.  The AD predictive accuracy of such
exams is generally in the range of 80%-90% in some of the larger AD centers, but
is usually closer to 60%, on average, when diagnosed outside of the larger AD
centers.  Costs to patients for such testing can range from $1,000 -
$4,000, including imaging procedures.  A simple, predictive, accurate
and cost effective diagnostic test would therefore address a large unmet medical
need.  If the test was a serum based test, it could potentially be
utilized as a routine screening test.





APNS’s diagnostic program is based on
Dr. Davies’ research of the tau pathology, and revolves around developing a
pipeline of diagnostic tests that could include: (i) the detection of
hyperphosphorylated tau in CSF, (ii) the detection of hyperphosphorylated tau in
serum, and (iii) a screening test to rule out AD in serum.  Our
product farthest along in development is a CSF-based diagnostic test to detect
whether a person has AD.  This diagnostic, based upon the detection of
a certain AD associated protein found in the CSF of AD patients (P-Tau 231), has
demonstrated, based on published research validation studies, an overall
sensitivity and specificity in the range of 85% to 95% (depending on patient
diagnosis).  This test is based on extensive testing in the APNS lab,
utilizing in excess of 2,000 CSF samples to differentiate patients diagnosed
with AD from patients diagnosed with other forms of dementia and relevant
neurological diseases, including major depression, as well as age-matched
healthy controls.  We are continuing development of our P-Tau
231CSF-based diagnostic test to enhance its commercial viability.





We currently have 22
peer-reviewed publications that report the performance of our CSF-based test in
various patient populations, including AD, mild cognitive impairment (“MCI”),
depression, other neurological disorders and normal controls.  The
studies have been published in prestigious, peer reviewed scientific journals
such as Neuroscience
Letters, Archives of
Neurology, and American
Journal of Psychiatry.  We have shown with our test that
phosphotau concentrations in CSF correlate well with the degree of cognitive
impairment.  A study published in 2001 in Annals of Neurology addressed
the relationship between phosphotau levels in CSF and natural AD
progression.  In addition, a report published in the November 2006
edition of Brain
describes a study utilizing our CSF-based test that importantly shows
statistically significant correlations of phosphotau 231 levels from 26 living
patients with the neurofibrillary pathology subsequently observed in those 26
patients upon autopsy.





5


A study published in the January 2004
edition of Archives of General
Psychiatry has shown that detecting phosphorylated tau (“ptau”) proteins
in CSF comes closest to fulfilling the criteria of a biological marker for
AD.  This publication reported that our CSF-based test exceeded
standards for an AD diagnostic test established by the National Institute of
Aging and the Ronald and Nancy Reagan Research Institute of the Alzheimer’s
Association in a 1998 published “Consensus Report”.  It was determined
by that group that a successful biological marker would be one that had a
sensitivity level and specificity level of at least 80%.  A Position
Paper, “Research Criteria for the Diagnosis of Alzheimer’s Disease: Revising the
NINCDS-ADRDA Criteria”, was published in the August 2007 edition of Lancet Neurology that
describes suggested revisions to the criteria for the diagnosis of Alzheimer’s
disease, including the use of CSF biomarkers, specifically referencing our
CSF-based p-tau 231 test.





Studies published in the December 2005
edition of Neuroscience
Letters and in the March 2006 journal Neurobiology of Aging support
the use of our CSF-based diagnostic test in identifying individuals with mild
cognitive impairment (“MCI”) who, over time, are most likely to develop
AD.  Two studies published in 2007 show the ability of our CSF-based
test to be a strong predictor of the decline from MCI to AD.  The
September 2007 online edition of Neurobiology of Aging
presented a study comparing five of the best-known CSF biomarkers for
AD.  Our ptau biomarker was the strongest predictor of the decline
from MCI to AD.  The December 2007 issue of Neurology published an
internationally based multi-center study that demonstrated our ptau biomarker
was a significant predictor of the decline from MCI to AD in a clinically useful
time period of 1.5 years. The February 2009 issue of Journal of Alzheimer’s
Disease showed the added value of our ptau biomarker when used in
conjunction with an MRI.





We are utilizing the knowledge gained
during the development of our CSF-based diagnostic test to develop two types of
serum-based tests to detect Alzheimer’s disease: one to “rule out” AD and one,
utilizing our P-Tau 231 biomarker, to support the diagnosis of
AD.  Throughout 2006, APNS scientists, working with external technical
expertise, developed an important understanding of the tools necessary to
advance the development of a serum-based AD diagnostic test with scientifically
accepted tau-based biomarkers.  This resulted in our creation of a
robust project plan.  We began developing these key tools in early
2007 and established 2008 milestones for the development of serum-based
diagnostic tests.





As part of our project plan, in 2007,
we secured additional expertise and resources by conducting a scientific
advisory board meeting that brought together APNS scientists, Dr. Davies and
three outside diagnostic experts to assist us in assessing the most effective
approaches and resources to advance our diagnostic development
programs.  Through 2007, we followed our work plans to develop program
related tools, primarily antibodies, that met our scientific
criteria.  We achieved a key milestone in the first quarter of 2008 by
identifying several antibodies that met our requirements.  These
antibodies support advancing development of a “rule out” serum based test for
AD.  We successfully met our next key milestone in the second quarter
of 2008 through the creation of proprietary tau-based  antibodies
required for the development of a serum-based test to support the early
diagnosis of AD, utilizing our P-Tau 231 biomarker (the “P-Tau
test”).   These new P-Tau related antibodies may also support
enhancing the commercial viability of our CSF-based test.





Throughout the antibody development
process we have been assessing specialized technologies that we believe are
necessary to advance our serum diagnostic development programs.  The
goal of collaboration is to bring together a company’s proprietary technology
and related know-how with APNS’ new proprietary antibodies and extensive
knowledge of the protein tau, and determine the opportunity for a joint effort
to develop a serum-based diagnostic test.  Technology assessments and
discussions with companies for initial collaborations led to the establishment
of key working arrangements with several specialized technology
companies.  We began working with these specialized technology
companies throughout the second half of 2008.  The primary focus of
the initial work was to determine feasibility of our proprietary P-Tau test in
serum with a supportive technology.  The results to date from one of
these technology companies have produced variable data that do not provide
clear-cut feasibility for our P-Tau serum-based diagnostic test in development
with their proprietary technology.  Additional antibodies were
developed in the fourth quarter of 2008 and the first quarter of 2009 that
potentially could be utilized to address the issues connected with the
development of the P-Tau test with this specialized technology
company.  Our work to establish feasibility for a P-Tau test is
ongoing with the other companies.





6


Additional antibodies to support a
serum-based “rule out” test were developed in the fourth quarter of 2008 and the
first quarter of 2009.  In early 2009, we expanded on our initial work
with the specialized technology companies to determine feasibility for a “rule
out” test.   In addition, we began work in-house on a total tau
“rule out” serum-based test, to support the external efforts.  Our
current plans target the feasibility of both the P-Tau test and the “rule out”
test in the middle of the second quarter of 2009.





Given the strong body of scientific
data available for our P-Tau 231 test, coupled with the growing number of
clinical trials directed at creating improved therapeutic solutions for AD
patients, we initiated a business development program to offer to
pharmaceutical, biotechnology, imaging and other clinical trial support
companies the opportunity to use our CSF-based P-Tau 231 test as a
cost-effective tool to help optimize their programs.  APNS and Dr.
Davies met with companies that had expressed an interest in utilizing the P-Tau
231 diagnostic test.  The meetings took place at the July 2008
International Conference on Alzheimer’s Disease (“ICAD”) meeting in
Chicago.  We have performed initial studies for two major
pharmaceutical companies and have had discussions with other interested
parties.  Net revenue we may generate by performing our test for
interested customers could be deployed to continue progress toward our goal of
developing a serum-based test for the early diagnosis of AD.  We are
actively continuing our efforts and are in discussions with companies that may
utilize our CSF-based diagnostic test.  Currently there is no FDA-approved
diagnostic test to detect AD.  Before approval by the FDA for general
sale, under certain conditions, companies can supply either “investigational use
only” or “research use only” assay kits under the Clinical Laboratory
Improvement Amendment (“CLIA”) of 1988.  As part of our plan to seek
commercialization opportunities for our proposed diagnostic products, we may
pursue some form of agreement with a reference lab.





Transgenic
Mice Model





Dr. Peter Davies, through collaboration
with a researcher at Nathan Klein Institute (“NKI”), has developed a transgenic
mouse containing the human tau gene that develops human paired helical
filaments, the building blocks of the neurofibrillary tangles, which are known
to be involved in the pathology of Alzheimer’s disease. The pathology in these
mice is Alzheimer-like, with hyperphosphorylated tau accumulating in cell bodies
and dendrites as neurofibrillary tangles.  In addition, these
transgenic mice have exhibited extensive neuronal death that accompanies the tau
pathology.  These transgenic mice could be used for testing the
efficacy of therapeutic compounds.  To date, no widely accepted animal
model that exhibits both AD pathologies has been developed.  AECOM and
the New York State Office of Mental Health, the agency that oversees NKI, each
have an interest in these transgenic mice.  Through our agreements
with AECOM, we have license rights to AECOM’s interest in these transgenic
mice.  In 2006, we entered into additional license agreements that
provide us with the exclusive rights to sell these mice.  The mice are
currently available through Jackson Laboratories.  In December 2006,
we entered into an agreement to sell a breeding pair of these mice.





Research
and Product Development





If we are able to fund our operations,
we expect to continue to spend a significant amount of our financial resources
on research and development activities.  We incurred costs of
approximately $1,472,000 in 2008 and $1,659,000 in 2007 on research and
development activities.  Since we are not yet engaged in the
commercial distribution of any diagnostic or therapeutic products and we have no
revenues from the sale of any such products, these research and development
costs must be funded through equity or debt financing or payments received from
collaborators.  Throughout our collaboration with Eli Lilly and
Company, Lilly will provide annual research and development support that
partially offsets these expenses.  We estimate that we will incur
costs of approximately $120,000 to $150,000 per month on research and
development activities over the next twenty-four months.  This
excludes the non-cash charges resulting from accounting for equity instruments
included in such monthly expenditures.  These expenditures, however,
may fluctuate from quarter-to-quarter and year-to-year depending upon the
resources available and our development schedule.  Lilly will fund the
vast majority of all pre-clinical research and development and will fully
finance the clinical testing, manufacturing, sales and marketing of AD
therapeutics developed from our collaboration.  If we were to conduct
diagnostic validation and proof of concept work, and/or diagnostic clinical
trials, our research and development expenditures would most likely increase
significantly.  In addition, regulatory decisions and competitive
developments may significantly influence the amount of our research and
development expenditures.




7


Sales
and Marketing





We do not have marketing and sales
expertise or personnel.  As we currently do not intend to develop a
marketing and sales force, we will depend on arrangements with corporate
partners or other entities for the marketing and sale of our proposed
products.  Under our agreement with Eli Lilly and Company, Lilly has
an exclusive world-wide license to market and sell any AD therapeutic, if any,
that comes to market from our collaboration agreement.  We do not
currently have any agreements with partners or other entities to provide sales
and marketing services for our proposed diagnostic products, but would seek
those arrangements at the appropriate time.





Manufacturing





We currently do not have any facilities
suitable for manufacturing on a commercial scale basis any of our proposed
products nor do we have any experience in volume manufacturing.  We
will either find our own manufacturing facilities, rely upon third-party
manufacturers to manufacture our proposed products in accordance with these
regulations, or we will most likely utilize the capabilities of our partners
and/or collaborators.  Under our agreement with Eli Lilly and Company,
Lilly has an exclusive world-wide license to manufacture any therapeutic for AD
that comes to market from our collaboration agreement.





Competition





Companies in the pharmaceutical,
diagnostic and biotechnology fields are subject to intense
competition.  We compete with numerous larger companies that have
substantially greater financial and other resources and more
experience.  The principal factors affecting our competitive markets
include scientific and technological factors, the availability of patent and
other protection for technology and products, the ability, length of time and
cost required to obtain governmental approval for testing, manufacturing and
marketing and physician acceptance.  Companies that complete clinical
trials, obtain regulatory approvals and commence commercial sales of their
products before us may achieve a significant competitive
advantage.  In addition, such companies may succeed in developing
products that are more effective and less costly than products that may be
developed by us.  There can be no assurance that developments by other
companies will not render our products or technologies obsolete or
noncompetitive or that we will be able to keep pace with the technological
developments of our competitors.





We believe that some of our competitors
are in the process of developing technologies that are, or in the future may be,
the basis for competitive products.  Some of these products may have
an entirely different approach or means of accomplishing the desired therapeutic
or diagnostic effect than products being developed by us.  These
competing products may be more effective and less costly than the products
developed by us.





Significant levels of research within
our fields of interest occur at universities, non-profit institutions, and
for-profit organizations.  These entities compete with us in
recruiting skilled scientific talent.





We believe that our ability to compete
successfully will depend upon our ability to create and maintain scientifically
advanced technology, obtain adequate funding, develop proprietary products,
attract and retain scientific personnel, obtain patent or other protection for
our products, develop strategic alliances to enhance the likelihood of success,
obtain required regulatory approvals and manufacture and successfully market our
products either directly by us or through our collaboration with Eli Lilly and
Company and other collaborations or partnerships we may enter into.





Diagnostics





There is currently no FDA-approved
diagnostic to detect Alzheimer's disease ("AD"), although there are tests
available under the CLIA exemption through reference labs.  If any of
our current diagnostic programs are ultimately successfully marketed, they would
compete against, or augment, the most widely used current practice of detecting
AD through a battery of tests, namely neurological and psychiatric examinations,
extensive laboratory tests and brain imaging to rule out other conditions (such
as stroke, brain tumor, or depression) with similar symptoms.  The AD
predictive accuracy of such a battery of exams is generally in the range of
80%-90% in some of the larger AD centers, but is usually closer to 60% when
diagnosed outside of the AD centers.  Costs to patients for such
testing can range from $1,000 - $4,000, including imaging
procedures.  A simple, predictive, accurate and cost effective
diagnostic test could, therefore, be an attractive alternative for medical
practitioners and insurers to the current practice to detect AD.  If
the test was a serum-based test it could potentially be utilized as a routine
screening test.





8


We are aware of other companies and
academic institutions pursuing the development of biochemical markers to be
utilized in the diagnosis of AD.  Potential competitors include Nymox
Pharmaceutical Corp. and Innogenetics, who have developed diagnostic tests for
AD.  Athena Diagnostics has “research use only” type CSF-based tests
available, and others (Satoris, Power 3 Medical, Proteosome Science, Acumen and
Bio-Rad/Cyphergen) have programs directed toward identifying proteomic or
genetic markers for AD.  Competitive diagnostics in development, as
well as some that are marketed through reference laboratories, include
approaches which attempt to identify AD patients by measuring: (i) normal tau,
total tau or phosphorylated tau in CSF, either individually, or as part of a
panel, (ii) beta amyloid, (iii) neural thread protein in CSF and/or urine, (iv)
amyloid derived diffusible ligands (ADDL’s) in CSF, (v) imaging plaques in the
brain, or (vi) employing proteomic or genetic markers for AD.  Much of
our knowledge of potential competitors and their diagnostic tests comes from our
review of published articles in scientific journals.  Publications and
other information publicly available indicate that tests being developed by
these companies and others are unable to adequately distinguish AD from other
brain disorders or are in too early a development stage to be
evaluated.  At this time, we believe our CSF-based diagnostic test
exhibits a unique ability to recognize early stage AD and to differentiate
patients diagnosed with AD from patients diagnosed with other forms of dementia
and relevant neurological diseases, including major depression, as well as
healthy controls.  In addition, our CSF-based diagnostic test has
shown to be a strong predictor of the decline from MCI to AD.





Therapeutics





The only products with FDA approved
label claims for pharmaceutical management of AD in the U.S. provide symptomatic
treatment through the use of acetylcholinesterase (“AchE”) inhibitors, of which
there are four: Aricept/donepezil (Pfizer and Esai), Exelon/rivastigmine
(Novartis), Razadyne/galantamine (Johnson & Johnson), and Cognex/tacrine
(Pfizer); or through the use of NMDA antagonists, of which there is
one:  Namenda/memantine (Forest Labs).  Despite limited
clinical effectiveness and a poor safety and side effect profile, sales of these
drugs in 2007 were nearly $4.5 billion, according to CNN.com.





The market for AD therapy is expected
to grow, based on the aging demographic of the seven major pharmaceutical
markets (USA, France, Germany, Italy, Spain, U.K. and Japan).  AchE
inhibitors remain the largest class of drugs within the late stage development
pipeline.  However, their apparent limited efficacy would seem to
provide an opportunity for other promising compounds.  It is estimated
that over 100 potential compounds are currently being developed by both major
pharmaceutical companies as well as small biotech companies.  The lack
of current effective pharmacological therapy for an increasing AD population
provides an attractive opportunity for therapeutics we may discover utilizing
our novel therapeutic approach in our collaboration with Eli Lilly and
Company.





Patents,
licenses, trade secrets and proprietary rights





Our success depends and will continue
to depend, in part, upon our ability to retain our exclusive licenses, to
maintain patent protection for our products and processes, to preserve our trade
secrets and proprietary information and to operate without infringing the
proprietary rights of third parties.  We believe in securing and
supporting a strong competitive position through the filing and prosecution of
patents where available, and through trade secrets, when patenting is
precluded.





We have filed patent applications in
the U.S. for composition of matter and use of compounds to treat AD, method of
use, as well as aspects of our diagnostic test technologies for use in MCI and
methods for developing novel therapeutic screens for the discovery of compounds
useful in the treatment of AD, novel approaches to therapeutic intervention,
transgenic mouse production and a novel gene.  Patent Cooperation
Treaty (P.C.T.) applications have been filed abroad, when
applicable.








9





Alzheimer's
disease technology license





We have various License and
Collaborative Research Agreements (the "Agreements") with Albert Einstein
College of Medicine ("AECOM").  These Agreements grant us the
exclusive rights to neurodegenerative disease technology, primarily Alzheimer's
disease technology for diagnostic and therapeutic applications from Dr. Peter
Davies’ lab at AECOM.  These Agreements were amended in March 2002, in
September 2002,  in October 2006, and again in December 2008 and
remain effective on an evergreen basis.  The minimum annual payments
to be made to AECOM, which consist of payments due for support of research
conducted in Dr. Davies' lab and for annual license maintenance, are as
follows:





Year
            
            Amount2008
      and each subsequent year
            
            $500,000





As part of the December 2008 amendment,
AECOM has agreed to defer the 2009 semi-annual maintenance payments until the
earlier of December 31, 2009 or a fund raise at least equal to $3,500,000. In
exchange for this deferral, we agreed to prepay the quarterly funding payments
that are due in February 2009, May 2009 and August 2009.  This
prepayment of $112,500 was made in December 2008.  We are obligated to
continue to pay AECOM $500,000 for each year after 2008 in which the Agreements
are still in effect.  In addition, we are obligated to pay AECOM a
percentage of all revenues we receive from selling and/or licensing aspects of
the AD technology licensed under the Agreements that exceeds the minimum
obligations reflected in the annual license maintenance payments.





Confidentiality
and assignment of inventions agreements





We require our employees, consultants
and advisors having access to our confidential information to execute
confidentiality agreements upon commencement of their employment or consulting
relationships with us.  These agreements generally provide that all
confidential information we develop or make known to the individual during the
course of the individual's employment or consulting relationship with us must be
kept confidential by the individual and not disclosed to any third
parties.  We also require all of our employees and consultants who
perform research and development for us to execute agreements that generally
provide that all inventions conceived by these individuals will be our
property.





Government
regulation





The research, development, manufacture,
and marketing of our potential products are subject to substantial regulation by
the U.S. Food and Drug Administration (“FDA”) in the United States and by
comparable authorities in other countries.  These national agencies
and other federal, state, and local entities regulate, among other things,
research and development activities and the testing, manufacture, safety,
effectiveness, labeling, storage, record keeping, approval, advertising, and
promotion of our potential products.





Therapeutics





As an initial step in the FDA
regulatory approval process for a prospective therapeutic product, preclinical
studies are typically conducted in animals to identify potential safety
problems.  For certain diseases, animal models may exist which are
believed to be predictive of human efficacy.  For these diseases, a
drug candidate is tested in an animal model.  The results of the
studies are submitted to the FDA as a part of an Investigational New Drug
Application (“IND”), which is filed to comply with FDA regulations prior to
beginning human clinical testing.





Clinical trials for new therapeutics
are typically conducted in three sequential phases, although the phases may
overlap.  In Phase I, the compound is tested in healthy human subjects
for safety (adverse effects), dosage tolerance, absorption, biodistribution,
metabolism, excretion, clinical pharmacology and, if possible, to gain early
information on effectiveness.  Phase II typically involves studies in
a small sample of the intended patient population to assess the efficacy of the
drug for a specific indication, to determine dose tolerance and the optimal dose
range, and to gather additional information relating to safety and potential
adverse effects.  Phase III trials are comparative clinical studies
undertaken to further evaluate clinical safety and efficacy in an expanded
patient population at geographically dispersed study sites in order to determine
the overall risk-benefit ratio of the drug and to provide an adequate basis for
physician labeling.  Each trial is conducted in accordance with
certain standards under protocols that detail the objectives of the study, the
parameters to be used to monitor safety and efficacy criteria to be
evaluated.  Each protocol must be submitted to the FDA as part of the
IND.  Further, each clinical study must be evaluated by an independent
Institutional Review Board (IRB) at the institution at which the study will be
conducted.  The IRB will consider, among other things, ethical
factors, the safety of human subjects and the possible liability of the
institution.





10


Data from preclinical testing and
clinical trials are submitted to the FDA in a New Drug Application (“NDA”) for
marketing approval.  Preparing an NDA involves considerable data
collection, verification, analysis and expense, and there can be no assurance
that any approval will be granted on a timely basis, if at all.  The
approval process is affected by a number of factors, including the severity of
the disease, the availability of alternative treatments and the risks and
benefits demonstrated in clinical trials.  The FDA may deny an NDA if
applicable regulatory criteria are not satisfied or require additional testing
or information.  Among the conditions for marketing approval is the
requirement that the prospective manufacturer's quality control and
manufacturing procedures conform to the FDA's good manufacturing practices
(“GMP”) regulations, which must be followed at all times.  In
complying with standards set forth in these regulations, manufacturers must
continue to expend time, monies and effort in the area of production and quality
control to ensure full technical compliance.  Manufacturing
establishments serving the U.S. markets, both foreign and domestic, are subject
to inspections by, or under the authority of, the FDA and by other federal,
state or local agencies.





The process of completing clinical
testing and obtaining FDA approval for a new drug is likely to take a number of
years from the commencement of the clinical trial and require the expenditure of
substantial resources.  We would require significant additional funds
in the future to finance the clinical testing process if we developed any
therapeutic products on our own.  Under our agreement with Eli Lilly
and Company, however, Lilly will finance the clinical testing process of any AD
therapeutic developed from our collaboration.





Diagnostic





In vitro diagnostic products have a
different path to regulatory approval, i.e., the Premarket Approval Application
(“PMA”) process regulated by the Office of In Vitro Diagnostic Device and Safety
(“OIVD”) of the FDA.  The regulatory process leading to a submission
of an in vitro diagnostic device PMA for FDA approval to market involves a
multistage process including: (1) a Pre-Investigational Device Exemption
(“Pre-IDE”) program in which preliminary information is submitted to the FDA for
review and guidance on, and acceptance of, the test protocol and proposed
clinical trial to evaluate the safety and effectiveness of an in vitro
diagnostic product followed by, (2) an Investigational Device Exemption (“IDE”)
submission for approval to allow the investigational diagnostic device to be
used in a clinical study in order to (3) collect safety and effectiveness data
required to support a PMA to receive FDA approval to market a
device.  Data from a clinical trial is used to evaluate the clinical
performance of the diagnostic test.  Before FDA approval for general
sale, under certain conditions, companies can supply either “investigational use
only” or “research use only” assays under the Clinical Laboratory Improvement
Amendment (“CLIA”) of 1988.  Whether we will be able to market kits
under these regulatory categories, or obtain final approval for a kit for
specific claims, is uncertain given changing regulatory environments in most
major markets.





Whether or not FDA approval has been
obtained, regulatory authorities in foreign countries must grant approval prior
to the commencement of commercial sales of the product in such
countries.  The requirements governing the conduct of clinical trials
and market entry vary widely from country to country, and the time required for
clearance may be longer or shorter than that required by the
FDA.  Although there are some procedures for unified filings for
certain European countries, in general, each country at this time has its own
procedures and requirements.  We would require significant additional
funds in the future to finance the clinical testing process if we developed any
diagnostic products on our own.  As funds permit, we will continue
advancing the development of our diagnostic program, while pursuing appropriate
partnering and/or out-licensing opportunities.





Environmental
regulation





In connection with our research and
development activities, our business is, and will in the future continue to be,
subject to regulation under various state and federal environmental
laws.  These laws and regulations govern our use, handling and
disposal of various biological and chemical substances used in our
operations.  Although we believe that we have complied with these laws
and regulations in all material respects and we have not been required to take
any action to correct any noncompliance, there can be no assurance that we will
not be required to incur significant costs of comply with health and safety
regulations in the future.





11


Employees





As of February 27, 2009 we had six
full-time employees, two of whom have advanced scientific
degrees.  None of our employees are covered by a collective bargaining
agreement and we believe all relations with our employees are
satisfactory.  In addition, to complement our internal expertise, we
have license agreements with AECOM that provide access to Dr. Peter Davies and
the academic researchers in his lab and we may contract with other academic
research laboratories, outside organizations with specific expertise and
scientific consultants that provide pertinent expertise with therapeutic and
diagnostic development.  In the future, we may hire additional
research, development and other personnel in addition to utilizing outside
organizations and consultants.





ITEM
1A.                      RISK
FACTORS





Factors that could cause or contribute
to differences in our actual results include those discussed in the following
section, as well as those discussed in other parts of this Annual Report on Form
10-K.  You should consider carefully the following risk factors,
together with all of the other information included in this Annual Report on
Form 10-K.  Each of these risk factors could adversely affect our
business, operating results and financial condition, as well as adversely affect
the value of our common stock.





Our
cash balances, coupled with our R & D support from Eli Lilly and Company for
2009, should be sufficient to fund our current planned development activities
into the middle of the third quarter of 2009.  We will need to raise
funds prior to the middle of the third quarter of 2009 in order to continue
operations and we may have to amend our charter to increase our authorized
shares of common stock in order to raise adequate capital and we may have
difficulty raising capital.





As of December 31, 2008, we had cash of
$1,045,020.  We anticipate that our cash balances at December 31,
2008, coupled with our R & D support for 2009 from Eli Lilly and Company,
should be sufficient to fund our current level of operations through the middle
of the third quarter of 2009.  We will need additional funding prior
to the middle of the third quarter of 2009 in order to continue our research,
product development and our operations.  The cash on hand will be used
for ongoing research and development, working capital, general corporate
purposes and possibly to secure appropriate partnerships and
expertise.  Since we do not expect to generate significant revenues
from operations in 2009 and 2010, we will be required to raise additional
capital in financing transactions or through some form of collaborative
partnership in order to satisfy our expected cash expenditures after the middle
of the third quarter of 2009.  We expect to raise such additional
capital by selling shares of our capital stock, proceeds from exercises of
existing warrants and/or stock options and/or by borrowing
money.  However, such additional capital may not be available to us at
acceptable terms or at all.  As of March 26, 2009, we have 48,411,861
authorized shares of common stock available for issuance.  In
September 2008, at our annual stockholders meeting, the stockholders approved a
proposal to amend our certificate of incorporation to effect a reverse stock
split of our common stock at any time prior to June 30, 2009 at a ratio between
1-for-20 and 1-for-30 as determined by our Board of Directors and to decrease
our authorized common stock from 200 million shares to 100 million
shares.  The proposal required the affirmative vote of a majority of
the outstanding shares of common stock, and 78,351,083 shares of common stock,
or 60.2% of the outstanding shares of common stock, voted to approve the
proposal.  After the reverse stock split and the change in authorized
shares of common stock have occurred, we will have sufficient available
authorized shares of common stock to issue in a funding and for other uses as
deemed appropriate by our Board of Directors.  Further, if we sell
additional shares of our capital stock, current ownership positions in our
Company will be subject to dilution. In the event that we are unable to obtain
additional capital, we may be forced to further reduce key operating
expenditures or to cease operations altogether.





Our
financial statements have been prepared assuming that we would continue as a
going concern.  We have had recurring net losses, including net losses
for each of the years ended December 31, 2008 and 2007, and have an accumulated
deficit of approximately $50.3 million as of December 31, 2008.  In
the view of our independent registered public accountants, these conditions
raise substantial doubt about our ability to continue as a going
concern.  We anticipate that our cash balances at December 31, 2008,
coupled with our R & D support from Eli Lilly and Company for 2009, should
be sufficient to fund our current level of operations into the middle of the
third quarter of 2009.  We will need additional funding prior to the
middle of the third quarter of 2009 in order to continue our research, product
development and operations.  If we are successful in achieving our
next milestone to establish the feasibility of the Company’s serum-based
diagnostic test, we believe the Company could begin generating revenue from our
serum diagnostic program in late 2010 to mid 2011 under the Clinical Laboratory
Improvement Amendment of 1988 (“CLIA”).  Under CLIA, companies can
supply either “investigational use only” or “research use only” tests, which do
not require FDA approval, but are subject to certain regulatory
conditions.  In order to sell our serum-based diagnostic test under
CLIA, we would need to contract or partner with a CLIA certified
lab.  Since we do not expect to generate significant revenues from the
sales of our serum-based diagnostic test under CLIA until 2011, our ability to
continue as a going concern depends, in large part, on our ability to raise
additional capital prior to the middle of the third quarter 2009, either through
some form of collaboration or joint venture or debt or equity financing, which
may include the exercise of outstanding stock options and/or
warrants.  If we are unable to raise additional capital, we may be
forced to discontinue our business.





12


We
are a development stage company without any products currently being validated
under CLIA regulations or in FDA clinical trials.





We are a development stage
company.  Our product furthest along is a diagnostic test which
detects Alzheimer’s disease utilizing cerebrospinal fluid (CSF).  Our
other potential diagnostic and therapeutic products and technologies are early
in the research and development phase, and product revenues may not be realized
from the sale of any such products for at least the next several years, if at
all.  Our proposed products will require significant additional
research and development efforts prior to any commercial use, including
extensive preclinical and clinical testing as well as lengthy regulatory
approval, whether under CLIA regulations, or under the FDA approval
process.  There can be no assurances that our research and development
efforts will be successful, that our potential products will prove to be safe
and effective in clinical trials or that we will develop any commercially
successful products.  We currently have no approved products on the
market and have not received any commercial revenues from the sale or license of
any diagnostic or therapeutic products.





We
have a history of operating losses and expect to sustain losses in the
future.





We have experienced significant
operating losses since our inception.  As of December 31, 2008, we had
an accumulated deficit of approximately $50.3 million.  We expect to
incur operating losses over the next several years as our research and
development efforts continue.  Our ability to achieve profitability
depends in part upon our ability, alone or with or through others, to raise
additional capital to execute our business plan, to advance development of our
proposed products, to obtain required regulatory approvals, to manufacture and
market our products, and to successfully commercialize our approved
products.





We
need to raise additional capital by the middle of the third quarter of 2009,
however, we may not be able to raise such capital, or we may only be able to
raise capital on unfavorable terms.





Our operations to date have consumed
substantial amounts of cash. Our development of our technologies and potential
products will require substantial funds to conduct the costly and time-consuming
activities necessary to research, develop and optimize our technologies, and
ultimately, to establish manufacturing and marketing
capabilities.  Our future capital requirements will depend on many
factors including:





·
            continued
      scientific progress in the research and development of our
      technologies;


·
            our
      ability to establish and maintain collaborative arrangements with others
      for product development;


·
            progress
      with validation testing, pre-clinical and clinical
  trials;


·
            the
      time and costs involved in obtaining regulatory
  approvals;


·
            the
      costs involved in preparing, filing, prosecuting, maintaining and
      enforcing patent claims;


·
            competing
      technological and market
developments;


·
            changes
      in our existing research relationships;
and


·
            effective
      product commercialization activities and
  arrangements.





We anticipate that our cash balances at
December 31, 2008, coupled with our R & D support from Eli Lilly and Company
for 2009, should be sufficient to fund our current level of operations through
the middle of the third quarter of 2009.  We will need additional
funding prior to the middle of the third quarter of 2009 in order to continue
our research, product development and our operations.  The cash on
hand will be used for ongoing research and development, working capital, general
corporate purposes and possibly to secure appropriate partnerships and
expertise.  If additional funding is not obtained, we will not be able
to continue funding the costs of any programs, and we may have to significantly
minimize or eliminate our programs, and possibly discontinue all our product
development and/or our operations.  We are currently evaluating our
options to maximize the value of our diagnostic technology, including seeking
partnerships and licensing arrangements.





13


We
face extensive governmental regulation and any failure to comply could prevent
or delay product approval or cause the disallowance of our products after
approval





The U.S. Food and Drug Administration,
and comparable agencies in foreign countries, impose many requirements on the
introduction of new therapeutics through lengthy and detailed clinical testing
procedures, and other costly and time consuming compliance procedures relating
to the manufacture, distribution, advertising, pricing and marketing of
pharmaceutical products.  These requirements make it difficult to
estimate when any of our products in development will be available commercially,
if at all.





The regulatory process takes many years
and requires the expenditure of substantial resources.  Clinical
trials for diagnostic products, including the FDA submission and approval
process, generally take less time than for therapeutic products.  Data
obtained from pre-clinical and clinical activities are subject to varying
interpretations that could delay, limit or prevent regulatory agency approval.
We may also encounter delays or rejections based on changes in regulatory agency
policies during the period in which we develop our products and/or the period
required for review of any application for regulatory agency approval of a
particular product. Delays in obtaining regulatory agency approvals will make
the projects more costly and adversely affect our business.





Diagnostic products have a different
path to regulatory approval than the path for pharmaceutical products. Before
approval by the FDA for general sale, under certain conditions, companies can
supply either “investigational use only” or “research use only” assay kits under
the Clinical Laboratory Improvement Amendment (“CLIA”) of 1988.  In
vitro diagnostic products have a different path to FDA regulatory approval,
i.e., the Premarket Approval Application (PMA) process regulated by the Office
of In Vitro Diagnostic Device and Safety (OIVD) of the FDA.  The
regulatory process leading to a submission of an in vitro diagnostic device PMA
for FDA approval to market involves a multistage process including: (1) a
Pre-Investigational Device Exemption (Pre-IDE) program in which preliminary
information is submitted to the FDA for review and guidance on, and acceptance
of, the test protocol and proposed clinical trial to evaluate the safety and
effectiveness of an in vitro diagnostic product followed by, (2) an
Investigational Device Exemption (IDE) submission for approval to allow the
investigational diagnostic device to be used in a clinical study in order to (3)
collect safety and effectiveness data required to support a PMA to receive FDA
approval to market a device.





Even if we successfully enroll patients
in clinical trials for our diagnostic or therapeutic products, setbacks are a
common occurrence in clinical trials.  These setbacks often
include:





·
            Failure
      to comply with the regulations applicable to such testing may delay,
      suspend or cancel our clinical
trials,


·
            The
      FDA might not accept the test
results,


·
            The
      FDA, or any comparable regulatory agency in another country, may suspend
      clinical trials at any time if it concludes that the trials expose
      subjects participating in such trials to unacceptable health
      risks


·
            Human
      clinical testing may not show any current or future product candidate to
      be safe and effective to the satisfaction of the FDA or comparable
      regulatory agencies


·
            The
      data derived from clinical trials may be unsuitable for submission to the
      FDA or other regulatory agencies.





In 2005 we filed with the FDA a
Pre-Investigational Device Exemption (“Pre-IDE”) application with respect to our
CSF-based diagnostic test and we had our Pre-IDE meeting with the FDA in
November 2005.    Subsequent to our meeting with the FDA, we
worked with our clinical consultants to refine our clinical
protocol.  At that time, work was suspended until such time that we,
along with our consultants, could identify a cost effective protocol that would
be acceptable to the FDA and offer the opportunity to obtain desired claims and
indications.  It is uncertain when we will file a Pre-IDE for any of
our diagnostic programs in development. We have not filed any Investigation New
Drug (“IND”) with respect to our AD therapeutic, and the timing of such filing
in the future is uncertain, and subject to the progress of our collaboration
with Eli Lilly and Company.  We cannot predict with certainty when we
might submit any of our proposed products currently under development for
regulatory review.  Once we submit a proposed product for review, the
FDA or other regulatory agencies may not issue their approvals on a timely
basis, if at all.  If we are delayed or fail to obtain such approvals,
our business may be adversely affected.   If the FDA grants
approval for a drug or device, such approval may limit the indicated uses for
which we may market the drug or device and this could limit the potential market
for such drug or device. Furthermore, if we obtain approval for any of our
products, the marketing and manufacture of such products remain subject to
extensive regulatory requirements. Even if the FDA grants approval, such
approval would be subject to continual review, and later discovery of unknown
problems could restrict the products future use or cause their withdrawal from
the market. If we fail to comply with regulatory requirements, either prior to
approval or in marketing our products after approval, we could be subject to
regulatory or judicial enforcement actions.  Failure to comply with
regulatory requirements could, among other things, result in:





14


·
            product
      recalls or seizures;


·
            fines
      and penalties;


·
            injunctions;


·
            criminal
      prosecution;


·
            refusals
      to approve new products and withdrawal of existing approvals;
      and/or


·
            enhanced
      exposure to product liabilities.







In order to market our products outside
of the United States, we must comply with numerous and varying regulatory
requirements of other countries regarding safety and quality. The approval
procedures vary among countries and can involve additional product testing and
administrative review periods. The time required to obtain approval in other
countries might differ from that required to obtain FDA approval. The regulatory
approval process in other countries includes all of the risks associated with
obtaining FDA approval detailed above. Approval by the FDA does not ensure
approval by the regulatory authorities of other countries.





In addition, many countries require
regulatory agency approval of pricing and may also require approval for the
marketing in such countries of any drugs or devices we develop. We cannot be
certain that we will obtain any regulatory approvals in other countries and the
failure to obtain such approvals may materially adversely affect our
business.





Under our agreement with Eli Lilly and
Company, however, all aspects of our therapeutic collaboration will be largely
funded by Lilly.





We
may not identify a cost effective protocol for obtaining FDA approval that could
yield desired claims for any of our proposed products





Prior to beginning the clinical testing
process required to obtain FDA approval for any of our proposed products, we
must determine if there is a cost effective protocol that would be acceptable to
the FDA and offer the opportunity to obtain desired claims and
indications.  If a cost effective clinical testing protocol cannot be
structured in a time appropriate duration for a specific proposed product, we
will not attempt to obtain FDA approval for that proposed
product.  This may reduce or eliminate any potential revenues we would
receive from the proposed product.





Our
technologies are subject to licenses and termination of any of those licenses
would seriously harm our business.





We have exclusive licenses with Albert
Einstein College of Medicine ("AECOM") covering virtually all of our Alzheimer's
disease technology, including virtually all our AD related diagnostic and
therapeutic products currently in development.  We depend on these
licensing arrangements to maintain rights to our products under
development.  These agreements require us to make payments in order to
maintain our rights.  The agreements also generally require us to pay
royalties on the sale of products developed from the licensed technologies, fees
on revenues from sublicensees, where applicable, and the costs of filing and
prosecuting patent applications.  We are currently in compliance with
our license agreements, however, we will need to raise additional capital prior
to the middle of the third quarter of 2009 in order to meet our ongoing
obligations to AECOM.  If we fail to raise sufficient funds, and
consequently default on our obligations to AECOM, our licenses could terminate,
and we could lose the rights to our proprietary technologies. Such a loss would
have a material adverse effect on our operations and prospects.





15


Our
collaboration agreement with Eli Lilly and Company may not provide the future
payments we anticipate over the course of the agreement, or may not provide the
future payments in a time frame consistent with our expectations, which could
result in the termination of our operations





In November 2006, we entered into an
agreement with Eli Lilly and Company to develop therapeutics to treat
AD.  Lilly received the exclusive worldwide rights to the intellectual
property related to our expertise in understanding the molecular neuropathology
of AD as it pertains to the formation of neurofibrillary
tangles.  Lilly may not advance any of the technology under the
agreement as fast, or as far, as we would anticipate, if at all, to provide us
with the milestone and royalty payments we expected when we signed the
agreement.  In addition, Lilly may decide to allocate internal
resources to other projects and slow down, or stop the work, under our
collaboration agreement for a period of time, which could cause our technology
under the agreement not to be advanced at the rate we expected, or not be
advanced at all.  Such a situation could have a material adverse
effect on our operations and prospects and we may have to shut down, or scale
back, our operations unless we could enter into a new partnership arrangement or
raise capital.





The
demand for diagnostic products for Alzheimer’s disease may be limited because
there is currently no cure or effective therapeutic products to treat the
disease





Since there is currently no cure or
therapy that can stop the progression of Alzheimer’s disease, the market
acceptance and financial success of a diagnostic technology capable of detecting
Alzheimer’s disease may be limited.  As a result, even if we
successfully develop a safe and effective diagnostic technology for identifying
this disease, its commercial value might be limited.





The
value of our research could diminish if we cannot protect, enforce and maintain
our intellectual property rights adequately





The pharmaceutical and diagnostic
industries place considerable importance on obtaining patent and trade secret
protection for new technologies, products and processes, and where possible, we
actively pursue both domestic and foreign patent protection for our proprietary
products and technologies. Our success will depend in part on our ability to
obtain and maintain patent protection for our technologies and to preserve our
trade secrets. When patent protection is available, it is our policy to file
patent applications in the United States and selected foreign jurisdictions.
During our review of our patent portfolio in 2007 and 2008, we stopped
maintaining some older method patents that we determined did not have the
potential for any future benefit. We currently hold and maintain 4 issued United
States patents and various related foreign patents.  One of the issued
United States patents is for our Alzheimer's diagnostic technology, two of the
issued United States patents are for our Alzheimer's therapeutic technology and
one of the issued United States patents relates to transgenic
animals.  One of the patents, issued in October 2007, relates to a
gene that is nested within the tau gene that in turn creates the tau
protein.  One of the issued AD patents is assigned to AECOM and is
licensed to us, and two of the issued AD patents are assigned to
us.  We currently have three patent applications filed, one has
Alzheimer's diagnostic applications, one has Alzheimer's therapeutic
applications, and one has both Alzheimer's diagnostic and therapeutic
applications.  The issued United States Alzheimer's technology patents
expire between 2014 and 2023.  No assurance can be given that our
issued patents will provide competitive advantages for our technologies or will
not be challenged or circumvented by competitors. With respect to already issued
patents, there can be no assurance that any patents issued to us will not be
challenged, invalidated, circumvented or that the patents will provide us
proprietary protection or a commercial advantage. We also rely on trade secrets
and proprietary know-how, which we seek to protect, in part, through
confidentiality agreements with employees, consultants, collaborative partners
and others. There can be no assurance that these agreements will not be
breached.





The ability to develop our technologies
and to commercialize products will depend on avoiding the infringement of
patents of others.  While we are aware of patents issued to
competitors, we are not aware of any claim of patent infringement against us,
except as described in the following two paragraphs.  Any potential
patent infringement may require us to acquire licensing rights to allow us to
continue the development and commercialization of our products.  Any
such future claims concerning us infringing patents and proprietary technologies
could have a material adverse effect on our business. In addition, litigation
may also be necessary to enforce any of our patents or to determine the scope
and validity of third-party proprietary rights.  There can be no
assurance that our patents would be held valid by a court of competent
jurisdiction.  We may have to file suit to protect our patents or to
defend use of our patents against infringement claims brought by
others.  Because we have limited cash resources, we may not be able to
afford to pursue or defend against litigation in order to protect our patent
rights.





16


In March 2004 we were notified by email
from Innogenetics, a Belgian biopharmaceutical company involved in specialty
diagnostics and therapeutic vaccines, that it believes the CSF diagnostic test
we have been developing uses technology that is encompassed by the claims of
its’ U.S. patents.    Innogenetics also informed
us


that it
could be amenable to entering into a licensing arrangement or other business
deal with APNS regarding its patents.  We had some discussions with
Innogenetics concerning a potential business relationship, however no further
discussions have been held since the second quarter of 2006.





We have reviewed these patents with our
patent counsel on several occasions prior to receipt of the email from
Innogenetics and subsequent to receipt of the email.  Based on these
reviews, we believe that our CSF diagnostic test does not infringe the claims of
these Innogenetics patents.    If we were unable to reach a
mutually agreeable arrangement with Innogenetics, we may be forced to litigate
the issue.  Expenses involved with litigation may be significant,
regardless of the ultimate outcome of any litigation.  An adverse
decision could prevent us from possibly marketing a future diagnostic product
and could have a material adverse impact on our business.





We also rely on trade secrets to
protect our proprietary technologies, especially where we do not believe patent
protection is appropriate or obtainable.  However, trade secrets can
be difficult to protect.  We rely in part on confidentiality
agreements with our employees, consultants, outside scientific collaborators,
sponsored researchers and others to protect our trade secrets and other
proprietary information.  These agreements may not effectively prevent
disclosure of confidential information and may not provide an adequate remedy if
unauthorized disclosure of confidential information occurs.  In
addition, others may independently discover our trade secrets and proprietary
information.  Costly and time-consuming litigation could be necessary
to enforce and determine the scope of our proprietary rights, and failure to
obtain or maintain trade secret protection could adversely affect our
competitive position.  None of our employees, consultants, scientific
researchers or collaborators has any rights to publish scientific data and
information generated in the development or commercialization of our products
without our approval, with the exception of Eli Lilly and Company’s rights under
our collaboration agreement.  Under the license agreements with us,
AECOM has a right to publish scientific results relating to the diagnosis of AD
and precursor or related conditions in scientific journals, provided, that AECOM
must give us pre-submission review of any such manuscript to determine if it
contains any of our confidential information or patentable
materials.





We
face large competitors and our limited financial and research resources may
limit our ability to develop and market new products





The biotechnology, diagnostic and
pharmaceutical markets generally involve rapidly changing technologies and
evolving industry standards.  Many companies, both public and private,
are developing products to diagnose and to treat Alzheimer’s
disease.  Most of these companies have substantially greater
financial, research and development, manufacturing and marketing experience and
resources than we do.  As a result, our competitors may more rapidly
develop effective diagnostic products as well as therapeutic products that are
more effective or less costly than any product that we may
develop.  Under our agreement with Eli Lilly and Company, however, all
aspects of our therapeutic collaboration will be largely funded by
Lilly.





We also face competition from colleges,
universities, governmental agencies and other public and private research
institutions.  These competitors are becoming more active in seeking
patent protection and licensing arrangements to collect royalties for use of
technology that they have developed.  Some of these technologies may
compete directly with the technologies being developed by us.  Also,
these institutions may also compete with us in recruiting highly qualified
scientific personnel.





We
do not have manufacturing capability and we must rely on third party
manufacturers to produce our products, giving us limited control over the
quality of our products and the volume of products produced





While we have internally manufactured
some of the reagents and materials necessary to conduct our activities related
to research and development of our diagnostic products, we do not currently have
any large scale manufacturing capability, expertise or personnel and expect to
rely on outside manufacturers to produce material that will meet applicable
standards for clinical testing of our products and for larger scale production
if marketing approval is obtained.




17


We will either find our own
manufacturing facilities, rely upon third-party manufacturers to manufacture our
proposed products in accordance with appropriate regulations, or we will most
likely utilize the capabilities of our partners and/or
collaborators.  Under our agreement with Eli Lilly and Company, Lilly
has an exclusive world-wide license to manufacture, market and sell any AD
therapeutic that comes to market from our collaboration agreement. We do not
have any outside manufacturing agreements for our proposed diagnostic
products.  If we, or Lilly, choose to utilize an outside manufacturer,
we cannot assure that any outside manufacturer that we, or Lilly, select will
perform suitably or will remain in the contract manufacturing business, in which
instances we (or Lilly) would need to find a replacement manufacturer or we
would have to develop our own manufacturing capabilities.  If we are
unable to do so, our ability to obtain regulatory approval for our products
could be delayed or impaired.  Our ability, and Lilly’s ability, to
market our products could also be affected by the failure of our third party
manufacturers or suppliers to comply with the good manufacturing practices
required by the FDA and foreign regulatory authorities.





We
do not have marketing and sales staff to sell our products and we must rely on
third parties to sell and market our products, the cost of which may make our
products less profitable for us





We do not have marketing and sales
experience or personnel.  As we currently do not intend to develop a
marketing and sales force, we will depend on arrangements with partners or other
entities for the marketing and sale of our proposed products.  Under
our agreement with Eli Lilly and Company, Lilly has an exclusive world-wide
license to market and sell any AD therapeutic that comes to market from our
collaboration agreement.  We do not currently have any agreements with
corporate partners or other entities to provide sales and marketing services for
our proposed diagnostic products.  We may not succeed in entering into
any satisfactory third-party arrangements for the marketing and sale of our
proposed products, or we may not be able to obtain the resources to develop our
own marketing and sales capabilities.  We may never have an AD
therapeutic come to market under the Lilly agreement, or we may never have a
diagnostic product come to market.  The failure to develop those
capabilities, either externally or internally, may adversely affect future sales
of our proposed products.





We
must rely on third party relationships to develop, manufacture and market our
products without which we may fail





We do not possess all the resources
necessary to complete the development, clinical testing, regulatory process,
manufacturing, marketing and commercialization of our diagnostic and therapeutic
products and we will need to obtain such resources from third
parties.  In order to obtain such resources, we will need to enter
into collaborations with corporate partners, licensors, licensees and possibly
relationships with third parties from whom we will outsource the necessary
expertise and resources.  Our success may depend on securing such
relationships.  This business strategy would utilize the expertise and
resources of third parties in a number of areas including:





·
            performing
      various activities associated with pre-clinical studies and clinical
      trials;


·
            preparing
      submissions seeking regulatory
approvals;


·
            manufacture
      of kits and solutions; and


·
            sales
      and marketing of our products.







This strategy of reliance on third
party relationships creates risks to us by placing critical aspects of our
business in the hands of third parties, whom we may not be able to control as
effectively as our own personnel.  For example, under our agreement
with Eli Lilly and Company, Lilly has an exclusive world-wide license to
manufacture, market and sell any AD therapeutics that comes to market from our
collaboration agreement.  We cannot be sure that the Lilly agreement
or any future collaborative agreements will be successful.   If
these third parties, such as Eli Lilly and Company, do not perform in a timely
and satisfactory manner, we may incur additional costs and lose time in our
development and clinical programs as well as the commercialization our
products.  To the extent we choose not to, or are not able to,
establish such arrangements, we could experience increased risk and capital
requirements.




We do not
have the ability to conduct clinical trials independently.  We intend
to rely on our partners, clinical investigators and third-party clinical
research organizations to perform a significant portion of these
functions.  There can be problems with using third-party clinical
research organizations such as:




18







·
            we
      are not able to locate acceptable contractors to run this portion of our
      clinical trials;




·
            we
      can not enter into favorable agreements with
  them;




·
            third
      parties may not successfully carryout their contractual duties;
      and/or




·
            third
      parties may not meet expected
deadlines







If any of these problems occur, we will
be unable to obtain required regulatory approvals and will be unable to
commercialize our products on a timely basis, if at all.




We
are dependent on our key employees and consultants, who may not readily be
replaced





We are highly dependent upon the
principal members of our management team, especially Ellen R. Hoffing, Chairman,
President and Chief Executive Officer, and Peter Davies, Ph.D., our founding
scientist, as well as our other officers and directors.  Ms. Hoffing’s
employment agreement is effective through August 29, 2009.  Our
consulting agreement with Dr. Davies was renewed in November 2008 and is
effective through November 2011.  We do not have employment agreements
with John DeBernardis, Ph.D., Chief Scientific Officer, and David Ellison, Chief
Financial Officer and Corporate Secretary.  We do not currently
maintain key-man life insurance and the loss of any of these persons' services,
and the resulting difficulty in finding sufficiently qualified replacements,
could adversely affect our ability to develop and market our products and obtain
necessary regulatory approvals.





Our success also will depend in part on
the continued service of other key scientific personnel, and our ability to
identify, hire and retain additional staff, if necessary.  We face
intense competition for qualified employees and consultants.  Large
pharmaceutical companies and other competitors, which have greater resources and
experience than we have, can, and do, offer superior compensation packages to
attract and retain skilled personnel.  As a result, we may have
difficulty retaining such employees and consultants because we may not be able
to match the packages offered by such competitors and large pharmaceutical
companies, and we may have difficulty attracting suitable
replacements.





We expect that our potential expansion
into areas and activities requiring additional expertise, such as clinical
trials, governmental approvals, contract and manufacturing and sales and
marketing, will be done by working with outside contractors who have the
appropriate expertise or by utilizing collaborators / partners.  The
management of these processes may require an increase in management and
scientific personnel and the development of additional expertise by existing
management personnel.  The failure to attract and retain such
personnel or to develop such expertise could materially adversely affect
prospects for our success.





If
our current research collaborators, scientific advisors, and specifically our
founding scientist, Dr. Peter Davies, terminate their agreements with us, or
develop relationships with competitors, our ability to advance existing programs
and add new tools and technologies could be adversely impacted.





We derive significant support and
benefit from research collaborators and other expertise that we
utilize.  These collaborators are not our employees and operate under
consulting agreements that are subject to termination provisions.  Our
core technology in the AD field is based on exclusive licenses with AECOM
covering virtually all of our diagnostic and therapeutic applications in the
field of neurodegenerative diseases.  We therefore cannot control the
explicit amount of time or output that is derived from our collaborators through
our agreements.  Dr. Davies is currently actively deploying the time
and resources at his lab at AECOM that is necessary to advance our collaboration
agreement with Eli Lilly and Company as well as providing support to our
diagnostic development programs.  We may not derive any new or
additional tools or technologies from our relationship with Dr. Davies at AECOM,
that would be appropriate for us to develop, or that fall outside of the rights
of the Lilly collaboration.





We
use hazardous materials in our research and that may subject us to liabilities
in excess of our resources





Our research and development involves
the controlled use of hazardous materials such as acids, caustic agents,
flammable solvents and carcinogens.  Although we believe that our
safety procedures for handling and disposing of hazardous materials comply in
all material respects with the standards prescribed by government regulations,
the risk of accidental contamination or injury from these materials cannot be
completely eliminated.  In the event of an accident, we could be held
liable for any damages that result.  Although we have insurance
coverage for third-party liabilities of this nature, such liability beyond this
insurance coverage could exceed our resources.  Our insurance for
hazardous materials liabilities has a deductible of $5,000 and a cap on coverage
for damages of $250,000.  There can be no assurance that current or
future environmental or transportation laws, rules, regulations or policies will
not have a material adverse effect on us.





19


If
we have any products used in clinical trials or products sold commercially,
potential product liability claims against us could result in reduced demand for
our products or extensive damages in excess of insurance
coverage





The use of our products in clinical
trials or from commercial sales will expose us to potential liability claims if
such use, or even their misuse, results in injury, disease or adverse
effects.  We intend to obtain product liability insurance coverage
before we initiate clinical trials for any of our
products.   This insurance is expensive and insurance companies
may not issue this type of insurance when needed.  Any product
liability claim resulting from the use of our diagnostic test in a clinical
study, even one that was not in excess of our insurance coverage or one that is
meritless, could adversely affect our ability to complete our clinical trials or
obtain FDA approval of our product, which could have a material adverse effect
on our business.





The
healthcare reimbursement environment is uncertain and our customers may not get
significant insurance reimbursement for our products, which could have a
materially adverse affect on our sales and our ability to sell our
products





Recent efforts by governmental and
third-party payors, including private insurance plans, to contain or reduce the
costs of health care could affect the levels of revenues and profitability of
pharmaceutical, diagnostic and biotechnology products and
companies.  For example, in some foreign markets, pricing or
profitability of prescription pharmaceuticals is subject to government
control.  In the United States, there have been a number of federal
and state proposals to implement similar government control.  Pricing
constraints on our potential products could negatively impact revenues and
profitability.





In the United States and elsewhere,
successful commercialization of our products will depend in part on the
availability of reimbursement to the consumer using our products from
third-party health care payors.  Insufficient reimbursement levels
could affect demand for our products, and therefore, our ability to realize an
appropriate return on our investment in product
development.  Third-party health care payors are increasingly
challenging the price and examining the cost-effectiveness of medical products
and services.  If we succeed in bringing one or more products to
market, and the government or third-party payors fail to provide adequate
coverage or reimbursement rates for those products, it could reduce our product
revenues and profitability.





Current
proposed regulations for reference laboratory developed diagnostic tests may
impact our ability to sell our proposed diagnostic tests under the Clinical
Laboratory Improvement Amendment (“CLIA”) exemption





Governmental agencies are currently
reviewing additional regulations to be imposed on reference laboratory developed
diagnostic tests, so called “homebrew” tests, including evidence of analytic and
clinical validity and enhanced labeling requirements.  In addition,
there have been discussions concerning lower Medicare reimbursement for non-FDA
approved tests.  Increased FDA regulation of reference laboratory
developed diagnostic tests could significantly increase the costs and
significantly reduce the demand for such tests.





We
must enroll a sufficient number of participants in our clinical trials and
generate clinical data that shows our products are safe and effective in order
to obtain the necessary regulatory approval to market our products





In order to sell our products, we must
receive regulatory approval to market our products.  Before obtaining
regulatory approvals for the commercial sale of any of our products under
development, we must demonstrate through all necessary regulatory studies,
including pre-clinical and clinical trials, that the product is safe and
effective for use in each target indication. If our products fail in research,
development and/or clinical trials, this may have a significant negative impact
on us.





In addition, the results from
pre-clinical testing and early clinical trials may not be predictive of results
obtained in late stage clinical trials. There can be no assurance that our
clinical trials will demonstrate sufficient safety and efficacy to obtain
regulatory approvals. The completion rate of our clinical trials is dependent
on, among other factors, the patient enrollment rate. Patient enrollment is a
function of many factors including:





20


·
            patient
      population size;


·
            access
      to patients;


·
            competitive
      trials;


·
            the
      nature of the protocol to be used in the
trial;


·
            patient
      proximity to clinical sites; and


·
            eligibility
      criteria for the study





Delays in
patient enrollment would increase costs and delay ultimate sales, if any, of our
products.





Our
stock price may fluctuate significantly due to reasons unrelated to our
operations, our products or our financial results.  Our stock price
may decrease if we have to issue a large number of shares of common stock in
order to raise the additional funds needed prior to the middle of the third
quarter of 2009.





Stock prices for many technology
companies fluctuate widely for reasons which may be unrelated to operating
performance or new product or service announcements.  Broad market
fluctuations, earnings and other announcements of other companies, general
economic conditions or other matters unrelated to us or our operations and
outside our control also could affect the market price of the Common
Stock.  During the  2008 fiscal year, the highest closing
price of our stock was $0.13 and the lowest closing price of our stock during
the same period was $0.02.  At our current level of operations, we
have sufficient cash to last into the middle of the third quarter of 2009, and
we will need to raise additional funds prior to the middle of the third quarter
of 2009.  In order to raise additional funds, we may have to sell a
significant number of shares of our common stock and/or issue warrants
exercisable to purchase shares of our common stock.  While the inflow
of additional funds may cause our stock price to increase, the prospect of
issuing, or the actual issuance of, a substantial number of additional shares of
common stock may cause our stock price to decrease.





We
will need to increase the number of our authorized shares of common stock in
order to raise a meaningful amount of capital through the sale of equity
securities.  Such increase has been approved by our
stockholders.





We have 200,000,000 authorized shares
of common stock.  As of December 31, 2008, we had 130,217,808 shares
of common stock issued and outstanding, and we have reserved (i) 43,273,903
shares of common stock for issuance upon the exercise of outstanding warrants
and (ii) 19,430,497 shares of common stock for issuance upon the exercise of
outstanding options.  In January 2009, 234,370 stock options expired,
unexercised.  In February 2009, 34,690,824 warrants expired,
unexercised and 799,752 options were issued.  In March 2009, we had a
stock option exchange program that resulted in a net decrease of 7,208,627 stock
options outstanding.  As of March 26, 2009, we have 48,411,861 shares
of common stock available for issuance in any capital raising
transaction.  Because we may have to issue warrants in any equity deal
to raise capital, we could have significantly less than 48.4 million shares to
sell, which reduces the amount of capital we could raise.  In order to
be able to raise a significant amount of capital for future operations, we will
need to increase our available shares of authorized common stock.  In
September 2008, at our annual stockholders meeting, the stockholders approved a
proposal to amend our certificate of incorporation to effect a reverse stock
split of our common stock at any time prior to June 30, 2009 at a ratio between
1-for-20 and 1-for-30 as determined by our Board of Directors and to decrease
our authorized common stock from 200 million shares to 100 million shares. After
the reverse stock split and the change in authorized shares of common stock have
occurred, we will have sufficient available authorized shares of common stock to
issue in a funding and for other uses as deemed appropriate by our Board of
Directors.





Our
share price may decline due to a large number of shares of our common stock
eligible for sale in the public markets and a large number of shares of our
common stock that could be issued upon the exercise of warrants and options
should our stock price increase to a level above the exercise price of the
warrants and options





As of March 26, 2009, we had
outstanding 130,217,808 shares of Common Stock, without giving effect to shares
of Common Stock issuable upon exercise of (i) warrants issued to SF Capital,
exercisable for 6,214,286 shares of or common stock, (ii) 10,120,585 options
granted under our stock option plan, (iv) 2,666,667 options granted outside of
our stock option plan, and (iv) 2,368,793 other warrants previously
issued.  Of such outstanding shares of common stock, all are freely
tradable, except for any shares not yet registered, shares underlying stock
options that are not yet vested, and any shares held by our "affiliates" within
the meaning of the Securities Act (officers, directors and 10% security
holders), which shares will be subject to the resale limitations of Rule 144
promulgated under the Securities Act.  We will need to raise capital
prior to the middle of the third quarter of 2009 and this may cause us to issue
additional shares of our common stock in 2009.





21


The
holders of our outstanding warrants and stock options may not exercise them, or
they may expire before we are able to receive any proceeds from the exercise of
these warrants and stock options





As of March 26, 2009, we had 8,583,079
outstanding warrants and 12,787,252 outstanding stock options.  The
outstanding warrants have an average exercise price of $0.18 and have expiration
dates between 2009 and 2013.  The outstanding stock options have
exercise prices ranging from $0.039 to $1.50 and have expiration dates between
2010 and 2019.  We may not receive any significant proceeds from the
exercise of these outstanding warrants and stock options due to market
conditions and/or the expiration of the warrants and stock options prior to
exercise.  This could impact our future fund raising
options.





We
have not paid any dividends and do not anticipate paying dividends in the
foreseeable future





A predecessor of Applied NeuroSolutions
liquidated most of its assets and paid a dividend to its shareholders in August
2001.  We have not paid cash dividends on our common stock, and we do
not anticipate paying cash dividends on our common stock in the foreseeable
future.  Investors who require dividend income should not rely on an
investment in our common stock to provide such dividend
income.  Potential income to investors in our common stock would only
come from any rise in the market price of our common stock, which is uncertain
and unpredictable.





A
limited market for our common stock and “Penny Stock” rules may make buying or
selling our common stock difficult




Our common stock presently trades in
the over-the-counter market on the OTC Bulletin Board. As a result, an investor
may find it difficult to sell, or to obtain accurate quotations as to the price
of, our securities.  In addition, our common stock is subject to the
penny stock rules that impose additional sales practice requirements on
broker-dealers who sell such securities to persons other than established
customers and accredited investors.  The SEC regulations generally
define a penny stock to be an equity that has a market price of less than $5.00
per share, subject to certain exceptions.  Unless an exception is
available, those regulations require the delivery, prior to any transaction
involving a penny stock, of a disclosure schedule explaining the penny stock
market and the risks associated therewith and impose various sales practice
requirements on broker-dealers who sell penny stocks to persons other than
established customers and accredited investors (generally institutions and high
net worth individuals).  In addition, the broker-dealer must provide
the customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction and
monthly account statements showing the market value of each penny stock held in
the customer's account.  Moreover, broker-dealers who recommend such
securities to persons other than established customers and accredited investors
must make a special written suitability determination for the purchaser and
receive the purchaser's written agreement to transactions prior to
sale.  Regulations on penny stocks could limit the ability of
broker-dealers to sell our common stock and thus the ability of purchasers of
our common stock to sell their shares in the secondary market.





Our
disclosure controls and procedures and our internal controls over financial
reporting are not adequate and may result in our failure to disclose items that
we may be required to disclose under the Securities Act or the Securities
Exchange Act or may result in financial statements that are incomplete or
subject to restatement





Section 404 of the Sarbanes Oxley Act
of 2002 (“Section 404”) requires significant additional procedures and review
processes of our system of internal controls.  Section 404 requires
that we evaluate and report on our system of internal controls over financial
reporting beginning with the Annual Report on Form 10-K for the year ended
December 31, 2007.  In addition, our independent auditors must report
on management’s evaluation of those controls for the year ending December 31,
2009.  The additional costs associated with this process may be
significant.  Our internal controls under Section 404 may not be
adequate.  After documenting and testing our system, we have
identified the following material weaknesses:




·
            We
      lack segregation of duties in the period-end financial reporting process,
      and


·
            Our
      accounting software has inherent control
  deficiencies.





Due to
these material weaknesses, our chief executive officer and chief financial
officer concluded that as of December 31, 2008, our disclosure controls and
procedures were not effective to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in SEC rules and forms.  Consequently, we may fail to disclose items
that we are required to report in our SEC filings, including registration
statements, proxy statements and periodic reports.  If we are required
to amend prior reports as a result of failing to disclose required information,
investors may react adversely to such amendments and our stock price may
decrease.





22


Our
Independent Registered Public Accountants have substantial doubt about our
ability to continue as a going concern





We have
had net losses for each of the years ended December 31, 2008 and 2007, and we
have an accumulated deficit as of December 31, 2008.  Since the
financial statements for each of these periods were prepared assuming that we
would continue as a going concern, in the view of our independent registered
public accountants, these conditions raise substantial doubt about our ability
to continue as a going concern.  We anticipate that our cash balances
at December 31, 2008, coupled with our R & D support from Eli Lilly and
Company for 2009, should be sufficient to fund our current level of operations
through the middle of the third quarter of 2009.  We will need
additional funding prior to the middle of the third quarter of 2009 in order to
continue our research, product development and our operations.  Since
we do not expect to generate any material revenues for the foreseeable future,
our ability to continue as a going concern depends, in large part, on our
ability to raise additional capital prior to the middle of the third quarter
2009, either through some form of collaboration or joint venture or debt or
equity financing, which may include the exercise of outstanding stock options
and/or warrants.  If we are unable to raise additional capital, we may
be forced to discontinue our business.





ITEM
2.                      PROPERTIES





We lease approximately 7,500 square
feet of office and laboratory space in Vernon Hills, Illinois at an annual
rental of approximately $125,000.Our
current lease agreement expired in May 2007 and was renewed for a three-year
period ending May 2010 at a slightly reduced base rent.  We believe
that we can acquire additional space, if needed, on acceptable
terms.





ITEM
3.                      LEGAL
PROCEEDINGS





We are not currently involved in any
legal proceedings.





ITEM
4.                      SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS





None.


23


PART
II





ITEM
5.                      MARKET
FOR REGISTRANT’S COMMON EQUITY,  RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES





Our common stock is quoted on the OTC
(Over-the-Counter) Bulletin Board and traded under the symbol,
"APNS".  Prior to November 25, 2003, our common stock was traded on
the OTC Bulletin Board under the symbol “HMYD”.  Our common stock was
previously traded on the OTC Bulletin Board under the symbol “OPHD” until
February 5, 2002.





The following table sets forth the
range of high and low closing bid prices for our common stock, from January 1,
2007 through December 31, 2008, and for each of the quarterly periods indicated
as reported by the OTC Bulletin Board.  The bid prices represent
prices between broker-dealers and don’t include retail mark-ups and mark-downs
or any commissions to the dealer.  These bid prices may not reflect
actual transactions.











High
            Low2007:First
      quarter
            $ 0.31
            $  
    0.23Second
      quarter
            0.32
            0.20Third
      quarter
            0.24
            0.15Fourth
      quarter
            0.22
            0.112008:First
      quarter
            $ 0.13
            $  
    0.09Second
      quarter
            0.10
            0.06Third
      quarter
            0.08
            0.05Fourth
      quarter
            0.06
            0.02





As of February 27, 2009, we had
approximately 2,500 record holders of our common stock.  We estimate
that as of such date, there were more than 2,000 beneficial holders of our
common stock.





No dividends were paid in 2007 and
2008.  There are no restrictions on the payment of
dividends.  We do not intend to pay dividends for the foreseeable
future.





All of our securities that were issued
or sold by us since March 15, 2001, have been registered with the SEC, except
2,666,667 stock options issued outside our Stock Option Plan in 2006 and 926,316
shares of restricted  common stock.  All of these issuances
were made in reliance upon the exemption set forth in Section 4(2) of the
Securities Act of 1933.  We filed an SB-2 registration statement in
July 2004, an S-8 registration statement in December 2004, and an SB-2
registration statement in November 2007. An S-8 registration statement is
expected to be filed in the second quarter of 2009 to register the stock options
and restricted stock noted above.








ITEM
6.                      SELECTED
FINANCIAL DATA





Not
applicable.




24


ITEM
7.                      MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS





The following discussion of the
financial condition and results of operations of the Company should be read in
conjunction with the financial statements and the related notes thereto included
in this document.





OVERVIEW





Our business strategy is to build on
our strong scientific research, and commitment to develop a range of solutions
to meet the unmet needs of the growing number of Alzheimer
patients.  Through our tau based approach we continue to develop
proprietary technology, know-how and tools.  We are seeking to offer
options for early diagnosis and disease modifying therapeutic solutions that
will enhance the physicians’ ability to effectively manage their patient’s
treatment.  We initiated a business development program in the second
half of 2008 to offer to pharmaceutical, biotechnology, imaging and other
clinical trial support companies the opportunity to use our CSF-based P-Tau 231
test as a cost-effective tool to help optimize their clinical trial
programs.  We have performed initial studies for two major
pharmaceutical companies and are in discussions with other interested
parties.





Our unique science, stemming from the
work of our founding scientist, Peter Davies, Ph.D., is focused on developing a
range of diagnostic tests.  In addition, through our collaboration
with a top tier Pharmaceutical company, Eli Lilly and Company, our tau-based
science is the foundation of the development and commercialization of novel
therapeutics to modify the course of AD.  During the first half of
2008, we achieved three important program milestones; we passed a significant
unpaid program milestone in our therapeutic program collaboration with Eli Lilly
and Company, we identified tools that meet our requirements to advance our serum
diagnostic development program to “rule out” AD, and we created proprietary
tau-based tools required for the development of a serum-based test to support
the early diagnosis of AD, utilizing our P-Tau 231 biomarker.  To
achieve our next diagnostic program milestones, we established key working
arrangements with several specialized technology companies in the second half of
2008.  Utilizing our newly developed proprietary tools with these
specialized technology companies, we are advancing the development of our serum
diagnostic development programs.  Our principal development programs,
and plan of operation for each, are as follows:





·
            AD Therapeutic
      Program– We are involved
      in the discovery and development of novel therapeutic targets for the
      development of treatments for Alzheimer’s disease based upon a concept
      developed by Dr. Davies, the Company’s founding scientist and the Burton
      P. and Judith Resnick Professor of Alzheimer’s Disease Research at
      AECOM.  As a result of Dr. Davies’ research, and the Company’s
      expertise, we are focused on discovery of unique targets that may be
      involved in a common intracellular phosphorylation pathway leading to the
      development of the abnormal, destructive brain structures, amyloid plaques
      and neurofibrillary tangles, that are characteristic of Alzheimer’s
      disease.  A patent application was filed in 2006 covering Dr.
      Davies work relative to the therapeutic work.  In November 2006,
      we entered into an agreement with Eli Lilly and Company to develop
      therapeutics to treat AD.  The agreement forms a collaboration
      that combines the expertise, research tools and tau-based approach
      advanced by Dr. Davies and our team at APNS, with the scientists,
      therapeutic development expertise and financial resources at Eli Lilly and
      Company.  The agreement calls for Lilly to receive the exclusive
      worldwide rights to the intellectual property related to our expertise in
      understanding the molecular neuropathology of AD as it pertains to the
      formation of neurofibrillary tangles.  Lilly will fund the vast
      majority of all pre-clinical research and development and will fully
      finance the clinical testing, manufacturing, sales and marketing of AD
      therapeutics developed from our
collaboration.





Since the
start of our collaboration with Eli Lilly & Company, the collaboration
management structure, working teams and external resources have become fully
operational.  The key assets and proprietary tools have been
appropriately transferred to support work being undertaken by each of Dr.
Davies, Lilly and APNS.  Key in-vivo models have been established with
the goal to validate our proprietary tau-based target.  The
collaboration with Lilly has established criteria that provide the team with a
clearly mandated and coordinated work plan that will enable them to generate the
data to validate the proprietary APNS target.  The APNS proprietary
tau-based target has already achieved two significant unpaid program milestones:
the first one in the second quarter of 2007 and the second one in the first
quarter of 2008.  The next milestone, if achieved, would be the first
milestone for which we receive a cash payment from Lilly.  The
achievement of the first paid milestone was targeted for review by Lilly’s
program management team in late March 2009.  Prior to the review by
Lilly’s program management team, the joint Lilly/APNS collaboration management
team deferred formal review pending the completion of the milestone
requirements.  Lilly remains fully committed to the collaboration with
resources focused on program progress and milestone achievement.  The
collaboration continues to make progress toward additional tau-based targets
with various screens established and studies underway for identifying other
tau-based targets.  We anticipate providing an update on the progress of
the collaboration with Lilly late second quarter 2009.





25


·
            AD Diagnostic Program–
      Our diagnostic program is based on Dr. Davies’ research of the tau
      pathology, and revolves around developing a pipeline of diagnostic tests
      that could include: (i) the detection of hyperphosphorylated tau in CSF,
      (ii) the detection of hyperphosphorylated tau in serum, and (iii) a
      screening test to rule out AD in serum.  Our product farthest
      along in development is a CSF-based diagnostic test to detect whether a
      person has AD.  This diagnostic, based upon the detection of a
      certain AD associated protein found in the CSF of AD patients (P-Tau 231),
      has demonstrated, based on published research validation studies, an
      overall sensitivity and specificity in the range of 85% to 95% (depending
      on patient diagnosis).  This test is based on extensive testing
      in our lab, utilizing in excess of 2,000 CSF samples to differentiate
      patients diagnosed with AD from patients diagnosed with other forms of
      dementia and relevant neurological diseases, including major depression,
      as well as age-matched healthy
controls.





CSF-Based Diagnostic - Our
most recent research has sought to further substantiate the utility of the test
in the mild cognitive impairment (“MCI”) population.  Two studies
published in 2007 show the ability of our CSF-based test to be a strong
predictor of the decline from MCI to AD.  The September 2007 online
edition of Neurobiology of
Aging presented a study comparing five of the best-known CSF biomarkers
for AD.  Our P-Tau 231 biomarker was the strongest predictor of the
decline from MCI to AD.  The December 2007 issue of Neurology published an
internationally based multi-center study that demonstrated our P-Tau 231
biomarker was a significant predictor of the decline from MCI to AD in a
clinically useful time period of 1.5 years.  Studies published in the
December 2005 edition of Neuroscience Letters and in
the March 2006 journal Neurobiology of Aging support
the use of our P-Tau 231 CSF-based diagnostic test in identifying individuals
with MCI who, over time, are most likely to develop AD.  Current data
seems to suggest that 60% to 80% of individuals with MCI will eventually
progress to AD.  As a neurodegenerative disease, it is theorized that
early detection of AD could greatly enhance the ability of current and future
therapies to better manage the disease.  A study published in the
January 2004 edition of Archives of General
Psychiatry has shown that detecting phosphorylated tau (“P-Tau”) proteins
in CSF comes closest to fulfilling the criteria of a biological marker for
AD.  This publication reported that our P-Tau 231 CSF-based test
exceeded standards for an AD diagnostic test established by the National
Institute of Aging and the Ronald and Nancy Reagan Research Institute of the
Alzheimer’s Association in a 1998 published “Consensus Report”.  It
was determined by that group that a successful biological marker would be one
that had a sensitivity level and specificity level of at least 80%.  A
Position Paper, “Research Criteria for the Diagnosis of Alzheimer’s Disease:
Revising the NINCDS-ADRDA Criteria”, was published in the August 2007 edition of
Lancet Neurology that
describes suggested revisions to the criteria for the diagnosis of Alzheimer’s
disease, including the use of CSF biomarkers, specifically referencing our P-Tau
231 CSF-based test.  The February 2009 issue of Journal of Alzheimer’s
Disease showed the added value of our ptau biomarker when used in
conjunction with an MRI.  New P-Tau 231 antibodies that have been created
for our serum-based diagnostic development may also allow us to enhance the
commercial viability of our CSF-based test.





Serum-Based Diagnostic - We
are utilizing the knowledge gained during the development of our CSF-based
diagnostic test to develop two types of serum-based tests to detect Alzheimer’s
disease: one to “rule out” AD and one, utilizing our P-Tau 231 biomarker, to
support the diagnosis of AD.  Throughout 2006, APNS scientists,
working with external technical expertise, developed an important understanding
of the tools necessary to advance the development of a serum-based AD diagnostic
test with scientifically accepted tau-based biomarkers.  This resulted
in APNS creating a robust project plan.  We began developing these key
tools in early 2007 and established 2008 milestones for the development of
serum-based diagnostic tests.





26


As part
of our project plan, in 2007, we secured additional expertise and resources by
conducting a scientific advisory board meeting that brought together APNS
scientists, Dr. Davies and three outside diagnostic experts to assist us in
assessing the most effective approaches and resources to advance our diagnostic
development programs.  Through 2007, we followed our work plans to
develop program related tools, primarily antibodies, that met our scientific
criteria.  We achieved a key milestone in the first quarter of 2008 by
identifying several antibodies that met our requirements.  These
antibodies support advancing development of a “rule out” serum based test for
AD.  We successfully met our next key milestone in the second quarter
of 2008 through the creation of proprietary tau-based  antibodies
required for the development of a serum-based test to support the early
diagnosis of AD, utilizing our P-Tau 231 biomarker (the “P-Tau
test”).   These new P-Tau related antibodies may also support
enhancing the commercial viability of our CSF-based test.





Throughout
the antibody development process we have been assessing specialized technologies
that we believe are necessary to advance our serum diagnostic development
programs.  The goal of collaboration is to bring together a company’s
proprietary technology and related know-how with APNS’ new proprietary
antibodies and extensive knowledge of the protein tau, and determine the
opportunity for a joint effort to develop a serum-based diagnostic
test.  Technology assessments and discussions with companies for
initial collaborations led to the establishment of key working arrangements with
several specialized technology companies.  We began working with these
specialized technology companies throughout the second half of
2008.  The primary focus of the initial work was to determine
feasibility of our proprietary P-Tau test in serum with a supportive
technology.  The results to date from one of these technology
companies have produced variable data that do not provide clear-cut feasibility
for our P-Tau serum-based diagnostic test in development with their proprietary
technology.  Additional antibodies were developed in the fourth
quarter of 2008 and the first quarter of 2009 that potentially could be utilized
to address the issues connected with the development of the P-Tau test with this
specialized technology company.  Our work to establish feasibility for
a P-Tau test is ongoing with the other companies.





Additional
antibodies to support a serum-based “rule out” test were developed in the fourth
quarter of 2008 and the first quarter of 2009.  In early 2009, we
expanded on our initial work with the specialized technology companies to
determine feasibility for a “rule out” test.   In addition, we
began work in-house on a total tau “rule out” serum-based test, to support the
external efforts.  Our current plans target the feasibility of both
the P-Tau test and the “rule out” test in the middle of the second quarter of
2009.





CSF-Based Diagnostic Test Business
Development Program - Given the strong body of scientific data available
for our P-Tau 231 test, coupled with the growing number of clinical trials
directed at creating improved therapeutic solutions for AD patients, APNS has
initiated a business development program to offer to pharmaceutical,
biotechnology, imaging and other clinical trial support companies the
opportunity to use our CSF-based P-Tau 231 test as a cost-effective tool to help
optimize their programs.  APNS and Dr. Davies met with companies that
had expressed an interest in utilizing the P-Tau 231 diagnostic
test.  The meetings took place at the July 2008 International
Conference on Alzheimer’s Disease (“ICAD”) meeting in Chicago.  We
have performed initial studies for two major pharmaceutical companies and have
had discussions with other interested parties.  Net revenue we may
generate by performing our test for interested customers could be deployed to
continue progress toward our goal of developing a serum-based test for the early
diagnosis of AD.  We are actively continuing our efforts and are in
discussions with companies that may utilize our CSF-based diagnostic
test.





·
            Transgenic Mice– Dr. Peter Davies,
      through collaboration with a researcher at Nathan Klein Institute (“NKI”),
      has developed a transgenic mouse containing the human tau gene that
      develops human paired helical filaments, the building blocks of the
      neurofibrillary tangles, which are known to be involved in the pathology
      of Alzheimer’s disease. The pathology in these mice is Alzheimer-like,
      with hyperphosphorylated tau accumulating in cell bodies and dendrites as
      neurofibrillary tangles.  In addition, these transgenic mice
      have exhibited extensive neuronal death that accompanies the tau
      pathology.  These transgenic mice could be used for testing the
      efficacy of therapeutic compounds.  To date, no widely accepted
      animal model that exhibits both AD pathologies has been
      developed.  AECOM and the New York State Office of Mental
      Health, the agency that oversees NKI, each have an interest in these
      transgenic mice.  Through our agreements with AECOM, we have
      license rights to AECOM’s interest in these transgenic mice.  In
      2006, we entered into additional license agreements that provide us with
      the exclusive rights to sell these mice.  The mice are currently
      available through Jackson Laboratories.  In December 2006, we
      entered into an agreement to sell a breeding pair of these
      mice.







27


As we currently do not have any
approved products in the marketplace, we do not have a time frame for generating
significant revenues from our research and development activities.





As of December 31, 2008, we had a cash
balance of $1,045,020.  We anticipate that our cash balance at
December 31, 2008, coupled with our R & D support from Eli Lilly and Company
for 2009, should be sufficient to fund our current planned development
activities and operating expenses into the middle of the third quarter of
2009.  We will need additional funding prior to the middle of the
third quarter of 2009 to continue our research, product development and our
operations.  We intend to seek such additional funding through private
and/or public financing, through exercise of currently outstanding stock options
and warrants or through collaborative or other arrangements with
partners.  If we need to sell additional shares of common stock in
order to raise such additional funding, we will in all likelihood amend our
certificate of incorporation to increase the number of available authorized
shares of common stock.  In September 2008, at our annual stockholders
meeting, the stockholders approved a proposal to amend our certificate of
incorporation to effect a reverse stock split of our common stock at any time
prior to June 30, 2009 at a ratio between 1-for-20 and 1-for-30 as determined by
our Board of Directors and to decrease our authorized common stock from 200
million shares to 100 million shares.  After the reverse stock split
and the change in authorized shares of common stock have occurred, we will have
sufficient available authorized shares of common stock to issue in a funding and
for other uses as deemed appropriate by our Board of Directors.  The
cash on hand will be used for ongoing research and development, working capital,
general corporate purposes and possibly to secure appropriate partnerships and
expertise.





We do not anticipate the purchase,
lease or sale of any significant property and equipment during
2009.  We do not anticipate any significant changes in our employee
count during 2009.











Critical
Accounting Policies and Estimates





Our consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America.  The consolidated financial
statements include the accounts of APNS and its wholly-owned subsidiaries prior
to our dissolution of our subsidiaries in 2004.  All significant
intercompany balances and transactions have been eliminated.  The
preparation of these financial statements requires our management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period.





On an on-going basis, our management
evaluates its estimates and judgments, including those related to tax valuation
and equity compensation.  Our management bases its estimates and
judgments on historical experience and on various other factors that are
believed to be reasonable under the circumstances.  Actual results may
differ from these estimates under different assumptions or
conditions.  Our management believes the following critical accounting
policies, among others, affect our more significant judgments and estimates used
in preparation of these consolidated financial statements.








28


Revenue
Recognition





We generate revenues from research
agreements and collaborations, and in the past, we also generated revenues from
grants, and recognize these revenues when earned.  Grant revenues
represent funds received from certain government agencies for costs expended to
further research on the subject of the grant.  In accordance with EITF
00-21 “Revenue Arrangements with Multiple Deliverables”, for arrangements that
contain multiple deliverables, we separate the deliverables into separate
accounting units if they meet all of the following:  a) the delivered
items have stand-alone value to the customer; b) the fair value of any
undelivered items can be reliably determined; and c) if the arrangement includes
a general right of return, delivery of the undelivered items if probable and
substantially controlled by the seller.  Deliverables that do not meet
these criteria are combined with one or more other deliverables into one
accounting unit.  Revenue from each accounting unit is recognized
based on the applicable accounting literature, primarily Staff Accounting
Bulletin No. 104 (SAB 104), "Revenue Recognition".





Research and
Development





All research and development costs are
expensed as incurred and include salaries of, and expenses related to, employees
and consultants who conduct research and development.  We have, from
time to time, entered into arrangements whereby we will obtain research
reimbursement in the form of funds received to partially reimburse us for costs
expended.





Net Deferred Tax Asset
Valuation Allowance





We record our net deferred tax assets
in the amount that we expect to realize based on projected future taxable
income.  In assessing the appropriateness of the valuation,
assumptions and estimates are required such as our ability to generate future
taxable income.  In the event that we were to determine that we would
be able to realize our deferred tax assets in the future in excess of our net
recorded amount, an adjustment to the deferred tax asset would increase income
in the period such determination was made.  Since inception, we have
concluded that the more likely than not criteria of Statement of Financial
Accounting Standard No. 109, Accounting for Income Taxes,
has not been met and accordingly, we have recorded a valuation allowance for all
our deferred income taxes for all periods presented.





For the year ended December 31, 2007,
we adopted Financial Accounting Standards Board (FASB) Interpretation
48, Accounting for Uncertainty
in Income Taxes — an Interpretation of FASB Statement No. 109, (FIN
48), which clarifies the accounting for uncertain income tax
positions.  This interpretation prescribes a financial statement
recognition threshold and measurement attribute for any tax position taken, or
expected to be taken, in a tax return. The interpretation also provides guidance
on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition.  Upon adoption, there was not
any unrecognized income tax benefits and the adoption of FIN
48 had no effect on shareholders’ equity.  We do not expect any
reasonably possible material changes to the estimated amount in our liability
associated with our uncertain tax position through December 31,
2009.





Equity
Compensation





Effective January 1, 2006, we adopted
Statement No. 123R, Share-Based Payment (SFAS
123R), which requires companies to measure and recognize compensation expense
for all stock-based payments at fair value.  SFAS 123R is being applied on
the modified prospective basis.  Prior to the adoption of SFAS 123R,
we accounted for our stock-based compensation plans under the recognition and
measurement principles of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to
Employees, and related interpretations, and accordingly, recognized no
compensation expense related to the stock-based plans.





Under the modified prospective
approach, SFAS 123R applies to new awards and to awards that were outstanding on
January 1, 2006 that are subsequently modified, repurchased, cancelled or
vest.  Under the modified prospective approach, compensation cost
recognized in 2006 includes compensation cost for all share-based payments
granted prior to, but not yet vested on, January 1, 2006, based on the
grant-date fair value estimated in accordance with the provisions of SFAS 123R,
and compensation cost for all shared-based payments granted subsequent to
January 1, 2006, based on the grant-date fair value estimated in accordance with
the provisions of SFAS 123R.  Prior periods were not restated to
reflect the impact of adopting the new standard.





29


We apply Statement of Financial
Accounting Standards (SFAS) No. 123 and EITF 96-18 Accounting for Equity Instruments
That are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services, for our options awarded to non-employee
consultants.  To determine fair value, management is required to make
assumptions such as the expected volatility and expected life of the
instruments.








Results
of Operations





The following discussion of the
financial condition and results of operations should be read in conjunction with
the consolidated financial statements and notes thereto included in Item
8.







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





Revenues





We recognized $838,133 of revenues in
2008 primarily from the recognition of twelve months of our initial funds
received from our collaboration with Eli Lilly and Company.  We
recognized $1,083,333 of revenues in 2007 from the completion of one research
agreement and the recognition of twelve months of our initial funds received
from our collaboration with Eli Lilly and Company.





Research
and development





Research and development expenses
consist primarily of compensation of personnel and related benefits and taxes,
funding for research and development programs, funding of research related to
license agreements, scientific consultant expenses and overhead
costs.  Research and development expenses for the year ended December
31, 2008 decreased 11% or $187,730 to $1,471,528 from $1,659,258 for the year
ended December 31, 2007.  Below is a summary of our research and
development expenses:





IncreaseExpense
            
            2008
            
            
            2007
            
            
            (Decrease)Compensation,
      taxes and benefits
            
            $
            441,262
            
            
            $
            786,961
            
            
            $
            (345,699
            )Program
      R & D funding, license fees and consulting
            
            
            870,853
            
            
            
            791,890
            
            
            
            78,963Rent,
      telephone and utilities
            
            
            112,304
            
            
            
            107,342
            
            
            
            4,962Stock
      option compensation expense
            
            
            -
            
            
            
            3,423
            
            
            
            (3,423
            )Other
      research and development expenses
            
            
            47,109
            
            
            
            (30,358
            )
            
            
            77,467Total
      Research and Development Expenses
            
            $
            1,471,528
            
            
            $
            1,659,258
            
            
            $
            (187,730
            )





This decrease is primarily due to a
decrease in compensation related expenses caused by a restructuring of our R
& D staffing in the fourth quarter of 2007 and early 2008, that was
partially offset by an increase in the cost of existing employee
benefits.  The increase in program R & D funding, license fees and
consulting was primarily due to an increase in our program R & D funding of
$132,529 to advance our serum-based diagnostic programs for Alzheimer’s
disease.  SFAS 123R requires companies to measure and recognize
compensation expense for all stock based payments at fair value. Non-cash
expense for all stock based payments was $0 in 2008 and was $3,423 in
2007. We estimate that we may incur costs of approximately $120,000 to
$150,000 per month on research and development activities going
forward.  This excludes the non-cash effect of accounting for equity
instruments included in the annual amounts mentioned above.  These
expenditures, however, may fluctuate from quarter-to-quarter and year-to-year
depending upon the resources available, our development schedule, and our
progress.  Results of preclinical studies, clinical trials, regulatory
decisions and competitive developments for our diagnostic programs may
significantly influence the amount of our research and development
expenditures.  In addition, if we incur clinical development costs of
any diagnostic program, research and development spending will significantly
increase.





30


General
and administrative





General and administrative expenses
consist primarily of compensation of personnel and related benefits and taxes,
public company compliance expenses, including legal and accounting expenses, and
occupancy related expenses.  General and administrative expenses for
the year ended December 31, 2008 decreased 18% or $358,427 to $1,642,012 from
$2,000,439 for the year ended December 31, 2007.  Below is a summary
of our general and administrative expenses:





IncreaseExpense
            
            2008
            
            
            2007
            
            
            (Decrease)Compensation,
      taxes and benefits
            
            $
            693,250
            
            
            $
            753,513
            
            
            $
            (60,263
            )Consulting
            
            
            105,377
            
            
            
            138,603
            
            
            
            (33,226
            )Professional
      fees
            
            
            298,176
            
            
            
            319,960
            
            
            
            (21,784
            )Rent,
      telephone and utilities
            
            
            43,550
            
            
            
            44,876
            
            
            
            (1,326
            )Stock
      option compensation expense
            
            
            306,014
            
            
            
            532,917
            
            
            
            (226,903
            )Other
      general and administrative expenses
            
            
            195,645
            
            
            
            210,570
            
            
            
            (14,925
            )Total
      General and Administrative Expenses
            
            $
            1,642,012
            
            
            $
            2,000,439
            
            
            $
            (358,427
            )





This decrease is primarily due to a
decrease in non-cash costs associated with expensing stock options and warrants.
a decrease in compensation related expenses and a decrease in professional fees
and consulting costs.  SFAS 123R requires companies to measure and
recognize compensation expense for all stock based payments at fair value.
Non-cash expense for all stock option based payments and warrant based payments
in 2008 was $306,014 and in 2007 was $532,917.  The decrease in this
non-cash compensation expense is primarily due to the reduction in the
amortization of larger option grants from 2006 and the expense from a warrant
grant in 2007, which was partially offset by the amortization of new option
grants and new restricted stock grants in the second half of 2007 and the first
half of 2008.  The decrease in compensation related expenses is
primarily due to the elimination of CEO bonus in 2008 to conserve cash for
operations.  This decrease was partially offset by higher wages and an
increase in the cost of existing employee benefits.  The decrease in
professional fees is primarily due to a decrease in corporate legal fees in
2008.  In 2007, additional legal costs were incurred for fund raising
activities. Consulting costs decreased primarily due to a decrease in IR / PR
expense.  We estimate that we may incur costs of approximately
$100,000 to $130,000 per month on general and administrative activities going
forward.  This excludes the non-cash effect of accounting for equity
instruments included in the annual amounts mentioned above.  These
expenditures, however, may fluctuate from quarter-to-quarter and year-to-year
depending upon the resources available, SEC requirements, and our development
schedule.





Other
income and expense





We did not incur any interest expense
in 2008.  Interest expense for the year ended December 31, 2007 was
$12,159, principally due to non-cash amortization of debt discount related to
the bridge loan.  Interest income for the year ended December 31, 2008
decreased 28% or $17,121, to $43,039 from $60,160 for the year ended December
31, 2007.  The decrease is primarily due to lower average invested
balances and a lower rate of return.





We currently do not hedge foreign
exchange transaction exposures.  As of December 31, 2008, we do not
have any assets denominated in foreign currencies.  At December 31,
2008, we did have an amount due in euros to a European
collaborator.  Included in accounts payable at December 31, 2008 was
an estimate of $50,935 due to this collaborator.  This amount due was
settled for $50,005 in January 2009.





Net
loss





We incurred a net loss of $2,232,368
for the year ended December 31, 2008 compared to a net loss of $2,528,363 for
the year ended December 31, 2007.  The primary reasons for the
$295,995 decrease in the net loss in 2008 were the $230,326 decrease in stock
based compensation expense and the $345,699 decrease in R & D compensation
and related taxes and benefits.  This was partially offset by a
$132,529 increase in program R & D funding and a $245,200 decrease in
research agreement revenues in 2008.








31





Capital
resources and liquidity





To date, we have raised equity and
convertible debt financing and received research agreement revenues,
collaboration revenues and grant revenues to fund our operations, and we expect
to continue this practice to fund our ongoing operations.  Since
inception, we have raised net proceeds of approximately $42.6 million from
private equity and convertible debt financings.  We have also received
approximately $3.9 million from research agreements, collaboration revenues and
grant revenues.





Our cash and cash equivalents were
$1,045,020 and $2,960,141 at December 31, 2008 and 2007,
respectively.  The decrease in our cash balance is due to the cash
used in operations in 2008, less the $500,000 received in convertible debt
funding in December 2008.





We used cash in operating activities of
$2,414,138 for the year ended December 31, 2008 versus cash used in operating
activities of $2,565,860 for the year ended December 31, 2007.  This
decrease primarily reflects an overall reduction in expenses in 2008 that was
partially offset by $250,000 of revenue received in 2007.  Cash used
in investing activities was negligible in 2008 and 2007.  Net cash
provided by financing activities was $500,000 for the year ended December 31,
2008 versus net cash provided by financing activities of $4,097,539 for the year
ended December 31, 2007.  This decrease primarily reflects the excess
of funds raised in 2007 over funds raised in 2008, less the repayment of the
bridge loan funds received in 2006, plus accrued interest, in January
2007.





We have incurred recurring losses since
our inception and expect to incur substantial additional research and
development costs prior to reaching profitability.  We incurred
research and development costs of $1,471,528 in 2008 and $1,659,258 in 2007,
excluding non-cash costs related to accounting for stock options and other costs
associated with the issuance of equity instruments.  Prior to 2007,
virtually all of our research and development costs were internal costs and
license costs which were not specifically allocated to any of our research and
development projects.  Beginning in 2007, an increasing amount of our
research and development costs are being specifically allocated to our research
and development projects.  Through a restructuring, we eliminated a
senior scientific management position in November 2007 and a staff scientist
position in February 2008.  The compensation that had been utilized
for the scientists is now being allocated to direct R & D projects and
working with outside companies and consultants to obtain specific expertise and
access to technologies to assist us in advancing our programs.  We
anticipate that our cash balances as of December 31, 2008, coupled with
anticipated funds to be received from operations, will be sufficient to cover
our planned research and development activities and general operating expenses
through the middle of the third quarter 2009.  We will need additional
funding prior to the middle of the third quarter 2009 to cover
operations.  If additional funding is not obtained, we will not be
able to fund the costs of any programs in development.  This would
have a material adverse effect on our operations and our prospects.





As we currently do not have any
approved products in the marketplace, we do not have a time frame for generating
significant revenues from our research and development activities.





We currently do not have sufficient
resources to maintain operations and complete the development of our proposed
research projects.  Therefore, we will need to raise additional
capital prior to the middle of the third quarter 2009 to fund our
operations.  We cannot be certain that any financing will be available
when needed, or on terms acceptable to us.  If we fail to raise
additional financing as we need it, we may have to delay or terminate our own
product development programs or pass on opportunities to in-license or otherwise
acquire new products and/or technologies that we believe may be beneficial to
our business.  We may spend capital on:





•      research
and development programs;


•      pre-clinical
studies and clinical trials; and


•      regulatory
processes.





The
amount of capital we may need will depend on many factors, including
the:





•      progress,
timing and scope of research and development programs;


•      progress,
timing and scope of our pre-clinical studies and clinical trials;


•      time and
cost necessary to obtain regulatory approvals;


•      time and
cost necessary to seek third party manufacturers to manufacture our products for
us;


•      time and
cost necessary to seek marketing partners to market our products for
us;


•      time and
cost necessary to respond to technological and market developments;


•      changes
made to, or new developments in, our existing collaborative, licensing and
other


commercial relationships;
and


•      new
collaborative, licensing and other commercial relationships that we may
establish.





32


Off-Balance
Sheet Arrangements





We have no off-balance sheet
arrangements.





Commitments





We have several financial commitments,
including those relating to our license agreements with Albert Einstein College
of Medicine (“AECOM”).





Under our license agreements with
AECOM, we are required to:


•      pay
semi-annual maintenance payments in January and July each year;


•
            pay
      quarterly funding payments in February, May, August and November each year
      as long as the license agreements are in place;
  and


•      pay the
costs of patent prosecution and maintenance of the patents included in the
agreement.





For 2009, AECOM has agreed to defer the
semi-annual maintenance payments until the earlier of December 31, 2009 or a
fund raise at least equal to $3,500,000. In exchange for this deferral, we
agreed to prepay the quarterly funding payments to support Dr. Davies lab at
AECOM that are due in February 2009, May 2009 and August 2009.  This
prepayment of $112,500 was made in December 2008.





Our fixed expenses, such as rent,
license payments and other contractual commitments, may increase in the future,
as we may:


•      enter into
additional leases for new facilities and capital equipment;


•      enter into
additional licenses and collaborative agreements; and


•      incur
additional expenses associated with being a public company.





In addition to the commitments to
AECOM, we also have consulting agreements and minimum annual lease
payments.





The following table summarizes the
timing of these future long term contractual obligations and commitments for the
next five years ending December 31:





Contractual
      Obligations
            
            2009
              Year
      1
            
            
            2010
              Year
      2
            
            
            2011
              Year
      3
            
            
            2012
              Year
      4
            
            
            2013
              Year
      5
            
            
            TotalOperating
      Leases
            
            $
            99,375
            
            
            $
            37,266
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            136,641Consulting
      Agreements with initial terms greater than one year
            
            
            108,000
            
            
            
            108,000
            
            
            
            99,000
            
            
            
            -
            
            
            
            -
            
            
            
            315,000Commitments
      Under License Agreement with AECOM
            
            
            500,000
            
            
            
            500,000
            
            
            
            500,000
            
            
            
            500,000
            
            
            
            500,000
            
            
            
            2,500,000Total
      Contractual Cash Obligations
            
            $
            707,375
            
            
            $
            645,266
            
            
            $
            599,000
            
            
            $
            500,000
            
            
            $
            500,000
            
            
            $
            2,951,641





We are obligated to continue to pay
AECOM $500,000 for each year in which the Agreements are still in
effect.  In addition, we are obligated to pay AECOM a percentage of
all revenues we receive from selling and/or licensing aspects of the AD
technology licensed under the Agreements that exceeds the minimum obligations
reflected in the annual license maintenance payments.





33


Recently
issued accounting pronouncements





In December
2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated
Financial Statements an amendment of ARB No. 51” (“SFAS 160”).  This
statement establishes accounting and reporting standards for noncontrolling
interests in subsidiaries and for the deconsolidation of subsidiaries and
clarifies that a noncontrolling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity in the
consolidated financial statements.  This Statement also requires
expanded disclosures that clearly identify and distinguish between the interests
of the parent owners and the interests of the noncontrolling owners of a
subsidiary.  SFAS 160 is effective for fiscal years beginning on or
after December 15, 2008.  We do not believe that the adoption of SFAS
160 will have a material effect on our results of operations or financial
position.





In December 2007, the FASB issued SFAS
No. 141 (Revised 2007), “Business Combinations” (“SFAS 141 (Revised
2007)”).  While this statement retains the fundamental requirement of
SFAS 141 that the acquisition method of accounting (which SFAS 141 called the
purchase method) be
used for all business combinations, SFAS 141 (Revised 2007) now establishes the
principles and requirements for how an acquirer in a business
combination:  1) recognizes and measures in its financial statements
the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interests in the acquiree; 2) recognizes and measures the
goodwill acquired in the business combination or the gain from a bargain
purchase; and 3) determines what information should be disclosed in the
financial statements to enable the users of the financial statements to evaluate
the nature and financial effects of the business combination.SFAS 141 (Revised 2007)
is effective for fiscal years beginning on or after December 15,
2008.  We do not believe that the adoption of SFAS 141 (Revised 2007)
will have a material effect on our results of operations or financial
position.





In March 2008,
the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities”(“SFAS No. 161”). SFAS
No. 161 requires enhanced disclosures about an entity’s derivative and
hedging activities.  It clarifies (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged items
are accounted for under SFAS No.133 and its related interpretations, and (c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows.  SFAS No. 161 is effective
for fiscal years beginning after November 15, 2008.  The Company
will disclose hedging activities under SFAS No. 161 beginning on January 1, 2009
and does not expect SFAS No. 161 to have a material effect on its financial
statements since it pertains to disclosure only.




In May
2008, the FASB issued SFAS No. 162,“The Hierarchy of Generally
Accepted Accounting Principles,”(“SFAS No. 162”).The current hierarchy
of generally accepted accounting principles is set forth in the American
Institute of Certified Accountants (AICPA) Statement of Auditing Standards (SAS)
No. 69, “The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting
Principles.   SFAS No. 162 is intended to improve financial
reporting by identifying a consistent framework or hierarchy for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with U.S. generally accepted accounting principles for
nongovernmental entities.  This Statement is effective November 15,
2008.  The Company will adopt this Statement effective January 1, 2009
but does not anticipate that the Statement will have a material effect on the
Company’s results of operations or financial position, as theStatement does not
directly impact the accounting principles applied in the preparation of the
Company’s financial statements.








ITEM
7A.                      QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Not applicable.




34


ITEM
8.                      
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA











APPLIED
NEUROSOLUTIONS, INC.


(a
development stage company)




FINANCIAL
STATEMENTS











Contents





PageReport
      of Independent Registered Public Accounting Firm
            36Consolidated
      Balance Sheets as of December 31, 2008 and 2007
            37Consolidated
      Statements of Operations for the Years Ended December 31, 2008 and 2007,
      and for the Cumulative Period From March 14, 1992 (inception) to December
      31, 2008
            38Consolidated
      Statements of Stockholders’ Equity/(Deficit) for the Years Ended December
      31, 2008, and 2007, and for the Cumulative Period From March 14, 1992
      (inception) to December 31, 2008
            39-41Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2008, and 2007,
      and for the Cumulative Period From March 14, 1992 (inception) to December
      31, 2008
            42-43Notes
      to Consolidated Financial Statements for the Years Ended December 31,
      2008, and 2007, and for the Cumulative Period From March 14, 1992
      (inception) to December 31, 2008
            44-62




















35


REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM











To the
Stockholders, Audit Committee and Board of Directors


Applied
NeuroSolutions, Inc.


Vernon
Hills, Illinois








We have
audited the accompanying consolidated balance sheets of Applied NeuroSolutions,
Inc. (a development stage company) as of December 31, 2008 and 2007, and the
related consolidated statements of operations, shareholders' equity/(deficit)
and cash flows for the years then ended.  These consolidated financial
statements are the responsibility of the company's management.  Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.





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





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Applied NeuroSolutions, Inc.
(a development stage company) as of December 31, 2008 and 2007 and the results
of their operations and their cash flows for the years then ended, in conformity
with U.S. generally accepted accounting principles.





The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1(c) to the
consolidated financial statements, the Company has suffered recurring losses
from operations, has an accumulated deficit and requires additional capital to
support the Company's continued development efforts, which raises substantial
doubt about its ability to continue as a going concern.  Management’s
plans in regard to these matters are also described in Note 1(c).  The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.








/s/
Virchow, Krause & Company, LLP





Chicago,
Illinois


March 24,
2009

















36


APPLIED
NEUROSOLUTIONS, INC.


(a
development stage company)




CONSOLIDATED
BALANCE SHEETS


December
      31,
            
            
            December
      31,2008
            
            
            2007Assets
              Current
      assets:Cash
            
            $
            1,045,020
            
            
            $
            2,960,141Accounts
      receivable
            
            
            4,800
            
            
            
            -Prepaids
      and other current assets
            
            
            157,786
            
            
            
            73,615Total
      current assets
            
            
            1,207,606
            
            
            
            3,033,756Property
      and equipment:Equipment
      and leaseholds
            
            
            2,168,498
            
            
            
            2,167,515Accumulated
      depreciation and amortization
            
            
            (2,156,805
            )
            
            
            (2,140,321
            )Net
      property and equipment
            
            
            11,693
            
            
            
            27,194Other
      assets:Prepaids
            
            
            -
            
            
            
            20,124Deposits
            
            
            8,281
            
            
            
            8,641Total
      other assets
            
            
            8,281
            
            
            
            28,765Total
      assets
            
            $
            1,227,580
            
            
            $
            3,089,715Liabilities
      and Stockholders’ EquityCurrent
      liabilities:Accounts
      payable
            
            $
            119,866
            
            
            $
            74,170Deferred
      revenues, current portion
            
            
            301,399
            
            
            
            333,333Accrued
      consultant fees
            
            
            4,500
            
            
            
            4,800Accrued
      wages
            
            
            -
            
            
            
            120,000Accrued
      vacation wages
            
            
            28,703
            
            
            
            39,060Accrued
      401k match
            
            
            38,550
            
            
            
            53,672Other
      accrued expenses
            
            
            26,432
            
            
            
            28,797Total
      current liabilities
            
            
            519,450
            
            
            
            653,832Long
      term liabilities:Notes
      payable, net of current portion
            
            
            500,000
            
            
            
            -Deferred
      revenues, net of current portion
            
            
            -
            
            
            
            301,399Total
      long term liabilities
            
            
            500,000
            
            
            
            301,399Stockholders'
      equity:Preferred
      stock, par value $0.0025: 5,000,000 shares authorized; none issued and
      outstanding
            
            
            -
            
            
            
            -Common
      stock, par value $0.0025; 200,000,000 shares authorized;
              130,217,808
      shares issued and outstanding
            
            
            325,547
            
            
            
            325,547Treasury
      stock, 23,294 shares, at cost
            
            
            (10,614
            )
            
            
            (10,614
            )Additional
      paid in capital
            
            
            50,156,580
            
            
            
            49,850,566Deficit
      accumulated during the development stage
            
            
            (50,263,383
            )
            
            
            (48,031,015
            )Total
      stockholders' equity
            
            
            208,130
            
            
            
            2,134,484Total
      liabilities and stockholders' equity
            
            $
            1,227,580
            
            
            $
            3,089,715See
      accompanying notes to consolidated financial statements.


37


APPLIED
NEUROSOLUTIONS, INC.


(a
development stage company)




CONSOLIDATED
STATEMENTS OF OPERATIONS





Year Ended December 31,
            
            
            Period
      from March 14, 1992 (inception) to December 31,2008
            
            
            2007
            
            
            2008(unaudited)Research
      agreement revenues
            
            $
            4,800
            
            
            $
            250,000
            
            
            $
            1,707,500Collaboration
      revenues
            
            
            833,333
            
            
            
            833,333
            
            
            
            1,698,600Grant
      revenues
            
            
            -
            
            
            
            -
            
            
            
            669,022Total
      revenues
            
            
            838,133
            
            
            
            1,083,333
            
            
            
            4,075,122Operating
      expenses:Research
      and development
            
            
            1,471,528
            
            
            
            1,659,258
            
            
            
            32,512,196General
      and administrative
            
            
            1,642,012
            
            
            
            2,000,439
            
            
            
            18,096,352Loss
      on impairment of intangible assets
            
            
            -
            
            
            
            -
            
            
            
            411,016Loss
      on writedown of leasehold improvements
            
            
            -
            
            
            
            -
            
            
            
            1,406,057Total
      operating expenses
            
            
            3,113,540
            
            
            
            3,659,697
            
            
            
            52,425,621Operating
      loss
            
            
            (2,275,407
            )
            
            
            (2,576,364
            )
            
            
            (48,350,499
            )Other
      (income) expense:Interest
      expense
            
            
            -
            
            
            
            12,159
            
            
            
            716,344Interest
      income
            
            
            (43,039
            )
            
            
            (60,160
            )
            
            
            (921,554
            )Amortization
      of debt discount
            
            
            -
            
            
            
            -
            
            
            
            272,837Beneficial
      conversion of debt to equity
            
            
            -
            
            
            
            -
            
            
            
            274,072Inducement
      to convert debt to equity
            
            
            -
            
            
            
            -
            
            
            
            1,631,107Cost
      of fund raising activities
            
            
            -
            
            
            
            -
            
            
            
            62,582Loss
      on extinguishments of debt
            
            
            -
            
            
            
            -
            
            
            
            4,707,939Gain
      on derivative instruments, net
            
            
            -
            
            
            
            -
            
            
            
            (4,894,163
            )Net
      other (income) expense
            
            
            -
            
            
            
            -
            
            
            
            63,720Total
      other (income) expense
            
            
            (43,039
            )
            
            
            (48,001
            )
            
            
            1,912,884Net
      loss
            
            
            (2,232,368
            )
            
            
            (2,528,363
            )
            
            
            (50,263,383
            )Less: Deemed dividend to
      common
              Stockholders
            
            
            -
            
            
            
            (391,312
            )
            
            
            (391,312
            )Less:
      Fair value of induced preferred stock conversion
            
            
            -
            
            
            
            -
            
            
            
            (1,866,620
            )Net
      loss attributable to common stockholders
            
            $
            (2,232,368
            )
            
            $
            (2,919,675
            )
            
            $
            (52,521,315
            )Basic
      and diluted loss per common share:Net
      loss attributable to common stockholders per share – basic
            
            $
            (0.02
            )
            
            $
            (0.03
            )
            
            $
            (1.35
            )Weighted
      average shares outstanding
            
            
            130,217,808
            
            
            
            113,325,596
            
            
            
            39,045,644See
      accompanying notes to consolidated financial statements


38




APPLIED
NEUROSOLUTIONS, INC.




(a
development stage company)




CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY / (DEFICIT)




FOR
THE PERIOD FROM MARCH 14, 1992 (INCEPTION) TO DECEMBER 31, 2008








Shares
            
            
            Common
              Stock
            
            
            Treasury
              Stock
            
            
            Additional
              Paid
      in
              Capital
            
            
            Deficit
      Accumulated During the DevelopmentStage
            
            
            Total
              Stockholders’
              Equity
              (Deficit)Issuance
      of Common Stock
            
            
            372,682
            
            
            $
            932
            
            
            $
            -
            
            
            $
            (332
            )
            
            $
            -
            
            
            $
            600Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (922,746
            )
            
            
            (922,746
            )Balance
      at December 31, 1992
            
            
            372,682
            
            
            
            932
            
            
            
            -
            
            
            
            (332
            )
            
            
            (922,746
            )
            
            
            (922,146
            )Issuance
      of Common Stock
            
            
            434,793
            
            
            
            1,087
            
            
            
            -
            
            
            
            (387
            )
            
            
            -
            
            
            
            700Issuance
      of Preferred Stock, subsequently converted to Common Stock
            
            
            165,936
            
            
            
            415
            
            
            
            -
            
            
            
            1,201,750
            
            
            
            -
            
            
            
            1,202,165Issuance
      of Preferred Stock, subsequently converted to Common Stock
            
            
            762,066
            
            
            
            1,905
            
            
            
            -
            
            
            
            5,640,172
            
            
            
            -
            
            
            
            5,642,077Issuance
      of Common Stock upon conversion of note and accrued
    interest
            
            
            368,322
            
            
            
            921
            
            
            
            -
            
            
            
            2,964,005
            
            
            
            -
            
            
            
            2,964,926Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (4,875,845
            )
            
            
            (4,875,845
            )Balance
      at December 31, 1993
            
            
            2,103,799
            
            
            
            5,260
            
            
            
            -
            
            
            
            9,805,208
            
            
            
            (5,798,591
            )
            
            
            4,011,877Issuance
      of Preferred Stock, subsequently converted to Common Stock
            
            
            533,020
            
            
            
            1,333
            
            
            
            -
            
            
            
            4,006,404
            
            
            
            -
            
            
            
            4,007,737Retirement
      of Common Stock
            
            
            (1,887
            )
            
            
            (5
            )
            
            
            -
            
            
            
            (13,663
            )
            
            
            -
            
            
            
            (13,668
            )Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (6,154,275
            )
            
            
            (6,154,275
            )Balance
      at December 31, 1994
            
            
            2,634,932
            
            
            
            6,588
            
            
            
            -
            
            
            
            13,797,949
            
            
            
            (11,952,866
            )
            
            
            1,851,671Issuance
      of Preferred Stock, subsequently converted to Common Stock
            
            
            493,801
            
            
            
            1,235
            
            
            
            -
            
            
            
            748,765
            
            
            
            -
            
            
            
            750,000Issuance
      of Preferred Stock upon conversion of bridge loan and accrued interest,
      subsequently converted to Common Stock
            
            
            689,179
            
            
            
            1,723
            
            
            
            -
            
            
            
            1,005,840
            
            
            
            -
            
            
            
            1,007,563Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (2,191,159
            )
            
            
            (2,191,159
            )Balance
      at December 31, 1995
            
            
            3,817,912
            
            
            
            9,546
            
            
            
            -
            
            
            
            15,552,554
            
            
            
            (14,144,025
            )
            
            
            1,418,075Issuance
      of Preferred Stock, subsequently converted to Common Stock
            
            
            4,957,145
            
            
            
            12,393
            
            
            
            -
            
            
            
            6,864,881
            
            
            
            -
            
            
            
            6,877,274Issuance
      of Common Stock
            
            
            31,802
            
            
            
            80
            
            
            
            -
            
            
            
            96,524
            
            
            
            -
            
            
            
            96,604Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (2,591,939
            )
            
            
            (2,591,939
            )Balance
      at December 31, 1996
            
            
            8,806,859
            
            
            
            22,019
            
            
            
            -
            
            
            
            22,513,959
            
            
            
            (16,735,964
            )
            
            
            5,800,014Issuance
      of Common Stock in connection with acquisition of intangible
      assets
            
            
            131,682
            
            
            
            329
            
            
            
            -
            
            
            
            399,671
            
            
            
            -
            
            
            
            400,000Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (2,040,092
            )
            
            
            (2,040,092
            )Balance
      at December 31, 1997
            
            
            8,938,541
            
            
            
            22,348
            
            
            
            -
            
            
            
            22,913,630
            
            
            
            (18,776,056
            )
            
            
            4,159,922Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (2,549,920
            )
            
            
            (2,549,920
            )Balance
      at December 31, 1998
            
            
            8,938,541
            
            
            
            22,348
            
            
            
            -
            
            
            
            22,913,630
            
            
            
            (21,325,976
            )
            
            
            1,610,002Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,692,356
            )
            
            
            (1,692,356
            )Balance
      at December 31, 1999
            
            
            8,938,541
            
            
            
            22,348
            
            
            
            -
            
            
            
            22,913,630
            
            
            
            (23,018,332
            )
            
            
            (82,354
            )Issuance
      of Preferred Stock, subsequently converted to Common Stock
            
            
            1,466,495
            
            
            
            3,666
            
            
            
            -
            
            
            
            983,614
            
            
            
            -
            
            
            
            987,280Issuance
      of warrants to purchase shares of Common Stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            83,406
            
            
            
            -
            
            
            
            83,406


39





Shares
            
            
            Common
              Stock
            
            
            Treasury
              Stock
            
            
            Additional
              Paid
      in
              Capital
            
            
            Deficit
      Accumulated During the DevelopmentStage
            
            
            Total
              Stockholders’
              Equity
              (Deficit)Extension
      of warrants to purchase shares of Common Stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            154,685
            
            
            
            -
            
            
            
            154,685Stock
      options granted to non-employees
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            315,976
            
            
            
            -
            
            
            
            315,976Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (2,395,538
            )
            
            
            (2,395,538
            )Balance
      at December 31, 2000
            
            
            10,405,036
            
            
            
            26,014
            
            
            
            -
            
            
            
            24,451,311
            
            
            
            (25,413,870
            )
            
            
            (936,545
            )Issuance
      of Common Stock upon conversion of bridge loans/accrd. int
            
            
            4,474,649
            
            
            
            11,185
            
            
            
            -
            
            
            
            2,027,696
            
            
            
            -
            
            
            
            2,038,881Issuance
      of Common Stock
            
            
            580,726
            
            
            
            1,452
            
            
            
            -
            
            
            
            211,048
            
            
            
            -
            
            
            
            212,500Stock
      options granted to non-employees
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            77,344
            
            
            
            -
            
            
            
            77,344Issuance
      of warrants to purchase shares of Common Stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            27,367
            
            
            
            -
            
            
            
            27,367Options
      reissued to adjust exercise term
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            64,033
            
            
            
            -
            
            
            
            64,033Beneficial
      conversion feature of convertible debt
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            229,799
            
            
            
            -
            
            
            
            229,799Induced
      conversion of convertible debt
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,631,107
            
            
            
            -
            
            
            
            1,631,107Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (4,146,913
            )
            
            
            (4,146,913
            )Balance
      at December 31, 2001
            
            
            15,460,411
            
            
            
            38,651
            
            
            
            -
            
            
            
            28,719,705
            
            
            
            (29,560,783
            )
            
            
            (802,427
            )Issuance
      of Common Stock upon conversion of bridge loans, accrued interest, other
      payables and as payment for services
            
            
            7,201,971
            
            
            
            18,005
            
            
            
            -
            
            
            
            1,792,878
            
            
            
            -
            
            
            
            1,810,883Issuance
      of Common Stock upon conversion of warrants
            
            
            156,859
            
            
            
            392
            
            
            
            -
            
            
            
            35,536
            
            
            
            -
            
            
            
            35,928Stock
      options granted to non-employees
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            6,136
            
            
            
            -
            
            
            
            6,136Repurchase
      of Common Stock
            
            
            (23,294
            )
            
            
            (58
            )
            
            
            (10,614
            )
            
            
            58
            
            
            
            -
            
            
            
            (10,614
            )Merger
      between the Company and Molecular Geriatrics Corporation
            
            
            24,905,151
            
            
            
            62,263
            
            
            
            -
            
            
            
            (62,263
            )
            
            
            -
            
            
            
            -Issuance
      of warrants to purchase shares of Common Stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            159,934
            
            
            
            -
            
            
            
            159,934Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (2,929,955
            )
            
            
            (2,929,955
            )Balance
      at December 31, 2002
            
            
            47,701,098
            
            
            
            119,253
            
            
            
            (10,614
            )
            
            
            30,651,984
            
            
            
            (32,490,738
            )
            
            
            (1,730,115
            )Variable
      accounting for stock options
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            604,100
            
            
            
            -
            
            
            
            604,100Stock
      options granted to non-employees
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            80,975
            
            
            
            -
            
            
            
            80,975Issuance
      of warrants to purchase shares of common stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            193,130
            
            
            
            -
            
            
            
            193,130Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (3,301,420
            )
            
            
            (3,301,420
            )Balance
      at December 31, 2003
            
            
            47,701,098
            
            
            
            119,253
            
            
            
            (10,614
            )
            
            
            31,530,189
            
            
            
            (35,792,158
            )
            
            
            (4,153,330
            )Issuance
      of units in private placement
            
            
            32,000,000
            
            
            
            80,000
            
            
            
            -
            
            
            
            1,483,066
            
            
            
            -
            
            
            
            1,563,066Issuance
      of placement agent warrants
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            875,407
            
            
            
            -
            
            
            
            875,407Issuance
      of units upon conversion of bridge loans
            
            
            10,440,714
            
            
            
            26,102
            
            
            
            -
            
            
            
            7,292,016
            
            
            
            -
            
            
            
            7,318,118Issuance
      of common stock for services
            
            
            200,000
            
            
            
            500
            
            
            
            -
            
            
            
            64,500
            
            
            
            -
            
            
            
            65,000Issuance
      of units for services
            
            
            400,000
            
            
            
            1,000
            
            
            
            -
            
            
            
            268,426
            
            
            
            -
            
            
            
            269,426Issuance
      of warrants to purchase shares of common stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            124,775
            
            
            
            -
            
            
            
            124,775Variable
      accounting for stock options
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,535
            
            
            
            -
            
            
            
            1,535Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (2,800,526
            )
            
            
            (2,800,526
            )Balance
      at December 31, 2004
            
            
            90,741,812
            
            
            
            226,855
            
            
            
            (10,614
            )
            
            
            41,639,914
            
            
            
            (38,592,684
            )
            
            
            3,263,471Issuance
      of stock upon exercise of warrants
            
            
            3,755,772
            
            
            
            9,389
            
            
            
            -
            
            
            
            667,745
            
            
            
            -
            
            
            
            677,134


40





Shares
            
            
            Common
              Stock
            
            
            Treasury
              Stock
            
            
            Additional
              Paid
      in
              Capital
            
            
            Deficit
      Accumulated During the DevelopmentStage
            
            
            Total
              Stockholders’
              Equity
              (Deficit)Issuance
      of stock options to purchase shares of common stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            77,057
            
            
            
            -
            
            
            
            77,057Variable
      accounting for stock options
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            219,952
            
            
            
            -
            
            
            
            219,952Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (2,620,641
            )
            
            
            (2,620,641
            )Balance
      at December 31, 2005
            
            
            94,497,584
            
            
            
            236,244
            
            
            
            (10,614
            )
            
            
            42,604,668
            
            
            
            (41,213,325
            )
            
            
            1,616,973Issuance
      of stock upon conversion of warrants
            
            
            2,014,195
            
            
            
            5,036
            
            
            
            -
            
            
            
            438,419
            
            
            
            -
            
            
            
            443,455Issuance
      of stock upon conversion of stock options
            
            
            510,206
            
            
            
            1,275
            
            
            
            -
            
            
            
            75,256
            
            
            
            -
            
            
            
            76,531Issuance
      of stock
            
            
            1,387,916
            
            
            
            3,470
            
            
            
            -
            
            
            
            559,054
            
            
            
            -
            
            
            
            562,524Non
      cash compensation for options FAS123R
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            720,322
            
            
            
            -
            
            
            
            720,322Issuance
      of warrants to purchase shares of common stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            200,866
            
            
            
            -
            
            
            
            200,866Non
      cash unrecognized compensation for options granted and
      cancelled
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            197,625
            
            
            
            -
            
            
            
            197,625Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (4,289,327
            )
            
            
            (4,289,327
            )Balance
      at December 31, 2006
            
            
            98,409,901
            
            
            
            246,025
            
            
            
            (10,614
            )
            
            
            44,796,210
            
            
            
            (45,502,652
            )
            
            
            (471,031
            )Issuance
      of stock upon conversion of warrants
            
            
            10,167,305
            
            
            
            25,420
            
            
            
            -
            
            
            
            1,672,119
            
            
            
            -
            
            
            
            1,697,539Issuance
      of stock
            
            
            21,640,602
            
            
            
            54,102
            
            
            
            -
            
            
            
            2,845,898
            
            
            
            -
            
            
            
            2,900,000Non
      cash compensation for options FAS123R
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            496,848
            
            
            
            -
            
            
            
            496,848Issuance
      of warrants to purchase shares of common stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            39,491
            
            
            
            -
            
            
            
            39,491Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (2,528,363
            )
            
            
            (2,528,363
            )Balance
      at December 31, 2007
            
            
            130,217,808
            
            
            
            325,547
            
            
            
            (10,614
            )
            
            
            49,850,566
            
            
            
            (48,031,015
            )
            
            
            2,134,484Non
      cash compensation for options FAS123R
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            301,514
            
            
            
            -
            
            
            
            301,514Issuance
      of warrants to purchase shares of common stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            4,500
            
            
            
            -
            
            
            
            4,500Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (2,232,368
            )
            
            
            (2,232,368
            )Balance
      at December 31, 2008
            
            
            130,217,808
            
            
            $
            325,547
            
            
            $
            (10,614
            )
            
            $
            50,156,580
            
            
            $
            (50,263,383
            )
            
            $
            208,130








See
accompanying notes to consolidated financial statements


41




APPLIED
NEUROSOLUTIONS, INC.




(a
development stage company)




CONSOLIDATED
STATEMENTS OF CASH FLOWS





Year
      Ended December 31,
            
            
            Period
      from March 14, 1992 (inception) to December 31,2008
            
            
            2007
            
            
            2008(unaudited)Cash
      flows from operating activities:Net loss
            
            $
            (2,232,368
            )
            
            $
            (2,528,363
            )
            
            $
            (50,263,383
            )Adjustments to reconcile net
      loss to net cash
              used in operating
      activities:Depreciation and
      amortization
            
            
            16,484
            
            
            
            15,857
            
            
            
            2,641,898Non-cash expense for equity
      compensation
            
            
            -
            
            
            
            -
            
            
            
            2,379,241Non-cash expense for equity
      compensation
              to employees and
      directors
            
            
            306,014
            
            
            
            536,340
            
            
            
            2,889,682Non-cash interest
      expense
            
            
            -
            
            
            
            11,159
            
            
            
            334,912Amortization of deferred
      financing costscosts
            
            
            -
            
            
            
            -
            
            
            
            111,000Non-cash expense for
      beneficial conversion
              of debt
            
            
            -
            
            
            
            -
            
            
            
            274,072Non cash expense for induced
      conversion
              of debt
            
            
            -
            
            
            
            -
            
            
            
            1,631,107Non-cash expense for loss
      on
              extinguishments of
      debt
            
            
            -
            
            
            
            -
            
            
            
            4,707,939Non-cash income for gain on
      derivative
              instrument, net
            
            
            -
            
            
            
            -
            
            
            
            (4,894,163
            )Amortization of intangible
      assets
            
            
            -
            
            
            
            -
            
            
            
            328,812Loss on writedown of
      leasehold
              Improvements
            
            
            -
            
            
            
            -
            
            
            
            1,406,057Loss on impairment of
      intangible assets
            
            
            -
            
            
            
            -
            
            
            
            411,016Gain on sale of
      equipment
            
            
            -
            
            
            
            -
            
            
            
            (250
            )Fund raising
      expense
            
            
            -
            
            
            
            -
            
            
            
            62,582Changes in assets and
      liabilities:Accounts
      receivable
            
            
            (4,800
            )
            
            
            250,000
            
            
            
            198,490Prepaids and other
      assets
            
            
            (63,687
            )
            
            
            50,230
            
            
            
            (151,349
            )Accounts
    payable
            
            
            45,696
            
            
            
            (196,528
            )
            
            
            216,470Deferred research agreement
      revenues
            
            
            (333,333
            )
            
            
            (583,334
            )
            
            
            301,399Accrued wages
            
            
            (120,000
            )
            
            
            63,244
            
            
            
            -Accrued collaborator
      payments
            
            
            -
            
            
            
            (70,000
            )
            
            
            -Accrued consultant
      fees
            
            
            (300
            )
            
            
            (32,200
            )
            
            
            29,500Accrued vacation
      wages
            
            
            (10,357
            )
            
            
            (53,611
            )
            
            
            28,703Other accrued
      expenses
            
            
            (17,487
            )
            
            
            (28,654
            )
            
            
            188,131Net
      cash used in operating activities
            
            
            (2,414,138
            )
            
            
            (2,565,860
            )
            
            
            (37,168,134
            )Cash
      flows from investing activities:Acquisition of investment
      securities
            
            
            -
            
            
            
            -
            
            
            
            (9,138,407
            )Redemption of investment
      securities
            
            
            -
            
            
            
            -
            
            
            
            9,138,407Acquisition of intangible
      assets
            
            
            -
            
            
            
            -
            
            
            
            (339,829
            )Acquisition of equipment
      and
              leasehold
      improvements
            
            
            (983
            )
            
            
            (4,788
            )
            
            
            (4,045,511
            )Net cash used in investing
      activitiesActivities
            
            
            (983
            )
            
            
            (4,788
            )
            
            
            (4,385,340
            )


42





Year Ended December 31,
            
            
            Period
      from March 14, 1992 (inception) to December 31,2008
            
            
            2007
            
            
            2008Cash
      flows from financing activities:
            
            
            
            
            
            
            
            (unaudited)Proceeds
      from issuance of Preferred Stock
            
            
            -
            
            
            
            -
            
            
            
            12,193,559Proceeds
      from issuance of units, net of issuance costs
            
            
            -
            
            
            
            2,900,000
            
            
            
            22,433,555Proceeds
      from exercise of warrants
            
            
            -
            
            
            
            1,697,539
            
            
            
            2,818,128Proceeds
      from exercise of stock options
            
            
            -
            
            
            
            -
            
            
            
            76,531Proceeds
      from issuance of (repayments of) debt
            
            
            500,000
            
            
            
            (500,000
            )
            
            
            500,000Deferred
      financing costs incurred
            
            
            -
            
            
            
            -
            
            
            
            (111,000
            )Advances
      from (repayments to) director and shareholders
            
            
            -
            
            
            
            -
            
            
            
            120,000Principal
      payments under capital lease
            
            
            -
            
            
            
            -
            
            
            
            (11,766
            )Proceeds
      from issuance of promissory loans payable
            
            
            -
            
            
            
            -
            
            
            
            4,438,491Payments
      to shareholders for registration statement penalties
            
            
            -
            
            
            
            -
            
            
            
            (84,000
            )Payments
      to repurchase Common Stock
            
            
            -
            
            
            
            -
            
            
            
            (10,614
            )Payments
      received on employee stock purchase notes receivable
            
            
            -
            
            
            
            -
            
            
            
            235,610Net
      cash provided by financing activities
            
            
            500,000
            
            
            
            4,097,539
            
            
            
            42,598,494Net
      increase (decrease) in cash
            
            
            (1,915,121
            )
            
            
            1,526,891
            
            
            
            1,045,020Cash
      beginning of period
            
            
            2,960,141
            
            
            
            1,433,250
            
            
            
            -Cash
      end of period
            
            $
            1,045,020
            
            
            $
            2,960,141
            
            
            $
            1,045,020Supplemental
      cash flow information:Cash
      paid for interest
            
            $
            -
            
            
            $
            30,000
            
            
            $
            72,090Supplemental
      disclosure of non-cash investing and financing activities:Issuance
      of stock for prior services
            
            $
            -
            
            
            $
            -
            
            
            $
            4,149,521Intangible
      assets acquired in exchange for stock
            
            $
            -
            
            
            $
            -
            
            
            $
            400,000Equipment
      acquired for account payable
            
            $
            -
            
            
            $
            -
            
            
            $
            31,649Equipment
      acquired under capital lease
            
            $
            -
            
            
            $
            -
            
            
            $
            11,766Issuance
      of stock for promissory loans payable
            
            $
            -
            
            
            $
            -
            
            
            $
            2,473,991Issuance
      of stock for accrued interest on promissory loans payable
            
            $
            -
            
            
            $
            -
            
            
            $
            136,188See
      accompanying notes to consolidated financial statements.


43




APPLIED
NEUROSOLUTIONS, INC.




(a
development stage company)




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS









Note 1 – Organization and
Summary of Significant Accounting Policies





(a)           Organization and Basis of
Presentation





Applied NeuroSolutions, Inc. (“APNS” or
the “Company”), is a development stage biopharmaceutical company primarily
engaged in the research and development of novel therapeutic targets for the
treatment of Alzheimer's disease (“AD”) and diagnostics to detect
AD.





Prior to 2004, the Company had two
wholly-owned operating subsidiaries.  One of the wholly-owned
operating subsidiaries was Molecular Geriatrics Corporation (“MGC”), a
development stage biopharmaceutical company incorporated in November 1991, with
operations commencing in March 1992, to develop diagnostics to detect, and
therapeutics to treat, Alzheimer’s disease (“AD”).





The other wholly-owned operating
subsidiary was Hemoxymed Europe, SAS, a development stage biopharmaceutical
company incorporated in February 1995 to develop therapies aimed at improving
tissue oxygenation by increasing oxygen release from hemoglobin to provide
therapeutic value to patients with serious, unmet, medical needs.  We
are not currently funding the development of this technology.  The
Company dissolved these two subsidiaries, and transferred all of their assets to
APNS in 2004.





On September 10, 2002, Hemoxymed, Inc.
and Molecular Geriatrics Corporation (“MGC”) established a strategic alliance
through the closing of a merger (the “Merger”).  The Merger Agreement
provided that the management team and Board of Directors of MGC took over
control of the merged company.  The transaction was tax-free to the
shareholders of both companies.  In October 2003, the Company changed
its’ name to Applied NeuroSolutions, Inc.





This transaction has been accounted for
as a reverse merger.  For financial reporting purposes, MGC is
continuing as the primary operating entity under the Company’s name, and its
historical financial statements have replaced those of the
Company.  Thus, all financial information prior to the Merger date is
the financial information of MGC only.





The consolidated financial statements
have been prepared in accordance with the provisions of Statement of Financial
Accounting Standards (“SFAS”) No. 7, "Accounting and Reporting by Development
Stage Enterprises," which requires development stage companies to employ the
same accounting principles as operating companies.





The Company is subject to risks and
uncertainties common to small cap biotech companies, including competition from
larger, well capitalized entities, patent protection issues, availability of
funding and government regulations.





(b)           Principles of
Consolidation





Prior to 2004, the consolidated
financial statements include the accounts of the Company and its subsidiaries,
MGC and Hemoxymed Europe, SAS.  All significant intercompany balances
and transactions have been eliminated.





(c)           Going Concern





The Company has experienced losses
since inception in addition to incurring cash outflows from operating activities
for the last two years as well as since inception.  The Company
expects to incur substantial additional research and development costs and
future losses prior to reaching profitability.  These matters have
raised substantial doubt about the Company's ability to continue as a going
concern for a reasonable period of time.  The Company's ability to
continue as a going concern is dependent on obtaining adequate funding and
ultimately


44


achieving
profitable operations.  In the opinion of management, the Company
anticipates cash balances as of December 31, 2008, coupled with R & D
support from Eli Lilly and Company for 2009, will be sufficient to fund the
Company’s current level of operations into the middle of the third quarter
2009.  The Company will need additional funding prior to the middle of
the third quarter 2009 in order to continue its research, product development
and operations.  If additional funding is not obtained, the Company
will not be able to fund any of its programs, and the Company will possibly
discontinue all its product development and/or operations.  Management
is currently evaluating its options to maximize the value of the Company’s
diagnostic technology, including evaluating partnering and licensing
opportunities.  The Company intends to seek such additional funding
through private and/or public financing, through exercise of currently
outstanding stock options and warrants or through collaborative or other
arrangements with partners, however, there is no assurance that additional
funding will be available for the Company to finance its operations on
acceptable terms, or at all.  This would have a material adverse
effect on the Company’s operations and prospects.





(d)           Cash





The Company maintains cash at financial
institutions from time to time in excess of the Federal Depository Insurance
Corporation (FDIC) insured limit.





(e)           Revenue Recognition, Accounts
Receivable and Allowance for Doubtful Accounts





The Company generates revenues from
research agreements, collaborations and grants and recognizes these revenues
when earned.  Grant revenues represent funds received from certain
government agencies for costs expended to further research on the subject of the
grant.  In accordance with Emerging Issues Task Force (EITF) 00-21
“Revenue Arrangements with Multiple Deliverables”, for arrangements that contain
multiple deliverables, the Company separates the deliverables into separate
accounting units if they meet all of the following:  a) the delivered
items have stand-alone value to the customer; b) the fair value of any
undelivered items can be reliably determined; and c) if the arrangement includes
a general right of return, delivery of the undelivered items is probable and
substantially controlled by the seller.  Deliverables that do not meet
these criteria are combined with one or more other deliverables into one
accounting unit.  Revenue from each accounting unit is recognized
based on the applicable accounting literature, primarily Staff Accounting
Bulletin No. 104 (SAB 104), “Revenue Recognition”.





Accounts receivable represent amounts
due, but not yet paid, from research agreements and
collaborations.   Accounts receivable are considered past due
when they are outstanding more than 30 days after the terms of the agreement.
The Company does not accrue interest on past due accounts
receivable.  Receivables are written off only after all collection
attempts have failed and are based on the specific circumstances of the
customer.  An allowance for doubtful accounts would be recorded if any
receivable was deemed to be potentially uncollectible.  No receivable
has been written off or been considered uncollectible during 2008 and
2007.  The allowance for doubtful accounts was $-0- at December 31,
2008 and 2007, respectively.





(f)           Equipment and Leasehold
Improvements





Equipment and leasehold improvements
are recorded at cost.  Depreciation of equipment is calculated using
accelerated methods over their useful lives, approximating five to seven
years.  Amortization of leasehold improvements is provided on the
straight-line method over the lesser of the asset’s useful life or the lease
term.





(g)           Research and
Development





All research and development costs are
expensed as incurred and include salaries of, and expenses related to, employees
and consultants who conduct research and development, funding for research and
development programs, funding for research related to license agreements, and
overhead costs.





(h)           Income Taxes





Under the asset and liability method of
Statement of Financial Accounting Standards (“SFAS”) No. 109, Accounting for Income Taxes,
the Company’s deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and operating loss and tax credit carryforwards.  In assessing
the realizability of the deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets will
not be realized.  A valuation allowance is recorded for the portion of
the deferred tax assets that are not expected to be realized based on the levels
of historical taxable income and projections for future taxable income over the
periods in which the deferred tax assets are deductible.





45


In July 2006, the FASB issued
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”).
FIN 48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in its tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 is effective in fiscal years
beginning after December 15, 2006. The provisions of FIN 48 are to be applied to
all tax positions upon initial adoption, with the cumulative effect adjustment
reported as an adjustment to the opening balance of retained earnings.Upon adoption, there were
no unrecognized income tax benefits and the adoption of FIN
48 had no effect on shareholders’ equity.





(i)           Stock Option
Plan





The
weighted average estimated fair value of the options granted in 2008 and 2007
was $0.09 and $0.08, respectively, based on the Black-Scholes valuation model
using the following assumptions:





2008
            
            
            2007Risk-free
      interest rate, average
            
            
            1.50
            %
            
            
            4.81
            %Dividend
            
            
            0.00
            %
            
            
            0.00
            %Expected
      volatility
            
            
            241.76
            %
            
            
            75.00
            %Expected
      life in years, average
            
            
            2
            
            
            
            3





From time to time, the Company has
issued equity awards to non-employees.  In these instances, the
Company applies the provisions of SFAS No. 123 and EITF No. 96-18 Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Serviceswhich results in the recognition of expense
related to these awards over the vesting or service period of an amount equal to
the estimated fair value of these awards at their respective measurement dates
(see Note 6).





(j)           Restricted
Shares





The holder of a restricted share award
is generally entitled at all times on and after the date of issuance of the
restricted shares to exercise the rights of a shareholder of the Company,
including the right to vote the shares and the right to receive dividends on the
shares. During 2007 the Company’s Board of Directors granted 526,316 restricted
shares to its CEO based on the terms of her employment. The Company’s Board of
Directors did not grant any restricted shares in 2008.  The restricted
shares are valued based on the closing price on the date of grant and vest
over a three-year period based on the continuation of
employment.





(k)           Use of Estimates





Management of the Company has made a
number of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenues and expenses
during the reporting period, to prepare these financial statements in conformity
with accounting principles generally accepted in the United States of
America.  Actual results could differ from those
estimates.





(l)           Computation of Net Loss Attributable
to Common Stockholder per Share





Net loss attributable to common
stockholder per share is computed based upon the weighted average number of
common shares of outstanding during the period as if the exchange of common
shares in the merger between the Company and MGC was in effect at the beginning
of all periods presented.





46


For each period, net loss attributable
to common stockholder per share is computed based on the weighted average number
of common shares outstanding with potential equivalent shares from all stock
options, warrants and convertible investor bridge loans excluded from the
computation because their effect is anti-dilutive.  The Company had
19,430,497 stock options and 43,273,903 warrants outstanding to issue common
stock at December 31, 2008.  The Company had 19,242,347 stock options
and 44,418,453 warrants outstanding to issue common stock at December 31,
2007.





(m)           Fair Value of Financial
Instruments





The Company’s financial instruments
include cash, accounts receivable, accounts payable, loans payable, and other
accrued expenses.  The carrying value of these financial instruments
approximates their fair values due to the nature and short-term maturity of
these instruments.





(n)           Recent Accounting
Pronouncements





In December 2007, the FASB issued SFAS
No. 160, “Noncontrolling Interests in Consolidated Financial Statements an
amendment of ARB No. 51” (“SFAS 160”).  This statement establishes
accounting and reporting standards for noncontrolling interests in subsidiaries
and for the deconsolidation of subsidiaries and clarifies that a noncontrolling
interest in a subsidiary is an ownership interest in the consolidated entity
that should be reported as equity in the consolidated financial
statements.  This Statement also requires expanded disclosures that
clearly identify and distinguish between the interests of the parent owners and
the interests of the noncontrolling owners of a subsidiary.  SFAS 160
is effective for fiscal years beginning on or after December 15,
2008.  We do not believe that the adoption of SFAS 160 will have a
material effect on our results of operations or financial position.





In December 2007, the FASB issued SFAS
No. 141 (Revised 2007), “Business Combinations” (“SFAS 141 (Revised
2007)”).  While this statement retains the fundamental requirement of
SFAS 141 that the acquisition method of accounting (which SFAS 141 called the
purchase method) be
used for all business combinations, SFAS 141 (Revised 2007) now establishes the
principles and requirements for how an acquirer in a business
combination:  1) recognizes and measures in its financial statements
the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interests in the acquiree; 2) recognizes and measures the
goodwill acquired in the business combination or the gain from a bargain
purchase; and 3) determines what information should be disclosed in the
financial statements to enable the users of the financial statements to evaluate
the nature and financial effects of the business combination.SFAS 141 (Revised 2007)
is effective for fiscal years beginning on or after December 15,
2008.  We do not believe that the adoption of SFAS 141 (Revised 2007)
will have a material effect on our results of operations or financial
position.





In March 2008,
the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities”(“SFAS No. 161”). SFAS
No. 161 requires enhanced disclosures about an entity’s derivative and
hedging activities.  It clarifies (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged items
are accounted for under SFAS No.133 and its related interpretations, and (c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows.  SFAS No. 161 is effective
for fiscal years beginning after November 15, 2008.  The Company
will disclose hedging activities under SFAS No. 161 beginning on January 1, 2009
and does not expect SFAS No. 161 to have a material effect on its financial
statements since it pertains to disclosure only.




In May
2008, the FASB issued SFAS No. 162,“The Hierarchy of Generally
Accepted Accounting Principles,”(“SFAS No. 162”).The current hierarchy
of generally accepted accounting principles is set forth in the American
Institute of Certified Accountants (AICPA) Statement of Auditing Standards (SAS)
No. 69, “The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting
Principles.   SFAS No. 162 is intended to improve financial
reporting by identifying a consistent framework or hierarchy for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with U.S. generally accepted accounting principles for
nongovernmental entities.  This Statement is effective November 15,
2008.  The Company will adopt this Statement effective January 1, 2009
but does not anticipate that the Statement will have a material effect on the
Company’s results of operations or financial position, as theStatement does not
directly impact the accounting principles applied in the preparation of the
Company’s financial statements.





47





Note 2 – Collaboration
Agreement with Eli Lilly and Company





In November 2006, the Company entered
into an agreement with Eli Lilly and Company (“Lilly”) to develop therapeutics
to treat AD.  Pursuant to the terms of the agreement, the Company
received $2 million in cash, including an equity investment of $500,000, from
Lilly, plus it will receive annual research and development support for the
duration of the collaboration agreement.  In addition, Lilly will,
based on the achievement of certain defined milestones, provide the Company over
time with up to $20 million in milestone payments for advancing the Company’s
proprietary target to a therapeutic compound.  The collaboration has
also made progress on other targets that are part of the collaboration that
could provide milestone payments to the Company over time of up to $10 million
for advancing each of these other targets to a therapeutic
compound.  There is no limit to the number of targets that the Company
could receive milestone payments from Lilly.  There are no assurances
that any milestones will be met.  Royalties are to be paid to the
Company for AD drug compounds brought to market that result from the
collaboration.  There is no limit on the number of drug compounds for
which royalty payments may be due to the Company.  Lilly received the
exclusive worldwide rights to the intellectual property related to the Company’s
expertise in understanding the molecular neuropathology of AD as it pertains to
the formation of neurofibrillary tangles.  Lilly will fund the vast
majority of all pre-clinical research and development and will fully finance the
clinical testing, manufacturing, sales and marketing of AD therapeutics
developed from the collaboration.  The Company recorded $1,000,000
received in 2006 as deferred revenues and is amortizing the deferral over 36
months.  Included in collaboration revenues in 2008 and 2007 is an
amortization of these deferred revenues of $333,333 each year.  Also
included in collaboration revenues in 2008 and 2007 is $500,000 received as
research and development support.  In addition, $66,173 of legal fees
directly associated with the agreement are included in prepaid assets and are
being amortized over 36 months.





Note
3  -  Property and Equipment





Property and equipment consist of the
following:





December
      31,2008
            
            
            December
      31, 2007Equipment
            
            $
            2,072,119
            
            
            $
            2,071,136Equipment
      held under capital lease
            
            
            11,766
            
            
            
            11,766Leasehold
      improvements
            
            
            84,613
            
            
            
            84,6132,168,498
            
            
            
            2,167,515Less
      accumulated depreciation and
              Amortization
            
            
            (2,156,805
            )
            
            
            (2,140,321
            )$
            11,693
            
            
            $
            27,194





Depreciation and amortization expense
amounted to $16,484 and $15,857 for the years ended December 31, 2008 and 2007,
respectively.





Note
4  -  Warrants





The Company issued warrants to
investors in conjunction with funds raised in December 1995.  These
warrants had an original expiration date of December 2000.  During
2000, these warrants were extended until December 2001.  Compensation
expense related to this extension was $154,685 in 2000.  These
warrants expired, unexercised, in December 2001.





The Company issued warrants to
investors in conjunction with funds raised in August through November
2000.  Compensation expense related to the issuance of these warrants
was $83,406 in 2000.  These warrants were converted to shares of
Common Stock in the 2001 Recapitalization (see Note 5).





The Company issued warrants to
investors in conjunction with funds raised in February through December
2001.  Compensation expense related to the issuance of these warrants
was $27,367 in 2001.  The majority of these warrants were converted to
shares of Common Stock in the 2001 Recapitalization (see Note
5).  Total compensation expense of $351,811 was recognized upon the
conversion of all the warrants in 2002.





48


The Company, in September 2002, prior
to the Merger date, issued 1,562,258 warrants to previous investors in the
Company.  These warrants have an exercise price of $0.0001 per share,
and expire in September 2009.





The Company issued 800,000 warrants, in
September 2002, to an entity controlled by the two largest shareholders of
Hemoxymed (prior to the Merger), in lieu of
compensation.  Compensation expense related to the issuance of these
warrants was $159,934 in 2002.  These warrants have an exercise price
of $0.20 per share, and expire in September 2012.





The Company issued 850,000 warrants to
consultants in September 2003, in lieu of compensation.  Compensation
expense related to the issuance of these warrants was $74,077 in
2003.  These warrants have an exercise price of $0.20 per share, and
expire in September 2008.





The Company issued 1,250,000 warrants
to a board member and a non-employee in September 2003, in lieu of compensation,
for fundraising.  Compensation expense related to the issuance of
these warrants was $119,053 in 2003.  These warrants have an exercise
price of $0.15 per share, and expired, unexercised in September
2008.





The Company issued 200,000 warrants to
consultants in January 2004, in lieu of compensation, for investor relations and
business consulting services and included the value of such warrants, $42,705,
in general and administrative expenses for the year ended December 31,
2004.  These warrants have an exercise price of $0.20 per share, and
expire in September 2008.





The Company issued 400,000 warrants to
consultants in February 2004, in lieu of compensation, for financial advisory
and business consulting services and included the value of such warrants,
$109,426, in general and administrative expenses for the year ended December 31,
2004.  These warrants have an exercise price of $0.30 per share, and
expire in February 2009.





The Company issued 43,564,795 warrants
to investors in the February 2004 offering and to bridge loan investors upon
conversion of their bridge loans upon closing the February 2004
offering.  These warrants have an exercise price of $0.30 per share,
and expire in February 2009.





The Company issued 3,200,000 warrants
to the placement agents for the February 2004 offering.  These
warrants have an exercise price of $0.30 per share, and expire in February
2009.  These warrants were not eligible to be exercised for a one-year
period from the date of grant.





The Company issued 500,000 warrants to
consultants in November 2004, in lieu of compensation, for investor relations
and business consulting services and included the value of such warrants,
$44,160, in general and administrative expenses for the year ended December 31,
2004.  These warrants have an exercise price of $0.30 per share, and
expire in November 2009.





The Company issued 400,000 warrants to
consultants in November 2004, in lieu of compensation, for financial advisory
and business consulting services and included the value of such warrants,
$37,910, in general and administrative expenses for the year ended December 31,
2004.  These warrants have an exercise price of $0.25 per share, and
expire in November 2009.





In 2005, 3,755,772 warrants were
exercised and 27,584 warrants were forfeited by warrant holders.  Net
proceeds of $677,134 were received by the Company (at an average exercise price
of $0.18 per warrant).





The Company issued 922,500 warrants to
bridge loan holders in July 2006.  These warrants have an exercise
price of $0.0025 per share, and expire in July 2011.





In 2006, 2,014,195 warrants were
exercised and 1,475 warrants were forfeited by warrant holders.  Net
proceeds of $443,455 were received by the Company (at an average exercise price
of $0.22 per warrant).





The Company issued 300,000 warrants to
a consultant in May 2007, as part of compensation paid to the consultant, for
investor relations and business consulting services and included the value of
such warrants, $39,491, in general and administrative expenses for the year
ended December 31, 2007.  These warrants have an exercise price of
$0.305 per share, and expire in May 2012.





49


The Company issued 6,214,286 warrants
to the investor in the September 2007 offering.  These warrants have
an exercise price of $0.19 per share, and expire in September 2012.





In 2007, 10,167,305 warrants were
exercised.  Net proceeds of $1,697,539 were received by the Company
(at an average exercise price of $0.17 per warrant).





The Company issued 105,450 warrants to
a consultant in April 2008, as part of compensation paid to the consultant, for
business consulting services and included the value of such warrants, $4,500, in
general and administrative expenses for the year ended December 31,
2008.  These warrants have an exercise price of $0.085 per share, and
expire in April 2013.





As of December 31, 2008, the Company
has reserved 43,273,903 shares of Common Stock for the exercise and conversion
of the warrants described above.





A summary of the status of, and changes
in, the Company’s warrants as of and for the years ended December 31, 2008 and
2007, is presented below for all warrants issued:





2008
            2007Warrants
            Weighted-
              Average-Exercise
              Price
            Warrants
            Weighted-
              Average-Exercise
              PriceOutstanding
      at beginningof
      year
            44,418,453
            $               
      0.27
            48,071,472
            $           
      0.29Granted
            105,450
            0.085
            6,514,286
            0.20Exercised
            -
            -
            10,167,305
            0.17Forfeited
            1,250,000
            0.15
            -
            -Outstanding
      at endof
      year
            43,273,903
            $          0.28
            44,418,453
            $          0.27





The weighted-average remaining
contractual life of the warrants outstanding as of December 31, 2008 is 0.75
years.





Note
5  -  Stockholders' Equity





The stockholders' equity information
presented in these financial statements reflects the retroactive recognition of
the effects of the Merger (see Note 1), and of the two recapitalizations of the
Company's capital structure, the "1996 Recapitalization", which became effective
in March, 1996 and the "2001 Recapitalization", which became effective in
November, 2001.  The 1996 Recapitalization consisted of (i) the
conversion of each share of outstanding Series A Convertible Preferred Stock and
Series B Convertible Preferred Stock of the Company into one share of Common
Stock, (ii) a 1.0-for-10.6 reverse split of the outstanding shares of Common
Stock, and (iii) a reduction in the number of authorized shares of Common Stock
and Preferred Stock from 50,000,000 to 20,000,000 and 35,000,000 to 15,000,000,
respectively.  The 2001 Recapitalization consisted of (i) the
conversion of each share of outstanding Series C Convertible Preferred Stock of
the Company into two shares of Common Stock, (ii) the conversion of each share
of outstanding Series D Convertible Preferred Stock of the Company into three
and one-third shares of Common Stock, (iii) the conversion of convertible debt
plus accrued interest into five shares of Common Stock for each $1.50 of
convertible debt, and (iv) an increase in the number of authorized shares of
Common Stock from 20,000,000 to 50,000,000 (See Note 11).





50


Pursuant to the terms of the General
Corporation Law of the State of Delaware, the Company's Restated Certificate of
Incorporation and the Certificates of Designation of the Series C and Series D
Convertible Preferred Stock, the increase in authorized shares in the 2001
Recapitalization was approved by the consent of a majority of the aggregate
voting power of the holders of the outstanding Common Stock and the Series C and
Series D Convertible Preferred Stock.  The conversion of the Series C
and Series D Convertible Preferred Stock was approved by a majority of the
respective holders of such shares voting separately as a class.  The
conversion of the convertible debt was approved by the individual debt
holder.





In conjunction with the Merger, each
outstanding share of MGC Common Stock was exchanged for .658394 shares of APNS
Common Stock and each outstanding MGC warrant and stock option was exchanged for
..658394 APNS warrant and stock option.





In December 2002, the Board of
Directors approved an increase in the number of authorized shares from
50,000,000 to 205,000,000, consisting of 200,000,000 Common Shares and 5,000,000
Preferred Shares.  Shareholder approval for this increase was obtained
in 2003.  See Note 11 for an explanation of the Company’s authorized
shares.





In September 2008, the Company’s
shareholders approved an amendment to the Company’s certificate of incorporation
to effect a reverse stock split of the Company’s common stock at any time prior
to June 30, 2009 at a ratio between 1-for-20 and 1-for-30 as determined by the
Company’s Board of Directors and to decrease the Company’s authorized common
stock from 200 million shares to 100 million shares.  As of February
27, 2009, the Company’s Board of Directors has not set a date, or determined the
ratio, for the reverse stock split.





In the Consolidated Statements of
Stockholders’ Equity / (Deficit), the Company has elected to present each
issuance of Preferred Stock, which was subsequently converted to Common Stock,
as Common Stock as of the date of each issuance of Preferred Stock.





Original Issuances of Preferred
Stock





In July 1993, the Company issued
2,671,478 shares of Series A Convertible Preferred Stock (“Series
A”).  These shares were subsequently converted to 165,936 shares of
Common Stock.





In September through December 1993, the
Company issued 12,269,000 shares of Series B Convertible Preferred Stock
(“Series B”).  These shares were subsequently converted to 762,066
shares of Common Stock.





In March through May 1994, the Company
issued 8,581,400 shares of Series B.  These shares were subsequently
converted to 533,020 shares of Common Stock.





In December 1995, the Company issued
375,000 shares of Series C Convertible Preferred Stock (“Series
C”).  These shares were subsequently converted to 493,801 shares of
Common Stock.





In December 1995, the Company issued
523,371 shares of Series C.  These shares were subsequently converted
to 689,179 shares of Common Stock.





In March through July 1996, the Company
issued 3,764,550 shares of Series C.  These shares were subsequently
converted to 4,957,145 shares of Common Stock.





In January through May 2000, the
Company issued 668,202 shares of Series D Convertible Preferred Stock (“Series
D”).  These shares were subsequently converted to 1,466,495 shares of
Common Stock.





Current Issuances of Common
Stock





In November 2001, as part of the 2001
Recapitalization, $2,038,881 of convertible debt, including accrued interest,
was converted to 4,474,649 shares of Common Stock.





In January through June 2002, the
Company issued 3,846,692 shares of common stock through a private placement, and
upon conversion of bridge loans, plus accrued interest.





51


In June 2002, the Company issued
3,355,279 shares of Common Stock to Company officers, consultants and vendors in
exchange for a reduction of $750,000 of amounts due.





In June 2002, the Company issued
156,859 shares of Common Stock to certain warrant holders in exchange for the
conversion of 650,139 warrants.





In September 2002, the Company
repurchased 23,294 shares of Common Stock.





In September 2002, certain shareholders
of a predecessor of the Company were issued, in exchange for past services,
1,562,258 seven-year warrants exercisable at $0.0001 to purchase shares of
Common Stock.





In September 2002, an entity controlled
by the two largest shareholders of the Company prior to the merger were issued,
in lieu of compensation, 800,000 five year warrants exercisable at $0.20 to
purchase shares of Common Stock.  Expense of $159,934 was included in
general and administrative expense for the issuance of these
warrants.





In September 2003, a director of the
Company and an advisor were issued, in lieu of compensation for fund raising
activities, 1,250,000 five-year warrants exercisable at $0.15 to purchase shares
of Common Stock.  Expense of $119,053 was included in general and
administrative expenses for the issuance of these warrants.





In September 2003, two entities were
issued, in lieu of compensation, 850,000 five-year warrants exercisable at $0.20
to purchase shares of Common Stock.  Expense of $74,077 was included
in general and administrative expenses for the issuance of these
warrants.





In February 2004, the Company completed
an $8,000,000 private placement (net proceeds of $7,354,054) in
February.  The private placement included accredited institutional
investors and accredited individuals.  In conjunction with this
financing, the Company issued an aggregate of 32 million units priced at $0.25
per unit to investors.  Each unit consisted of one share of common
stock of the Company and a five-year warrant exercisable to purchase one share
of common stock of the Company at an exercise price of $0.30.  The
warrants issued to investors were immediately exercisable.





Pursuant to the terms of the
Registration Rights Agreement entered into in connection with the transaction,
within seven calendar days following the date that the Company filed its Annual
Report on Form 10-KSB, the Company was required to file, and did file, with the
Securities and Exchange Commission (the “SEC”) a registration statement under
the Securities Act of 1933, as amended, covering the resale of all of the common
stock purchased and the common stock underlying the warrants, including the
common stock underlying the placement agents’ warrants.





The Registration Rights Agreement
further provided that if a registration statement was not filed, or did not
become effective, within 150 days from the closing date of the private
placement, then in addition to any other rights the holders may have, the
Company would be required to pay each holder an amount in cash, as liquidated
damages, equal to 1.5% per month of the aggregate purchase price paid by such
holder in the private placement for the common stock and warrants then held,
prorated daily.  The registration statement was filed within the
allowed time, however it was declared effective July 28, 2004 under SEC File
Number 333-113821, resulting in the Company incurring certain liquidated damages
in accordance with the terms of the private placement.  Liquidating
damages of $84,000 were paid to the unit holders in the private placement in the
third quarter 2004.





In accordance with Emerging Issues Task
Force (EITF) Issue No. 00-19, “Accounting for Derivative Financial Instruments
Indexed To, and Potentially Settled In a Company’s Own Stock,” the terms of the
warrants and the transaction documents, the fair value of the warrants was
accounted for as a liability, with an offsetting reduction to additional paid-in
capital at the closing date (February 6, 2004).  The warrant
liability, net of the liquidated damages, was reclassified to equity on July 28,
2004, when the registration statement became effective.





The fair value of the warrants was
estimated using the Black-Scholes option-pricing model with the following
assumptions:  no dividends; risk-free interest rate of 3.20%; the
contractual life of five years and volatility of 75%.  The fair value
of the warrants was estimated to be $8,754,068 on the closing date of the
transaction.  The difference between the fair value of the warrants of
$8,754,068 and the gross proceeds from the offering was classified as a
non-operating expense in the Company’s statement of operations, and included in
“Gain on derivative instrument, net”.  The fair value of the warrants
was then re-measured at March 31, 2004, June 30, 2004 and July 28, 2004 (the
date the registration statement became effective) and estimated to be $3,105,837
at July 28, 2004, with the decrease in fair value since February 6, 2004 due to
the decrease in the market value of the Company’s common stock.  The
decrease in fair value of the warrants of $5,648,231 from the transaction date
to July 28, 2004 was recorded as non-operating income in the Company’s statement
of operations, and included in “Gain on derivative instrument,
net”.  The fair value of the warrants at July 28, 2004 was
reclassified to additional paid in capital as of July 28, 2004.





52


The Company used $315,783 of the
proceeds from the private placement to reimburse officers of the Company for
expenses, including compensation that was incurred but unpaid, as of January 31,
2004.





The Company paid the placement agent
and its sub-agents $560,000 in cash as fees for services performed in
conjunction with the private placement.  The Company also incurred
$85,946 in other legal and accounting fees.  The Company also issued a
five-year warrant to purchase 3.2 million shares of common stock of the Company
at an exercise price of $0.30 per share to the placement agent and its
sub-agents in the private placement.  The warrants issued to the
placement agent are exercisable commencing on February 6, 2005.  The
fair value of the warrants was computed as $875,407 based on the Black-Scholes
option-pricing model with the following assumptions:  no dividends;
risk-free interest rate of 3.20%; the contractual life of five years and
volatility of 75%.  The Company allocated $1,521,353 between issuance
costs offsetting the liability for common stock warrants and equity based on a
relative fair value allocation of the stock issued and warrants issued to the
unit holders.  As a result, the Company initially recorded $621,171 of
issuance costs as an offset to the liability for common stock warrants related
to these fund raising activities in the Company’s consolidated balance
sheet.  The Company further recorded $62,582 of amortization expenses
from these issue costs as “Costs of fund raising activities” in the statement of
operations for the year ended December 31, 2004.





The adjustments required by EITF Issue
No. 00-19 were triggered by the terms of the Company’s agreements for the
private placement it completed in February 2004, specifically related to the
potential penalties if the Company did not timely register the common stock
underlying the warrants issued in the transaction.  The adjustments
for EITF Issue No. 00-19 had no impact on the Company’s working capital,
liquidity, or business operations.





All of the warrants issued in the
transaction provide a call right in favor of the Company to the extent that the
price per share of the Company’s common stock exceeds $1.00 per share for 20
consecutive trading days, subject to certain circumstances.





Concurrent with the closing of the
private placement, bridge investors, who had made loans to the Company over the
past 18 months, agreed to convert the $2,610,179 of loans and unpaid interest
into units on substantially the same terms as the investors in the private
placement.  The conversion terms accepted by the bridge investors were
substantially different than the initial conversion terms of the bridge
loans.  As a result, the Company accounted for the change in
conversion terms as a substantial modification of terms in accordance with EITF
Issue No. 96-19, “Debtor’s Accounting for a Modification or Exchange of Debt
Instruments”.  As a result, the Company recorded a $4,707,939 loss on
debt extinguishment in the three month period ended March 31, 2004 for the
difference between the carrying value of the bridge loans on the date the
conversion terms were modified ($2,610,179) and the fair value of the equity
issued under the new conversion terms ($7,318,118).  Upon conversion,
the Company issued the bridge investors 10,440,714 shares of common stock and
11,484,788 warrants to purchase shares of common stock on the same terms as the
unit holders.  The fair value of the common stock was computed as
$4,176,286 based on the closing price of the Company’s stock on February 6,
2004.  The fair value of the warrants was determined to be $3,141,832
using the Black-Scholes option-pricing model with the following
assumptions:  no dividends; risk-free interest rate of 3.20%; the
contractual life of five years and volatility of 75%.  Upon
conversion, the $7,318,118 adjusted value of the bridge loans was reclassified
as $26,102 of common stock and $7,292,016 of additional
paid-in-capital.





In February 2004, the Company issued
400,000 shares of common stock and 400,000 warrants to consultants, in lieu of
compensation, for financial advisory and business consulting services valued at
$269,426.  Consulting expense related to the issuance of the shares of
common stock was $160,000 in 2004 based on the closing price of the Company’s
stock on the date of issuance.  Expense related to the issuance of the
warrants of $109,426 was included in general and administrative
expenses.  These warrants have an exercise price of $0.30 per share,
and expire in February 2009.





53


In February 2004, the Company issued
100,000 shares of common stock to a consultant, in lieu of compensation, for
financial advisory and business consulting services.  Expense of
$40,000 was included in general and administrative expenses.





In November 2004, the Company issued
100,000 shares of common stock to a consultant, in lieu of compensation, for
scientific consulting services.  Expense of $25,000 was included in
research and development expenses.





During 2005, The Company issued
3,755,772 shares of common stock to warrant holders upon exercise of
warrants.





In August 2006, the Company issued
400,000 shares of restricted common stock to the Company’s President and CEO
under terms of her employment.  These restricted shares vest over a
three-year period.  Expense of $45,804 and $19,100 was included in
general and administrative expense in 2007 and 2006, respectively.





In October 2006, the Company issued
271,845 shares of common stock to a consultant, as part of the compensation to
the consultant, for executive search services.  Expense of $62,524 was
included in general and administrative expenses.





In November 2006, the Company sold
1,116,071 shares of common stock to Eli Lilly and Company for $500,000 (see Note
2).





During 2006, the Company issued
2,014,195 shares of common stock to warrant holders upon exercise of
warrants.





During 2006, the Company issued 510,206
shares of common stock to option holders upon exercise of options.





In September 2007, the Company sold
20,714,286 shares of common stock, along with 6,214,286 warrants to purchase
shares of common stock) to an investor in the September 2007 Placement for
$2,900,000.





During 2007, the Company issued
10,167,305 shares of common stock to warrant holders upon exercise of
warrants.





In December 2007, the Company issued
526,316 shares of restricted common stock to the Company’s President and CEO
under terms of her employment.  These restricted shares vest over a
three-year period.  Expense of $20,761 was included in general and
administrative expense in 2007.





In the event of any liquidation,
dissolution or winding up of the affairs of the Company, either voluntary or
involuntary, the holders of Preferred Stock are entitled to receive a
liquidation preference, adjusted for combinations, consolidations, stock splits
or certain issuances of Common Stock.  After payment has been made to
the holders of Preferred Stock of the full amounts to which they shall be
entitled, the holders of the Common Stock shall be entitled to receive ratably,
on a per share basis, the remaining assets.  As of December 31, 2007,
no Preferred Stock is outstanding.  The Company has reserved
44,418,453 shares of Common Stock for the exercise and conversion warrants, and
19,242,347 shares of Common Stock for the exercise and conversion of stock
options.





Note
6  -  Stock Option Plan





As of December 31, 2002, the Board of
Directors approved the Hemoxymed, Inc. (now called Applied NeuroSolutions, Inc.)
Stock Option Plan.  This plan is identical to the MGC pre-merger plan
(discussed below), with an increase in the number of options in the plan to
12,000,000.  Shareholder approval was obtained in 2003.





In conjunction with the Merger in
September 2002, each outstanding MGC stock option was exchanged for .658394 APNS
stock options.





54


In April 2001, management issued
non-qualifying stock options to two former employees to replace the incentive
stock options previously granted.  All terms of these options remained
the same.  Compensation expense of $64,033 was recorded to reflect the
fair value of these options.





In April 2001, the Board of Directors
granted 13,168 options to a non-employee exercisable at $1.50 per share, which
vest monthly over a twenty-four month period.  Compensation expense of
$24,170 was recorded to reflect the fair value of these options.





In July 2001, the Board of Directors
granted 6,584 options to an employee exercisable at $1.50 per share, which vest
one-fourth per year beginning July 2002.  These options were forfeited
during 2002.





In November 2001, the Board of
Directors granted 2,050,904 options exercisable at $0.30 per share which vest
one-fourth immediately and one-fourth per year beginning November
2002.  Non-employees were granted 144,847 of these options, which were
vested immediately.  Compensation expense of $53,174 was recorded to
reflect the fair value of options issued to non-employees.





In June 2002, the Board of Directors
granted 434,172 options exercisable at $0.15 per share which vest one-fourth
immediately and one-fourth per year beginning in June
2003.  Non-employees were granted 33,430 of these
options.  Compensation expense of $6,136 was recorded to reflect the
fair value of options issued to non-employees.





In June 2002, the Board of Directors
approved adjusting the exercise price of 4,399,052 options to $0.15 per
share.  This changed the accounting treatment for these stock options
to variable accounting until they are exercised.  For the year ended
December 31, 2003, the Company recorded compensation expense under variable
accounting equal to $604,100 related to these modified options.  For
the year ended December 31, 2002, no compensation expense had been recorded
related to these modified options as the Company’s stock price was below $0.15
as of December 31, 2002.





In September 2003, the Board of
Directors granted 5,337,000 options exercisable at $0.15 per share which vest
one-fourth immediately and one-fourth per year beginning in September
2004.  Non-employees were granted 752,000 of these
options.  Compensation expense of $80,975 was recorded to reflect the
fair value of options issued to non-employees.





In November 2004, the Board of
Directors granted 120,000 options exercisable at $0.17 per share which vest
one-fourth immediately and one-fourth per year beginning in November
2005.





In April 2005, the Company granted
4,045,136 stock options to employees, officers, independent directors and a
consultant, of which 3,302,565 options were granted to executive officers and
directors, 542,571 options were granted to employees, and 200,000 options were
granted to a consultant.  Compensation expense of $31,870 was recorded
to reflect the fair value of options issued to the consultant.  In
addition, the Company granted 300,000 stock options to independent directors in
the second half of 2005.  The 3,602,565 stock options granted to
executive officers and independent directors in 2005 were not approved by the
Company’s stockholders at the Company’s Annual Stockholder Meeting on June 20,
2006 and were cancelled and not reissued.  Included in general and
administrative expense and research and development expense in the quarter ended
June 30, 2006 was a non-cash expense of $80,165 and $117,460, respectively, to
record unrecognized compensation costs on these options.





In January 2006, 94,041 options were
exercised at an average exercise price of $0.l5 and 676,674 options with
exercise prices ranging from $0.15 to $5.30 expired, unexercised.  In
May 2006, 42,796 options with an exercise price of $0.15 expired,
unexercised.





On June 20, 2006, at the Company’s
Annual Stockholder Meeting, the stockholders voted against increasing the
maximum allowable shares of common stock issuable under the Company’s 2003 stock
option plan from 12,000,000 shares to 20,000,000 shares and voted against
ratification of the 3,602,565 options granted to executive officers and
independent directors in 2005.  Thus, these 2005 stock options were
cancelled and not reissued, and consequently, became available for future grants
under the Company’s 2003 stock option plan.





55


On June 27, 2006, the Board of
Directors approved a grant of 600,000 stock options to independent directors or
the Company.





On June 27, 2006, the Board of
Directors also approved a grant of 4,000,000 stock options to the Company’s new
Chairman.  This option grant was not made under the Company’s 2003
stock option plan, but was made in consideration of the engagement of the new
Chairman.





On August 29, 2006, The Board of
Directors approved a grant of 6,000,000 stock options to the Company’s newly
appointed President and CEO.  This option grant was made pursuant to
the terms of the new CEO’s employment and was not made under the Company’s 2003
stock option plan.  The Board of Directors also approved a grant to
the Company’s new CEO of 400,000 restricted shares of common stock, which grant
was made (i) on the same day as the new CEO’s option grants and (ii) pursuant to
the terms of the new CEO’s employment.  In addition, the Board of
Directors approved a grant to the Company’s new CEO of $100,000 of restricted
shares of common stock on both the first and second anniversaries of her
employment (August 29, 2007 and 2008).





On September 7, 2006, the Board of
Directors approved a grant of 300,000 stock options to an outside director of
the Company.





On October 23, 2007, the Board of
Directors approved a grant of 300,000 stock options to a new outside director of
the Company.





During 2007, 176,851 stock options
expired, unexercised.





On December 7, 2007, the Company’s
Chairman stepped down, remaining as a Director, and offered to return to the
Company 1,333,333 unvested stock options.  These options were
cancelled and the underlying shares are available for future issuance by the
Company.





In March 2008, the Board of Directors
approved a compensation plan for independent Directors effective as of January
1, 2008.  As part of the compensation plan, each independent Director
will receive an annual stock option grant as of the first Board meeting of the
year, valued at $5,000, calculated using a Black-Scholes valuation on the date
of the grant.  The stock options will have an exercise price equal to
the closing price of the Company’s common stock on the day prior to the grant
and will vest on the first business day of January in the following
year.  On March 7, 2008, the Company’s four independent Directors each
received a grant of 117,185 stock options.  On October 30, 2008, a new
independent Director received a pro-rated grant of 20,055 stock
options.  On November 14, 2008, a new independent Director received a
pro-rated grant of 19,175 stock options.





During 2008, 319,820 stock options
expired, unexercised.





The Company calculates expected
volatility for stock options using historical volatility.  The
starting point for the historical period used is September 2002, the timing of
the Merger (see Note 1).  The Company currently estimates the
forfeiture rate for stock options to be minimal.





The risk-free rates for the expected
terms of the stock options and awards and the employee stock purchase plan is
based on the U.S. Treasury yield curve in effect at the time of the
grant.





As of December 31, 2008, the Company
had 10,763,830 outstanding stock options granted under its 2003 stock option
plan and had 8,666,667 outstanding stock options granted outside the 2003 stock
option plan.  As of December 31, 2008 there was approximately $109,777
of total unrecognized non-cash compensation costs related to the outstanding
stock options, which is expected to be recognized over a weighted-average period
of 0.94 years.





As of December 31, 2008, 19,430,497
options were outstanding (17,539,201 were fully vested and exercisable) at
prices ranging from $0.04 to $1.50 per share.





A summary of the status of, and changes
in, the Company’s stock options as of and for the years ended December 31, 2008
and 2007, is presented below for all stock options issued to employees,
directors and non-employees:





56


2008
            2007Options
            Weighted-
              Average-Exercise
              Price
            Options
            Weighted-
              Average-Exercise
              PriceOutstanding
      at beginningof
      year
            19,242,347
            $           
       0.19
            20,452,531
            $          
       0.20Granted
            507,970
            0.10
            300,000
            0.19Exercised
            -
            -
            -
            -Forfeited
            319,820
            0.23
            1,510,184
            0.21Outstanding
      at endof
      year
            19,430,497
            $           
      0.19
            19,242,347
            $         
        0.19Options
      exercisable atend
      of year
            17,539,201
            $          
       0.19
            15,528,374
            $          
       0.18





All outstanding stock options at
December 31, 2008 have an exercise price greater than the December 31, 2008
market price.The intrinsic value of options outstanding and
options exercisable at December 31, 2008 was $0 and $0,
respectively.  No options were exercised during 2008.  The
intrinsic value at December 31, 2008 of options expected to vest was
$0.





Stock
      Options as of December 31, 2008Exercise
              Price
            Number
              Outstanding
      at
              December 31, 2008
            Weighted-Average
              Remaining
              Contractual Life
            Number
              Exercisable
      at
              December 31, 2008$ 
      0.04
            19,175
            9.9
      years
            -0-0.05
            20,055
            9.8
      years
            -0-0.10
            468,740
            9.2
      years
            -0-0.15
            8,363,475
            3.3 years
            8,363,4750.17
            75,000
            5.8 years
            75,0000.19
            300,000
            8.8 years
            250,0000.20
            3,166,667
            7.5 years
            3,166,6670.23
            6,000,000
            7.7 years
            4,666,6740.275
            300,000
            7.7 years
            300,0000.285
            702,571
            6.3 years
            702,5711.500
            14,814
            2.1 years
            14,81419,430,497
            
            17,539,201








Note
7  -  Employee Savings Plan





The Company sponsors a defined
contribution benefit plan (the “Savings Plan”) which qualifies under Section
401(k) of the Internal Revenue Code.  The Savings Plan covers all
eligible employees who are at least eighteen years of age and have completed six
months of service with the Company.  Employee contributions to the
Savings Plan are based on percentages of employee compensation plus a
discretionary matching contribution by the Company.  Vesting in the
Company’s contributions is based on length of service over a five-year
period.  The Company amended the Savings Plan, effective January 1,
2001, to increase the Company match from 50% to 100% of the first 5% of an
employee’s deferral, subject to certain limitations.  Contributions by
the Company for the years ended December 31, 2008 and 2007 were $36,654 and
$53,672, respectively.  In February 2009, the Company’s Board of
Directors suspended the Company match for 2009.





57





Note
8  -  Income Taxes





No Federal or state income taxes have
been provided for in the accompanying consolidated financial statements because
of net operating losses incurred to date and the establishment of a valuation
allowance equal to the amount of the Company's deferred tax
assets.  At December 31, 2008, the Company has net operating loss and
research and development credit carry-forwards for Federal income tax purposes
of approximately $37,200,000 and $970,000, respectively.  These
carry-forwards expire between 2009 and 2028.  In 2008, net operating
loss carry-forwards of $4,655,901 expired and research and development credit
carry-forwards of $121,653 expired.  Changes in the Company's
ownership may cause annual limitations on the amount of loss and credit
carry-forwards that can be utilized to offset income in the
future.  Net operating loss and research and development credit
carry-forwards, as of December 31, 2008, expiring over the next five years are
as follows:





Year
      Expiring
            
            Net
      Operating Loss
            
            
            Research
      and Development Credit2009
            
            $
            6,039,518
            
            
            $
            208,1482010
            
            
            2,100,609
            
            
            
            31,5222011
            
            
            2,003,368
            
            
            
            21,4542012
            
            
            2,398,264
            
            
            
            51,2372013
            
            
            0
            
            
            
            53,731Total
            
            $
            12,541,759
            
            
            $
            366,092





The net deferred tax assets as of
December 31, 2008 and 2007 are summarized as follows:





December 31,
      2008
            
            
            December 31,
      2007Deferred
      tax assets:Depreciation
            
            $
            150,000
            
            
            $
            170,000Net operating loss
      carry-forwards
            
            
            14,900,000
            
            
            
            15,900,000Tax credit
      carry-forwards
            
            
            970,000
            
            
            
            1,025,00016,020,000
            
            
            
            17,095,000Valuation
      allowance
            
            
            (16,020,000
            )
            
            
            (17,095,000
            )Net deferred income
      taxes
            
            $
            -
            
            
            $
            -





The net change in the valuation
allowance during 2008, after taking into account expiring net operating loss and
research and development credit carry-forwards, was a decrease of
$1,075,000.  The net change in the valuation allowance during 2007 was
an increase of $435,000.





Note
9  -  Commitments and Contingencies





Operating
Lease


The Company operates out of a
laboratory and office facility in Vernon Hills, Illinois.  The
original lease term was for sixty-three months through May 14, 2002 and included
a renewal option for two additional five-year periods.  In May 2002,
the lease was extended for a five-year period, through May 14,
2007.  In April 2007, the lease was extended for a three-year period,
through May 14, 2010.





Future minimum lease payments as of
December 31, 2008, under the terms of the operating lease for the facility in
Vernon Hills, Illinois are as follows:





Year ending December
      31,
            Amount2009
            $
      99,3752010
            37,266





58


Rental expense, including allocated
operating costs and taxes, was $125,100 and $120,038 for the years ended
December 31, 2008 and 2007, respectively.








Collaboration, Consulting
and Licensing Agreements


Under the terms of various license and
collaborative research agreements with Albert Einstein College of Medicine
(“AECOM”) the Company is obligated to make semi annual maintenance payments and
quarterly funding payments.  In addition, the agreements call for
royalty and revenue sharing agreements upon the sale and/or license of products
or technology licensed under the agreements.  In March 2002, September
2002, October 2006 and December 2008 the Company renegotiated various terms of
the AECOM agreements.  As part of the December 2008 amendment, AECOM
has agreed to defer the 2009 semi-annual maintenance payments until the earlier
of December 31, 2009 or a fund raise at least equal to $3,500,000. In exchange
for this deferral, the Company agreed to prepay the quarterly funding payments
that are due in February 2009, May 2009 and August 2009.  This
prepayment of $112,500 was made in December 2008.





Total expense for these outside
research, collaboration and license agreements, included in research and
development expenses, was $500,000 and $505,000 for the years ended December 31,
2008 and 2007, respectively.





The Company has a consulting agreement
with Dr. Peter Davies, its founding scientist, which has been renewed through
November 2011, but in some instances, may be terminated at an earlier date by
the Company and the consultant.  Expense for the consulting agreement,
included in research and development expenses, was $108,000 and $108,000 for the
years ended December 31, 2008 and 2007, respectively.





Future minimum payments, as of December
31, 2008, under the above agreements are as follows:





Year ending December
      31,
            Collaborations
            Consulting2009
            $   387,500
            $  
      108,0002010
            500,000
            108,0002011
            500,000
            99,0002012
            500,000
            -2013
            500,000
            -Total
            $2,387,500
            $315,000





The Company is obligated to pay AECOM
$500,000 each year subsequent to 2008 that the Agreements are still in
effect.  The future minimum payment for 2008 excludes $112,500 that
was prepaid in December 2008 as part of the December 2008
amendment.  In addition, the Company is obligated to pay AECOM a
percentage of all revenues received from selling and/or licensing aspects of the
AD technology licensed from AECOM that exceeds the minimum obligations reflected
in the annual license maintenance payments.  The Company can terminate
the Agreements at any time with sixty days written notice, but would be required
to return all rights granted under the Agreements to AECOM and reimburse AECOM
for any salary obligations undertaken by AECOM for the research projects covered
by the Agreements for up to one year from the termination date.





Employment
Agreement


Under the terms of her employment
agreement, Ellen R. Hoffing, the President and CEO, receives a minimum base
salary of $300,000 per year, plus a bonus of up to 40% of Ms. Hoffing’s base
salary upon attainment of performance objectives established by the Company’s
Board of Directors and acceptable to Ms. Hoffing.  On August 29, 2006,
the Company’s Board of Directors granted Ms. Hoffing a stock option to purchase
6,000,000 shares of the Company’s common stock at an exercise price of $0.23
(which was the closing price of the common stock on the over-the-counter market
on the date of grant).  The option vests as to 1,000,000 shares of
common stock on the sixth month anniversary of the grant, and then will vest as
to an additional 166,667 shares for each month thereafter until the option is
vested in full (which will be on the third anniversary of the date of
grant).  On August 29, 2006, the Company’s Board of Directors also
granted Ms. Hoffing 400,000 shares of restricted stock ($100,000 at $0.25 per
share, which was the high price of the common stock on the over-the-counter
market on the date of the grant), which vests as to 133,334 shares on the first
anniversary of the date of grant and 133,333 shares on the second and third
anniversaries of the date of grant.  On October 23, 2007, the
Company’s Board of Directors granted Ms. Hoffing 526,316 shares of restricted
stock ($100,000 at $0.19, which was the closing price of the common stock on the
over-the-counter market on the date of the grant), which vests as to 175,439
shares on August 29, 2008 and 2009 and 175,438 shares on August 29,
2010.  The Company’s Board of Directors did not grant any restricted
stock to Ms. Hoffing in 2008.  If Ms. Hoffing’s employment is
terminated by the Company without cause, she is entitled to her base salary and
benefits for a period of 12 months after such termination, and the portion of
her options and restricted stock that would have vested during the 12 months
following such termination will immediately vest.  If Ms. Hoffing’s
employment is terminated upon or in connection with a change of control of the
Company, then Ms. Hoffing will be paid the equivalent of one year’s base salary
and benefits and any unvested shares of restricted stock and stock options will
immediately vest in full upon such change in control.





59


Contingencies


The Company does not maintain any
product liability insurance for products in development.  The Company
believes that even if product liability insurance were obtained, there is no
assurance that such insurance would be sufficient to cover any
claims.  The Company is unaware of any product liability
claims.





The ability to develop the Company’s
technologies and to commercialize products will depend on avoiding patents of
others.  While the Company is aware of patents issued to competitors,
as of December 31, 2008, the Company was not aware of any claim of patent
infringement against it.





In March 2004, the Company was notified
by email from Innogenetics, a Belgian biopharmaceutical company involved in
specialty diagnostics and therapeutic vaccines, that it believes the CSF
diagnostic test the Company has been developing uses technology that is
encompassed by the claims of its’ U.S. patents.  Innogenetics also
informed the Company that it could be amenable to entering into a licensing
arrangement or other business deal with the Company regarding its
patents.  The Company had some discussions with Innogenetics
concerning a potential business relationship, however no further discussions
have been held since the second quarter of 2006.





The Company has reviewed these patents
with its patent counsel on several occasions prior to receipt of the email from
Innogenetics and subsequent to receipt of the email.  Based on these
reviews, the Company believes that its CSF diagnostic test does not infringe the
claims of these Innogenetics patents.  If the Company is unable to
reach a mutually agreeable arrangement with Innogenetics, it may be forced to
litigate the issue.  Expenses involved with litigation may be
significant, regardless of the ultimate outcome of any litigation.  An
adverse decision could prevent the Company from possibly marketing a future
diagnostic product and could have a material adverse impact on its
business.








Note
10 – Notes Payable





On July 10, 2006, the Company entered
into a Note and Warrant Purchase Agreement with private investors pursuant to
which the Company sold to the investors 12% senior unsecured notes due January
10, 2007 in the aggregate principal amount of $500,000 (“Bridge Funding”), and
five year warrants (the “Warrants”) exercisable to purchase an aggregate of
922,500 shares of the Company’s common stock at an exercise price of $.0025 per
share.  The Notes, plus accrued interest, were paid in full as of
January 10, 2007.  The Notes were not guaranteed by any third party,
and not secured by the Company, and were senior to all of the Company’s
indebtedness and were non-transferable.  The Warrants are immediately
exercisable, however, the shares of common stock to be issued upon exercise of
the warrants have not yet been registered.





Pursuant to FSP EITF 00-19-2,
“Accounting for Registration Payment Arrangements” (“FSP”), which addresses an
issuer’s accounting for registration payment arrangements, the Company concluded
that no obligation should be recorded related to the registration rights for the
warrants issued.  "





The Company accounted for the warrants
issued based on guidance from SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities and Emerging Issues Task Force (“EITF”) No.
00-19. Accounting for Derivative Financial Instruments Indexed to and
Potentially Settled in a Company’s Own stock.  Accordingly, the
warrants are classified as equity.





60


The Company allocated the proceeds from
the Bridge Funding of $500,000 between the debt and the warrants based upon the
fair value of the debt and warrants at the transaction date.  The
warrants were valued using the Black-Scholes pricing model.  This
resulted in an increase in additional paid-in capital at the transaction date
related to the warrants in the amount of $200,866.  The carrying value
of the debt was reduced by the $200,866 and the discount was amortized over the
life of the loan (6 months).  During 2007 and 2006, $11,159 and
$189,707 of the discount was recognized as interest expense,
respectively.  Included in current liabilities as of December 31,
2006, was a bridge loan balance of $488,841, comprised of the $500,000 Bridge
Funding proceeds received, net of the unamortized debt discount of
$11,159.





The fair value of the warrants issued
was determined using the Black-Scholes option pricing model based on the
following assumptions: volatility of 75%, expected life of two years, risk free
interest rate of 5.14% and no dividends.





On
December 31, 2008, the Company entered into Convertible Note Purchase Agreements
(the “Purchase Agreement”) with private investors pursuant to which the Company
sold to the investors 12% convertible notes due June 30, 2010 in the aggregate
principal amount of $535,000 (the “Notes”).  $500,000 of the Notes was
closed on in December 2008 and is reflected as Notes Payable as of December 31,
2008.  The remaining $35,000 was closed on in January
2009.  The price at which principal of the Notes will be converted
into shares of Common Stock (the “Note Conversion Price”) shall be equal to the
lesser of (i) the average closing price of the Common Stock on the OTC Bulletin
Board for the 20 trading day period immediately preceding the date of the
Closing, (ii) $0.04, or (iii) the per share price (or conversion price) in any
subsequent financing while the debt is outstanding (in each case as such amount
is equitably adjusted to reflect any stock split, reverse stock split or stock
dividend carried out by the Company).  The current conversion price of
$.0291 per share was determined by the average closing price of the Company’s
common stock for the twenty trading days immediately preceding December 31,
2008.  At December 31, 2008, there is no deemed beneficial conversion
feature related to the Convertible Note Payable.  As of December 31,
2008, the carrying cost of these notes approximates fair value.  The
Notes are not secured and are non-transferable.





Pursuant to the Purchase Agreement, the
Company has granted to the investors demand registration rights for the shares
of common stock that would be issued upon conversion of the Note principal and
piggyback registration rights for the shares of common stock that would be
issued upon conversion of the Note interest.








Note
      11 – Authorized Shares





The Company discovered in the first
quarter of 2006 that three prior amendments to its certificate of incorporation
were approved by written consent of the stockholders.  The first
amendment, approved in October 2001 and filed in November 2001, increased the
Company's authorized common stock from 22.4 million shares to 50 million shares,
and the second amendment, approved in June 2003 and filed in September 2003,
increased the authorized common stock to 200 million shares.  The
third amendment to the Company's certificate of incorporation was approved and
filed in October 2003 to change the name of the Company to “Applied
NeuroSolutions, Inc.”  For each of these amendments, the Company filed
an information statement and duly mailed it to stockholders 20 days prior to
effective date of the stockholders' written consents becoming effective, all in
accordance with the Exchange Act and its applicable rules.





In January 2006, in preparation of the
proxy statement for the Company’s annual meeting, the Company discovered that
the certificate of incorporation of its predecessor entity, Ophidian
Pharmaceuticals, Inc., limited stockholders from taking action by written
consent.  That provision is still in effect.  Consequently,
the 2001 and 2003 amendments to the certificate of incorporation, while approved
by the Board of Directors and approved by a majority of the then-outstanding
shares of common stock in the manner described above, were technically not
adopted properly under Delaware law.  Such shares may be deemed issued
in excess of the Company's 22,400,000 authorized and outstanding shares of
common stock.





To remedy this technical error, the
Company corrected its certificate of incorporation by means of a
subsidiary-parent merger approved by the stockholders, with a new “corrected”
certificate of incorporation resulting from such merger.





61


To assure that this correction would be
made, thereby preserving the status quo for the Company's existing common
stockholders, the Company created a new class of “super voting” Series A
preferred stock, which is permitted by the “blank check” provisions of the
current certificate of incorporation that was approved by the stockholders of
the Company's predecessor at an annual meeting held in 1999.  The
shares of this Series A preferred stock were issued solely to the members of the
Company's Audit Committee, in trust for the benefit of the Company's common
stockholders.  The members of the Audit Committee agreed to vote the
shares in favor of the curative merger transaction.  Following the
merger transaction and the correction of the certificate of incorporation to
affirm the previous actions of the Company's stockholders, the Company redeemed
and canceled the shares of the Series A preferred stock at a nominal cost of
$250.





The Board of Directors
unanimously approved the Merger Agreement and the approach
outlined above.


The
Company’s annual meeting was held on June 20, 2006 and the parent-subsidiary
merger, as described above, was approved and the Company immediately filed a
certificate of merger to effect the technical correction to its certificate of
incorporation.  The Company’s authorized common stock under Article IV
of the amended and restated certificate of incorporation is now 200 million
shares.





Because the holders of the Series A
preferred stock had informed the Company of their agreement with each other to
vote the Series A preferred shares in favor of the Merger Agreement, the Company
continued to treat the over-issued shares of common stock in the same manner as
the remaining outstanding shares of the Company’s common stock.





In September 2008, the Company’s
shareholders approved an amendment to the Company’s certificate of incorporation
to effect a reverse stock split of the Company’s common stock at any time prior
to June 30, 2009 at a ratio between 1-for-20 and 1-for-30 as determined by the
Company’s Board of Directors and to decrease the Company’s authorized common
stock from 200 million shares to 100 million shares.  As of February
27, 2009, the Company’s Board of Directors has not set a date, or determined the
ratio, for the reverse stock split.





Note
12 – Quarterly Financial Data (Unaudited)





2008
            
            Fourth
      Quarter
            
            
            Third
      Quarter
            
            
            Second
      Quarter
            
            
            First QuarterTotal
      Revenues
            
            $
            213,134
            
            
            $
            208,333
            
            
            $
            208,333
            
            
            $
            208,333Total
      Operating Expenses
            
            
            685,235
            
            
            
            794,780
            
            
            
            805,271
            
            
            
            828,254Net
      Loss
            
            
            (468,792
            )
            
            
            (579,146
            )
            
            
            (585,822
            )
            
            
            (598,608
            )Net
      Loss Per Share
            
            $
            (0.00
            )
            
            $
            (0.00
            )
            
            $
            (0.00
            )
            
            $
            (0.00
            )2007Total
      Revenues
            
            $
            208,334
            
            
            $
            208,333
            
            
            $
            458,333
            
            
            $
            208,333Total
      Operating Expenses
            
            
            880,199
            
            
            
            860,431
            
            
            
            995,603
            
            
            
            923,464Net
      Loss
            
            
            (643,200
            )
            
            
            (642,095
            )
            
            
            (524,311
            )
            
            
            (718,575
            )Net
      Loss Per Share
            
            $
            (0.01
            )
            
            $
            (0.01
            )
            
            $
            (0.01
            )
            
            $
            (0.01
            )





62


ITEM
9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.





None.





ITEM
9A. CONTROLS AND PROCEDURES




(a)Disclosure
Controls and Procedures.   Our management, with the
participation of our principal executive officer (chief executive officer) and
principal financial officer (chief financial officer), has conducted an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end
of the period covered by this report (the “Evaluation Date”).  Based
on this evaluation, and due to the material weaknesses in our internal control
over financial reporting (as described below in the “Report of Management on Applied
NeuroSolutions, Inc.’s Internal Control over Financial Reporting”), our
chief executive officer and chief financial officer concluded that as of
December 31, 2008, our disclosure controls and procedures were not
effective to ensure that information required to be disclosed by us in reports
that we file or submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in SEC rules and
forms.




(b)Internal
Controls Over Financial
Reporting.      There was no change in our
internal control over financial reporting during our most recently completed
fiscal quarter that has materially affected or is reasonably likely to
materially affect our internal control over financial reporting.  Set
forth below is the “Report of
Management on Applied NeuroSolutions, Inc.’s Internal Control over Financial
Reporting”




Report
of Management on Applied NeuroSolutions, Inc.’s Internal Control Over Financial
Reporting




Our principal executive officer (chief
executive officer) and principal financial officer (chief financial officer), as
members of management of Applied NeuroSolutions, Inc., are responsible for
establishing and maintaining adequate internal control over financial reporting,
as such term is defined in Exchange Act Rules 13a-15(f) or
15d-15(f).  Internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles.  Internal
control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of our assets;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that our receipts and expenditures
are being made only in accordance with authorizations of our management and
directors; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of our assets
that could have a material effect on the financial statements.




Because of its inherent limitations,
our internal controls and procedures may not prevent or detect
misstatements.  A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, have been
detected.  Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies and procedures may deteriorate.




The following material weaknesses have
been identified by members of our management and reported to the audit
committee:




·
            We
      lack segregation of duties in the period-end financial reporting
      process.  Our Chief Financial Officer (CFO) is the only
      employee with any significant knowledge of generally accepted accounting
      principles. The CFO is also the sole employee in charge of the general
      ledger (including the preparation of routine and non-routine journal
      entries and journal entries involving accounting estimates), the
      preparation of accounting reconciliations, the selection of accounting
      principles, and the preparation of interim and annual financial statements
      (including report combinations, consolidation entries and footnote
      disclosures) in accordance with generally accepted accounting
      principles.




·
            We
      use accounting software that has inherent control deficiencies over user
      access and audit trail
capabilities.




63


As of December 31, 2008, our
management, with the participation of our chief executive officer and chief
financial officer, documented our control environment, however, management did
not assess our internal control over financial reporting based on criteria for
effective internal control over financial reporting as described in “Internal
Control — Integrated Framework” issued by the Committee of Sponsoring
Organizations (COSO) of the Treadway Commission.  As a result of the
material weaknesses described above, management has concluded that our internal
controls over financial reporting were not effective as of December 31,
2008.








ITEM
9B. OTHER INFORMATION





None.











PART
III





ITEM
      10.   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
      GOVERNANCE





Our executive officers and directors
as of December 31, 2008, and their ages as of February 28, 2009, are as
follows:








Name
            
            Age
            
            PositionEllen
      R. Hoffing
            
            52
            
            President,
      Chief Executive Officer, Chairman of the Board of Directors & Class II
      DirectorAlan
      L. Heller (1)(2)
            
            55
            
            Class
      III DirectorEdward
      A. Ogunro (2)(3)
            
            56
            
            Class
      I DirectorGary
      C. Parks (1)
            
            58
            
            Class
      III DirectorDavid
      C. Tiemeier (3)
            
            62
            
            Class
      I DirectorDavid
      Ellison
            
            47
            
            Chief
      Financial Officer & Corporate
Secretary





(1)
            Member
      of the Audit Committee


(2)
            Member
      of the Compensation Committee


(3)
            Member
      of Nominating and Governance
Committee





Ellen R. Hoffing, a Class II
director, was appointed Chairman of the Board of Directors in December 2007 and
has been President, Chief Executive Officer and a Director since August 29,
2006.  Ms. Hoffing currently serves on the Board of Directors of one public
company, Perrigo Company.  Since 2005, she had been a consultant to
healthcare focused companies.  In 2005, Ms. Hoffing was Vice President,
Strategic Planning at American Pharmaceutical Partners, a publicly traded
specialty pharmaceutical company focused on injectable oncology, anti-infective
and critical care products.  From 2002 to 2005, Ms. Hoffing was Vice
President, Renal Pharmaceuticals at Baxter Healthcare, a New York Stock Exchange
listed company.  From 2001 to 2002, she was Vice President, Strategy
and Acquisitions, at Merisant (the maker of Equal®) and from 2000 to 2001, Ms.
Hoffing was a strategy and management consultant to healthcare focused
companies.  Prior to 2000, Ms. Hoffing took on roles of increasing
responsibility in her 17 years at the Searle division of Monsanto, which
culminated in her position as Vice President, Global Analytics.





Alan L. Heller, a Class III
director, has been a director since September 2006.  Since March 2006,
Mr. Heller has been an Operating Partner at a private equity firm, Water Street
Healthcare Partners.  Mr. Heller currently serves on the Board of
Directors of two other public companies: Savient Pharmaceuticals, Inc. and
Northfield Laboratories Inc.  From November 2004 to November 2005, Mr.
Heller was President and Chief Executive Officer of American Pharmaceutical
Partners, Inc., a company that develops, manufactures and markets branded and
generic injectable pharmaceutical products.  From January 2004 to
November 2004 Mr. Heller served as an investment advisor on life science
transactions to One Equity Partners, a private equity arm of JP Morgan
Chase.  From 2000 to 2004, Mr. Heller also served as Senior Vice
President and President Global Renal operations at Baxter Healthcare
Corporation.  Prior to joining Baxter, Mr. Heller spent 23 years at
G.D. Searle. He served in several senior level positions including Co-President
and Chief Operating Officer, with responsibility for all commercial operations
worldwide, and Executive Vice President and President, Searle
Operations.





64


Edward A. Ogunro, Ph.D.,, a
Class I director, has been a director since October 2008.  Dr. Ogunro
recently retired from his position as Senior Vice President, R&D and Medical
Affairs and Chief Scientific Officer at Hospira, Inc. where he was part of the
executive management team that transitioned the company from a division of
Abbott Laboratories in April 2004 to a successful stand-alone entity. Dr. Ogunro
joined Abbott Labs as a Research Biochemist in the Diagnostics Division in June
1982 and took on roles of increasing responsibility including Program Director
for AxSym, one of the most successful analyzers in the diagnostic
industry.  In addition, in his 20 plus years at Abbott Labs, Dr. Ogunro
held senior leadership positions including Divisional Vice President,
Immunodiagnostics and Chemistry in the Diagnostics Division and Corporate Vice
President R&D, Medical and Regulatory Affairs in the Hospital Products
Division. Previously, Dr. Ogunro pursued postdoctoral studies and served as an
Assistant Professor at Northwestern University Medical School in
Chicago.





Gary C. Parks, a Class III
director, has been a director since November 2008.  Since 1993 Mr.
Parks has served as the Secretary, Treasurer and Chief Financial Officer of
Immtech Pharmaceuticals, Inc., a company dedicated to the discovery and
development of therapies to treat infectious diseases affecting the global
community. Previously, Mr. Parks held financial operations roles of increasing
responsibility including Vice President, Finance at Smallbone, Inc., from 1989
until 1993, Division Controller with International Paper from 1986 to 1989 and
Vice President of Serck Baker, Inc., a subsidiary of BTR plc, from 1982 to 1989
and board member of Serck Baker de Venezuela.





David C. Tiemeier, Ph.D., a Class I director, has
been a director since October 2007.  He is currently serving as Deputy
Director of UChicagoTech, the University of Chicago’s Office of Technology and
Intellectual Property.  Previously, Dr. Tiemeier pursued postdoctoral
studies in molecular genetics at the National Institutes of Health before
joining the faculty of the University of California, Irvine, Medical
School.  He joined Monsanto Co. (NYSE:MON) as the head of Molecular
Genetics, and continued his career in Monsanto’s pharmaceutical division as
Senior Director of Immunoinflammatory and Infectious Diseases and took on roles
of increasing responsibility including General Manager of the Global New
Business Franchise and Vice President of Global Business Development.  He
subsequently held senior positions in Pharmacia Corporation and Pfizer
Inc.  Following his retirement from Pfizer, Dr. Tiemeier held senior
management positions with NeoPharm, Inc., Immtech Pharmaceuticals, Inc. and
Kalypsys, Inc.





David Ellison, CPA, has been
Chief Financial Officer of the Company since May 1996 and Corporate Secretary
since August 1999.  He had been Chief Financial Officer of a long-term
care facility specializing in Alzheimer’s care and prior to that he was a senior
manager in a Chicago-area public accounting firm.








Board
of directors committees and other information





Since April 1999, the Company's
Certificate of Incorporation and Bylaws have provided that the Company's Board
of Directors is divided into three classes with staggered terms of three years
each.  In June 2006, the Company's stockholders voted on initial terms
for the three classes of directors as set forth in the Company’s By-laws,
because the terms for all classes of directors had expired.  As a
result of the election of directors in June 2006, the initial term of the
directors of the first class (“Class I”) expired in 2007, the initial term of
the directors of the second class (“Class II”) expired in 2008 and the initial
term of the directors of the third class (“Class III”) will expire in
2009.  In October 2007, we appointed David C. Tiemeier as a Class I
director.  The Company’s By-laws require that directors who are
appointed to fill vacancies must stand for election at the next annual meeting
of stockholders and thereafter will stand for election with the other directors
in their class.  After the expiration of the initial term, all of the
Company's directors serve three year terms and hold office until the third
annual meeting of stockholders of the Company following their election to the
Board and until their respective successors have been qualified and
elected.  Officers are elected by, and serve at the discretion of, the
Board of Directors.  On April 20, 2007, Michael Sorell, MD, a Class
III director since November 2004, passed away.    On January
30, 2007, Bruce N. Barron, a Class I director since 1994, informed the Company
that he would not run for re-election at the Company’s next annual meeting of
stockholders, due to an increase in Mr. Barron’s external business commitments.
On December 7, 2007, Mr. Barron resigned.  On September 16, 2008, at
our annual stockholders meeting, the Company’s stockholders approved all
directors up for election, which included all Class I directors, all Class II
directors and all directors who had not previously stood for
election.  On October 30, 2008, we appointed Edward A. Ogunro, Ph.D.
as a Class I director.  On November 14, 2008, we appointed Gary C.
Parks as a Class III director, replacing Robert S. Vaters, a Class III director
since October 2005, who resigned due to an increase in his external business
commitments.  On December 17, 2008, Jay B. Langner, a Class II
director since July 2005, resigned from the board for personal
reasons.





65


Section
16(a) beneficial reporting compliance





The Company's executive officers,
directors and shareholders beneficially owning more than 10% of the Company's
Common Stock are required under the Exchange Act to file reports of ownership of
Common Stock of the Company with the Securities and Exchange
Commission.  Copies of those reports must also be furnished to the
Company.  The Company believes that during the preceding year all
filing requirements applicable to executive officers, directors and shareholders
beneficially owning more than 10% of the Company's Common Stock have been
complied with.





Committees





In November 2008, the Board of
Directors appointed Gary C. Parks (Chairman) and Jay B. Langner to the Audit
Committee.  Mr. Langner resigned from the Board in December 2008 and
Alan L. Heller has been appointed as Mr. Langner’s replacement on the audit
committee.  The Audit Committee reviews the scope and results of the
Company's financial statements conducted by the Company's independent
auditors.  The Committee also reviews the scope of other services
provided by the Company's independent auditors, proposed changes in the
Company's financial and accounting standards and principles, and the Company's
policies and procedures with respect to its internal accounting, and auditing
and financial controls.  The Committee makes recommendations to the
Board of Directors on the engagement of the independent auditors, as well as
other matters that may come before it or as directed by the Board of
Directors.  Our Board of Directors has determined that Mr. Parks is an
“audit committee financial expert” within the applicable definition of the
Securities and Exchange Commission.  Each of Mr. Parks and Mr. Heller
qualify as independent directors under Rule 10A-3 of the Securities Exchange Act
of 1934 and as defined in NASD Marketplace Rule 4200(15).





In November 2008, the Board of
Directors appointed Alan L. Heller (Chairman) and Edward A. Ogunro to the
Compensation Committee.  The Compensation Committee makes decisions
concerning matters of executive compensation; administers the Company's
executive incentive plans; reviews compensation plans, programs and policies;
and monitors the performance and compensation of executive
officers.  The goal of our Board of Directors executive compensation
policy is to ensure that an appropriate relationship exists between executive
compensation and the creation of stockholder value, while at the same time
attracting, motivating and retaining senior management.Each of Mr. Heller and Dr.
Ogunro qualify as independent directors under Rule 10A-3 of the Securities
Exchange Act of 1934 and as defined in NASD Marketplace Rule
4200(15).





In November 2008, the Board of
Directors appointed David C. Tiemeier (Chairman) and Edward A. Ogunro to the
Nominating and Governance Committee.  The Nominating and Governance
Committee participates in identifying qualified individuals to become directors
and determining the composition of the Board and its committees.  In
addition, the Committee reviews and recommends to the Board of Directors
proposed changes to the Company’s Certificate of Incorporation and
By-Laws.  In consultation with the Chairman of the Board, the Chief
Executive Officer and the Chairman of the Committee, the committee periodically
reviews, revises, interprets and confirms compliance with the Company’s
corporate governance policies and corporate governance
guidelines.  The committee recommends to the Board of Directors ways
to enhance services to and improve communications and relations with the
Company’s shareholders; and conducts, in consultation with the Chairman of the
Board, the Chief Executive Officer and the Chairman of the Committee, an annual
review of the Corporation’s Code of Ethics and Business Conduct.  Each
of Dr. Tiemeier and Dr. Ogunro qualify as independent directors under Rule 10A-3
of the Securities Exchange Act of 1934 and as defined in NASD Marketplace Rule
4200(15).





66


Code
of Ethics





Effective June 1, 2005, we adopted a
code of ethics that applies to all of our directors, officers (including our
chief executive officer and chief financial officer, and any person performing
similar functions) and employees.  We have made our Code of Ethics
available by filing it as Exhibit 14 with our 2005 Annual Report on Form
10-KSB.  In January 2009, we updated the code of
ethics.  The updated code of ethics is included as Exhibit 14 to this
2008 Annual Report on Form 10K.





67


ITEM
      11.
            EXECUTIVE
      COMPENSATION





SUMMARY
COMPENSATION TABLE


The following table sets forth all
compensation awarded to, earned by, or paid for services in all capacities
during 2008 and 2007 by our President and Chief Executive Officer, Chief
Financial Officer, and Chief Scientific Officer.





Name
      and
              Principal
      Position
            Year
            Salary
            Bonus
            Stock
              Awards
            Option
              Awards
            All
      Other
              Compensation
            TotalEllen
      R. Hoffing
              President
      & CEO (1)
            2008
              2007
            $ 
      315,000
              301,250
            $           
      0
              120,000
            $  
      70,237
              66,565
            $          
      0
              0
            $          
      0
              0
            $  
      385,237
              487,815David
      Ellison
              CFO
      (2)
            2008
              2007
            $ 
      205,000
              195,339
            $           
      0
              0
            $          
      0
              0
            $           
      0
              0
            $ 
      12,000
              0
            $  
      217,000
              195,339John
      F. DeBernardis
              Chief
      Scientific Officer (3)
            2008
              2007
            $ 
      185,000
              291,526
            $           
      0
              0
            $         
       0
              0
            $          
       0
              0
            $          
       0
              1,000
            $  
      185,000
              292,526





(1)
            Ms.
      Hoffing began employment as President and Chief Executive Officer of the
      Company in September 2006.  Her minimum annual base salary per
      her employment agreement is $300,000.  On August 29, 2006, The
      Company’s Board of Directors approved a grant of 6,000,000 stock options
      to Ms. Hoffing.  This option grant was made pursuant to her
      employment agreement and was not made under the Company’s 2003 stock
      option plan.  On August 29, 2006, the Company’s Board of
      Directors granted Ms. Hoffing 400,000 shares of restricted
      stock.  On October 23, 2007, the company’s Board of Directors
      granted Ms. Hoffing 526,316 shares of restricted stock.  Both
      restricted stock grants were made pursuant to her employment
      agreement.  The Company’s Board of Directors did not grant any
      restricted stock to Ms. Hoffing in 2008.  In January 2007, The
      Company’s Board of Directors approved a $40,000 bonus for 2006 for Ms.
      Hoffing.  In February 2008, The Company’s Board of Directors
      approved a $120,000 bonus for 2007 for Ms. Hoffing.  The bonuses
      were made pursuant to her employment agreement.  In order to
      conserve cash for 2009 operations, the Company’s Board of Directors and
      Ms. Hoffing agreed to forego any bonus for 2008.  Ms. Hoffing
      will be eligible for a bonus in 2009 that could exceed the 40% stipulated
      in her employment agreement, if certain achievements are met and funds are
      available.    In December 2007, Ms. Hoffing was
      appointed as Chairman of the Company’s Board of
      Directors.  Effective December 1, 2007, the Company’s Board of
      Directors approved an increase in Ms. Hoffing’s annual base salary to
      $315,000.


(2)
            Mr.
      Ellison was employed as Chief Financial Officer of the Company pursuant to
      an agreement through October 31, 2007 that provided for a minimum base
      salary of $174,000 per year, with an annual cost of living
      increase.  Mr. Ellison had not received an increase in his base
      salary of $183,000 since April 2005.  Mr. Ellison’s agreement
      also provided a minimum monthly non-accountable allowance of $300 for
      automobile and cell phone expenses.  This allowance was
      increased to $400 per month in April 2005.  In July 2007, the
      Company gave Mr. Ellison timely notice that his employment agreement was
      not being renewed.  On October 31, 2007, the Company paid Mr.
      Ellison $13,201, representing his earned, but unpaid, cost of living
      increase for the period April 2006 through October 2007.  Since
      November 1, 2007, Mr. Ellison has continued in his current position with
      the Company as an at-will employee with an annual base salary of
      $205,000.  In 2008, the Company included $12,000 in Mr.
      Ellison’s compensation to compensate him for unused vacation time that he
      had been unable to take through December 31,
  2007.


(3)
            Dr.
      DeBernardis was President and CEO of the Company from October 2004 through
      August 2006.  Dr. DeBernardis was employed as Chief Scientific
      Officer of the Company pursuant to an agreement through October 31, 2007
      that provided for a minimum base salary of $282,000 per year, with an
      annual cost of living increase.  Dr. DeBernardis had not
      received an increase in his base salary of $296,000 since April
      2005.  Dr. DeBernardis’s agreement also provided a minimum
      monthly non-accountable allowance of $1,000 for automobile and cell phone
      expenses.  This allowance was increased to $1,150 per month in
      April 2005.  Dr. DeBernardis’s employment agreement provided for
      the Company to pay for a life insurance policy, in addition to the life
      insurance policy provided through the Company’s group health
      plan.  The annual premium is included in All Other
      Compensation.  This additional life insurance policy was
      cancelled in April 2007.  In July 2007, the Company gave Dr.
      DeBernardis timely notice that his employment agreement was not being
      renewed.  On October 31, 2007, the Company paid Dr. DeBernardis
      $21,352, representing his earned, but unpaid, cost of living increase for
      the period April 2006 through October 2007.  Since November 1,
      2007, Dr. DeBernardis has continued in his current position with the
      Company as an at-will employee with an annual base salary of
      $185,000.





68


OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END - DECEMBER 31, 2008





Option
      Awards
            Stock
      AwardsName
            Number
      of Securities Underlying Unexercised Options (#) Exercisable(2)
            Number
      of Securities Underlying Unexercised Options (#) Unexercisable(1)
            Equity
      Incentive Plan Awards:  Number of Securities Underlying
      Unexercised Unearned Options (#)
            Option
      Exercise Price ($)
            Option
      Expiration Date
            Number
      of Shares or Units of Stock That Have Not Vested (#)(1)
            Market
      Value of Shares or Units of Stock That Have Not Vested ($)
            Equity
      Incentive Plan Awards:  Number of Unearned Shares, Units or
      Other Rights That Have Not Vested (#)
            Equity
      Incentive Plan Awards:  Market or Payout Value of Unearned
      Shares, Units or Other Rights That Have Not Vested ($)Ellen
      R. Hoffing(1)
            4,666,674
            1,333,326
            -
            $0.230
            08/29/2016
            133,333
            $  
      6,721
            -
            $ -350,877
            $
      29,376David
      Ellison
            69,132
            -
            -
            $0.150
            11/16/2010
            -
            -
            -
            $ -164,599
            -
            -
            $0.150
            11/01/201135,656
            -
            -
            $0.150
            06/01/2012500,000
            -
            -
            $0.150
            09/02/2013John
      F. DeBernardis
            233,731
            -
            -
            $0.150
            11/16/2010
            -
            -
            -
            $ -427,957
            -
            -
            $0.150
            11/01/2001120,402
            -
            -
            $0.150
            06/01/20121,500,000
            -
            -
            $0.150
            09/02/2013





(1)
            Ms.
      Hoffing’s unexercised stock options as of December 31, 2008 will become
      exercisable as follows: 166,667 options will become exercisable each month
      through July 29, 2009 and 166,657 options will become exercisable on
      August 29, 2009.  Ms. Hoffing’s restricted common stock as of
      December 31, 2008 will vest as follows:308,772 shares of
      restricted common stock vests on August 29, 2009, and 175,438 shares of
      restricted common stock vests on August 29,
  2010.





(2)
            In
      March 2009, the Company entered into stock option exchange agreements with
      the three employees above, two other employees and the Company’s founding
      scientist.  In return for exchanging 10,812,940 previously
      granted stock options with exercise prices ranging from $0.15 to $0.285,
      the Company issued 3,604,313 new stock options, 1 new option for every 3
      options returned, with an exercise price of $0.0495.  The
      vesting schedules and the expiration dates of the new options are the same
      as the vesting schedules and expiration dates of the returned
      options.  The stock option exchange was approved by the
      Company’s Board of Directors.







69


Employment
agreement





Under the terms of her employment
agreement, Ellen R. Hoffing, the Chairman, President and CEO, receives a minimum
base salary of $300,000 per year, plus a bonus of up to 40% of Ms. Hoffing’s
base salary upon attainment of performance objectives established by the
Company’s Board of Directors and acceptable to Ms. Hoffing.  On August
29, 2006, the Company’s Board of Directors granted Ms. Hoffing a stock option to
purchase 6,000,000 shares of the Company’s common stock at an exercise price of
$0.23 (which was the closing price of the common stock on the over-the-counter
market on the date of grant).  The option vests as to 1,000,000 shares
of common stock on the sixth month anniversary of the grant, and then will vest
as to an additional 166,667 shares for each month thereafter until the option is
vested in full (which will be on the third anniversary of the date of
grant).  On August 29, 2006, the Company’s Board of Directors also
granted Ms. Hoffing 400,000 shares of restricted stock ($100,000 at $0.25 per
share, which was the high price of the common stock on the over-the-counter
market on the date of grant), which vests as to 133,334 shares on the first
anniversary of the date of grant and 133,333 shares on the second and third
anniversaries of the date of grant.  On October 23, 2007, the
Company’s Board of Directors granted Ms. Hoffing 526,316 shares of restricted
stock ($100,000 at $0.19, which was the closing price of the common stock on the
over-the-counter market on the day prior to the grant), which vests as to
175,439 shares on August 29, 2008 and 2009 and 175,438 shares on August 29,
2010.    The Company’s Board of Directors did not grant any
restricted stock to Ms. Hoffing in 2008.  If Ms. Hoffing’s employment
is terminated by the Company without cause, she is entitled to her base salary
and benefits for a period of 12 months after such termination, and the portion
of her options and restricted stock that would have vested during the 12 months
following such termination will immediately vest.  If Ms. Hoffing’s
employment is terminated upon or in connection with a change of control of the
Company, then Ms. Hoffing will be paid the equivalent of one year’s base salary
and any unvested shares of restricted stock and stock options will immediately
vest in full upon such change in control.





Prior
employment agreements





David Ellison, the Chief Financial
Officer and Corporate Secretary, was employed pursuant to an agreement through
October 31, 2007 that provided for a minimum base salary of $174,000 per year,
with an annual cost of living increase.  Mr. Ellison had not received
an increase in his base salary since April 2005.  Included in general
and administrative expense is $8,672 and $4,529 for 2007 and 2006, respectively,
representing his earned, but not yet paid, cost of living increase from April
2006 to October 2007.  Mr. Ellison’s agreement also provided a minimum
monthly non-accountable allowance of $300 for automobile and cell phone
expenses.  This allowance was increased to $400 per month in April
2005.  In July 2007, the Company gave Mr. Ellison timely notice that
his employment agreement was not being renewed.  On October 31, 2007,
the Company paid Mr. Ellison $13,201, representing his earned, but unpaid, cost
of living increase for the period April 2006 through October
2007.  Since November 1, 2007, Mr. Ellison has continued in his
current position with the Company as an at-will employee with an annual base
salary of $205,000.





John F. DeBernardis, Ph.D., Senior
Advisor to the Company’s Chief Executive Officer, was employed pursuant to an
agreement through October 31, 2007 that provided for a minimum base salary of
$282,000 per year, with an annual cost of living increase.  Dr.
DeBernardis had not received an increase in his base salary since April
2005.  Included in research and development expense is $14,026 and
$7,326 for 2007 and 2006, respectively, representing his earned, but not yet
paid, cost of living increase from April 2006 to October 2007.  Dr.
DeBernardis’s agreement also provided a minimum monthly non-accountable
allowance of $1,000 for automobile and cell phone expenses.  This
allowance was increased to $1,150 per month in April 2005.  In
addition, the Company also provided Dr. DeBernardis, at the Company’s expense, a
term life insurance policy in the amount of $600,000.  This additional
life insurance policy was cancelled in April 2007.  In July 2007, the
Company gave Dr. DeBernardis timely notice that his employment agreement was not
being renewed.  On October 31, 2007, the Company paid Dr. DeBernardis
$21,352, representing his earned, but unpaid, cost of living increase for the
period April 2006 through October 2007.  Since November 1, 2007, Dr.
DeBernardis has continued in his current position with the Company as an at-will
employee with an annual base salary of $185,000.





Compensation
of directors





Prior to 2008, Directors received
option grants upon becoming directors and received additional option grants from
time to time as compensation for their service as members of the board of
directors.  In March 2008, the Board of Directors approved a
compensation plan for independent Directors effective as of January 1,
2008.  Each independent Director will receive annually a $5,000 cash
retainer (paid quarterly) plus $1,000 for each in-person Board meeting attended,
$500 for each telephonic Board meeting attended and $500 for each committee
meeting attended.  The total annual cash compensation for each
Director cannot exceed $10,000.  In addition, each independent
Director will receive an annual stock option grant as of the first Board meeting
of the year, valued at $5,000, calculated using a Black-Scholes valuation on the
date of the grant.  The stock options will have an exercise price
equal to the closing price of the Company’s common stock on the day prior to the
grant and will vest on the first business day of January in the following
year.  Directors are reimbursed for reasonable out-of-pocket expenses
incurred in the performance of their duties and the attendance of board meetings
and any meeting of stockholders.  Any new independent Director will
receive a pro-rata annual cash retainer and stock option grant.




70





DIRECTOR
COMPENSATION - 2008


Name
            
            Fees
              Earned
      or
              Paid
      in
              Cash
      ($)
            
            
            Stock
              Awards(2)
              ($)
            
            
            Option
              Awards(2)
              ($)
            
            
            Non-Equity
              Incentive
      Plan
              Compensation
              ($)
            
            
            Change in
      Pension
              Value
      and Non-
              Qualified
      Deferred
              Compensation
              Earnings
            
            
            All
      Other
              Compensation
              ($)
            
            
            Total
      ($)Alan
      L. Heller(1)
            
            $
            10,000
            
            
            $
            -
            
            
            $
            5,000
            (3)
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            15,000Jay
      B. Langner
            
            $
            10,000
            
            
            $
            -
            
            
            $
            5,000
            (3)
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            15,000Edward
      A. Ogunro(1)
            
            $
            2,833
            
            
            $
            -
            
            
            $
            834
            (4)
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            3,667Gary
      C. Parks(1)
            
            $
            2,833
            
            
            $
            -
            
            
            $
            625
            (5)
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            3,458David
      C. Tiemeier(1)
            
            $
            10,000
            
            
            $
            -
            
            
            $
            5,000
            (3)
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            15,000Robert
      S. Vaters
            
            $
            10,000
            
            
            $
            -
            
            
            $
            5,000
            (3)
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            15,000





(1)           Director
as of December 31, 2008.


(2)
            The
      Company’s Independent Board of Directors at December 31, 2008, in
      aggregate, have –0- stock awards and 823,600 option
  awards.


(3)           Grant
date fair value as of March 7, 2008.


(4)           Grant
date fair value as of October 30, 2008.


(5)           Grant
date fair value as of November 14, 2008.






71


ITEM
12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS





The following table sets forth the
beneficial ownership of our securities as of February 27, 2009, by (a) each
person known by the Company to be the beneficial owner of more than 5% of any
class of the Company’s securities, (b) the Company’s directors, (c) the
Company’s executive officers, and (d) all directors and executive officers as a
group.  Except as listed below, the address of all owners listed is
c/o Applied NeuroSolutions, Inc., 50 Lakeview Parkway, Suite 111, Vernon Hills,
Illinois 60061.  As of February 27, 2009, a total of 130,217,808
shares of the Company’s common stock were outstanding.





Nature of Beneficial Owner
              Amount
      and nature
                of
      beneficial
                ownership
              Percent
      of
                Class (1)SF
      Capital Partners, Ltd.
                c/o
      Stark Offshore Management LLC
                235
      Pine Street, Suite 1175
                San
      Francisco, CA  94104
              26,928,572
      (5)
              19.7%Ellen
      R. Hoffing (2)
              6,309,658 (6)
              4.7%Alan
      L. Heller (3)
              582,185 (7)
              *Edward
      A.Ogunro (3)
              20,055 (8)
              *Gary
      C. Parks (3)
              19,175 (9)
              *David
      C. Tiemeier (3)
              367,185 (10)
              *David
      Ellison (4)
              769,387 (11)
              *Benjamin
      Family Trusts
              8,307,780 (12)
              6.4%All
      Directors and Officers as a group(6
      persons)
              8,067,645 (13)
              5.9%


*  Indicates
      ownership of less than 1.0%








(1)
            Based
      on 130,217,808 shares of common stock outstanding as of February 27, 2009,
      plus each person’s warrants or options that are currently exercisable or
      that will become exercisable within 60 days of February 27,
      2009.


(2)
            Director
      and officer.


(3)
            Director.


(4)
            Officer.


(5)
            Consists
      of 20,714,286 of common stock and 6,214,286 shares of common stock
      issuable upon the exercise of warrants held by SF Capital Partners Ltd.
      (“SF Capital”).  Brian J. Stark and Michael A. Roth (the
      “Reporting Persons”) are the Managing Members of Stark Offshore
      Management, LLC, (“Stark Offshore”) which acts as investment manager and
      has sole power to direct the management of SF Capital.  Through
      Stark Offshore, the Reporting Persons possess voting and dispositive power
      over the shares of common stock held by SF
  Capital.


(6)
            Consists
      of 50,000 shares of common stock, 5,333,342 shares of common stock
      issuable upon the exercise of currently exercisable stock options and
      926,316 shares of restricted stock, of which 442,106 shares have vested as
      of February 27, 2009.


(7)
            Consists
      of 165,000 shares of common stock and 417,185 shares of common stock
      issuable upon the exercise of currently exercisable stock
      options.


(8)
            Consists
      of 20,055 shares of common stock issuable upon the exercise of currently
      exercisable stock options.


(9)
            Consists
      of 19,175 shares of common stock issuable upon the exercise of currently
      exercisable stock options.


(10)
            Consists
      of 367,185 shares of common stock issuable upon the exercise of currently
      exercisable stock options.


(11)
            Consists
      of 769,387 shares of common stock issuable upon the exercise of currently
      exercisable stock options.


(12)
            Consists
      of 8,207,780 shares of common stock held by various family trusts and
      100,000 shares of common stock held by a family member.  The
      trustee of these various family trusts is Wilmington Trust Corporation and
      Wilmington Trust Company, 1100 North Market Street, Wilmington, DE
      19890.


(13)
            Consists
      of 215,000 shares of common stock, 6,926,329 shares of common stock
      issuable upon the exercise of currently exercisable stock options, and
      926,316 shares of restricted stock, of which 442,106 shares have vested as
      of February 27, 2009.








72


Securities
authorized for issuance under equity compensation plans





In October 2002, the Board of Directors
approved a Stock Option Plan (the “Plan”) under which officers, employees,
directors and consultants may be granted incentive or non-qualified stock option
to acquire common stock.  The incentive stock options granted under
the Plan are intended to meet the requirements of Section 322 of the Internal
Revenue Code of 1986.  The exercise price of each option is no less
than the market price of our stock on the date of the grant, and an option’s
maximum term is ten years.  Options typically vest over a four-year
period.  The Plan calls for a maximum of 12,000,000 options to
purchase shares of common stock.  The Plan was approved by
shareholders in 2003.  A registration statement, Form S-8, was filed
in December 2004, registering the stock option plan.





In 2007, our Compensation Committee
approved 300,000 stock options to a director under the
Plan.  Additionally, in 2007, our former Chairman returned 1,333,333
unvested stock options that were granted to him in 2006 when he stepped down as
chairman.  These options were cancelled and the underlying shares are
available for future issuance.





In 2008, independent directors were
granted 507,970 stock options as part of our compensation plan for independent
directors.  In addition, 319,820 stock options expired, unexercised in
April 2008.





Our only
equity compensation plan is the Applied NeuroSolutions, Inc. (formerly
Hemoxymed, Inc.) 2003 Stock Option Plan.





The following table summarizes
outstanding options under our Stock Option Plan as of December 31,
2008.  Options granted in the future under the Plan and outside of the
Plan are within the discretion of our Compensation Committee and therefore
cannot be ascertained at this time.





Plan
      Category
            (a)
              
              
              Number
      of Securities to
              be
      Issued Upon Exercise
              of
      Outstanding Options
            (b)
              
              
              Weighted-Average
              Exercise
      Price of
              Outstanding
      Options
            (c)
              Number
      of Securities
              Remaining
      Available for
              Future
      Issuance Under
              Equity
      Compensation
              Plans
      (excluding securities
              Reflected
      in column (a))Equity
      compensation plans
              Approved
      by security holders
            10,763,830
            $0.165
            725,964Equity
      compensation plansnot
      approved by
              security
      holders
            8,666,667(1)
            $0.221
            -Total
            19,430,497(2)
            $0.190
            725,964








73


(1)
Consists of an option exercisable to purchase 6,000,000 shares of our common
stock that was granted to Ellen R. Hoffing in connection with her employment as
our President and Chief Executive Officer and an option to purchase 4,000,000
shares of common stock that was granted to Robert S. Vaters in connection with
his appointment as Chairman of our Board of Directors.  In December
2007, Mr. Vaters stepped down as Chairman, while continuing as a Director of the
Company, and returned to the Company 1,333,333 unvested options from this
grant.  A description of the material terms of the option granted to
Ms. Hoffing is set forth in Part III, Item 10 of this Annual
Report.  The option granted to Mr. Vaters is now exercisable for a
ten-year period to purchase 2,666,667 shares of common stock at an exercise
price of $0.20 per share (which was the closing price of our common stock on the
OTC Bulletin Board on June 23, 2006).  Mr. Vaters remaining 2,666,667
options are fully exercisable as of December 31, 2008.





(2) In
March 2009, the Company entered into stock option exchange agreements with five
employees and the Company’s founding scientist.  In return for
exchanging 10,812,940 previously granted stock options with exercise prices
ranging from $0.15 to $0.285, the Company issued 3,604,313 new stock options, 1
new option for every 3 options returned, with an exercise price of
$0.0495.  This exercise price represents a 25% premium to the
Company’s closing price on the day prior to the exchange.  The vesting
schedules and the expiration dates of the new options are the same as the
vesting schedules and expiration dates of the returned options.  The
stock option exchange was approved by the Company’s Board of
Directors.








ITEM
      13.     CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE





During 2003, 2002, and 2001, due to
cash constraints, officers of the Company deferred compensation, loaned funds to
the Company and personally paid for some Company expenses.  In June
2002, $215,000 of the amount due to these officers was converted to shares of
common stock at the merger-adjusted market price of $0.228 per
share.  The balance due to these officers was paid in February
2004.





In 2003, Richard Stone, one of our
directors until September 2004, invested $100,000 in our convertible bridge
debt, which earned interest at rate of 6% per annum.  Mr. Stone’s
investment, including accrued interest, was converted, at rate of $0.25 per unit
of one share and 1.1 warrant, to 413,819 shares of common stock and 455,201
warrants to purchase shares of common stock at an exercise price of $0.30 per
share in the debt conversion in conjunction with the February 2004 private
placement.  The conversion rate was the same offered to all holders of
the bridge debt.





We believe that each of the
transactions set forth above were entered into on (i) terms as fair as those
that could be obtained from independent third parties, and (ii) were ratified by
a majority (but no less than two) of our independent directors who did not have
an interest in the transaction and who had access to our counsel at our
expense.








ITEM
14.                      PRINCIPAL
ACCOUNTING FEES AND SERVICES





The following is a summary of the fees
billed to us by Virchow, Krause & Company, LLP for professional services
rendered for the fiscal years ended December 31, 2008 and 2007:











Fee Category
            
            Fiscal
      2008
              Fees
            
            
            Fiscal
      2007
              FeesAudit
      Fees
            
            $
            82,536
            
            
            $
            76,800Audit
      Related Fees
            
            
            345
            
            
            
            1,920Tax
      Fees
            
            
            1,385
            
            
            
            -All
      Other Fees
            
            
            -
            
            
            
            -Total
      Fees
            
            $
            84,266
            
            
            $
            78,720







74


Audit
Fees.  Consists of fees billed for professional services
rendered for the audit of our consolidated financial statements and review of
interim consolidated financial statements included in quarterly reports and
services that are normally provided by Virchow, Krause & Company, LLP in
connection with statutory and regulatory filings or engagements.





Audit Related
Fees.  Consists of fees billed for assurance and related
services that are reasonably related to the performance of the audit or review
of our consolidated financial statements and are not reported under “Audit
Fees”.





Tax Fees.  Consists
of fees billed for professional services for tax compliance, tax advice and tax
planning.





All Other
Fees.  Consists of fees for product and services other than the
services reported above.





Policy
on audit committee pre-approval of audit and permissible non-audit services of
independent auditors





The Audit Committee has adopted a
policy that requires advance approval of all audits, audit-related, tax, and
other services performed by our independent registered public accounting
firm.  The policy provides for pre-approval by the Audit Committee of
specifically defined audit and non-audit services.  Unless the
specific service has been previously pre-approved with respect to that year, the
Audit Committee must approve the permitted service before the independent
registered public accounting firm is engaged to perform it.  The Audit
Committee has delegated to the Chair of the Audit Committee authority to approve
permitted service, provided that the Chair reports any decisions to the Audit
Committee at its next scheduled meeting.  All of the services
performed by our independent registered public accounting firm during 2008 and
2007 were pre-approved by the Audit Committee.











PART
      IV





ITEM
      15.   EXHIBITS, FINANCIAL STATEMENT
    SCHEDULES





(a)
Documents filed as a part of this report.





1.
            List
      of Financial Statements.





The
following consolidated financial statements of Applied NeuroSolutions, Inc. and
Report of Virchow, Krause & Company, LLP, Independent Registered Public
Accounting Firm, are included in this report:


·
            Report
      of Virchow, Krause & Company, LLP, Independent Registered Public
      Accounting Firm.


·
            Consolidated
      Balance Sheets at December 31, 2008 and
2007


·
            Consolidated
      Statements of Operations for the years ended December 31, 2008 and 2007
      and for the period from March 14, 1992 (inception) to December 31,
      2008


·
            Consolidated
      Statements of Stockholders’ Equity/(Deficit) for the years ended December
      31, 2008 and 2007 and for the period from March 14, 1992 (inception) to
      December 31, 2008


·
            Consolidated
      Statements of Cash Flows for the years ended December 31, 2008 and 2007
      and for the period from March 14, 1992 (inception) to December 31,
      2008


·
            Notes
      to Consolidated Financial Statements for the years ended December 31, 2008
      and 2007 and for the period from March 14, 1992 (inception) to December
      31, 2008





2.
            List
      of all Financial Statement
Schedules.





All
schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes
thereto.


75


3.Exhibits required by
      Item 601 of Regulation S-K. The following exhibits are filed as a part of,
      or incorporated by reference into, this
Report:





Number
            Description3.1
            Certificate
      of Incorporation, filed as Exhibit C to the Company Proxy Statement on
      Schedule 14A filed on February 23, 1999 (the "Proxy Statement")
      and incorporated herein by reference.3.1.1
            Certificate
      of Amendment of Certificate of Incorporation, filed as Exhibit A to the
      Company's
      Proxy         Statement on
      Schedule 14A, filed on June 29, 1999 and incorporated herein by
      reference.3.1.2
            Certificate
      of Amendment of Certificate of Incorporation, filed as Exhibit 3.1.2 to
      the Company’s Registration Statement on Form SB-2 SEC File Number
      333-84412, filed on March 15, 2002 (the “March 2002 Registration
      Statement”) and incorporated herein by reference.3.1.3
            Amended
      and Restated Certificate of Incorporation filed as Exhibit B to the
      Company’s Proxy Statement on Schedule 14A filed on May 15, 2006 and
      incorporated herein by reference.3.1.4
            Certificate
      of Designation of Series A Preferred Stock, filed as Exhibit 4.1 to the
      Company’s Current Report on Form 8-K, dated April 25, 2006, filed on May
      1, 2006 and incorporated herein by reference.3.2
            Company
      Bylaws, filed as Exhibit D to the February 1999 Proxy Statement and
      incorporated herein by reference.4.1
            Specimen
      Common Stock Certificate, filed as Exhibit 4.1 to Amendment No. 3 to the
      Company's Registration Statement on Form S-1, 1998, Registration Number
      333-33219 (the "1998 Registration Statement") filed on January 27, 1998
      and incorporated herein by reference.4.1.1
            Specimen
      Common Stock Certificate, identifying the Company name change from
      Ophidian Pharmaceuticals, Inc. to Hemoxymed, Inc., filed as Exhibit 4.1.1
      to the March 2002 Registration Statement and incorporated herein by
      reference.4.2
            Specimen
      Warrant Certificate, filed as Exhibit 4.2 to Amendment No. 4 to the 1998
      Registration Statement filed on January 29, 1998 and incorporated herein
      by reference.4.3
            Form
      of Representatives' Warrant Agreement, including Specimen Representatives'
      Warrant filed as Exhibit 4.3 to Amendment No. 4 the 1998 Registration
      Statement filed on January 29, 2004 and incorporated herein by
      reference.4.4
            Form
      of Warrant Agreement filed as Exhibit 4.4 to Amendment No. 4 to the 1998
      Registration Statement filed on January 29, 2004 and incorporated herein
      by reference.4.5
            Specimen
      Unit Certificate filed as Exhibit 4.5 to Amendment No. 5 to the 1998
      Registration Statement filed on February 5, 1998 and incorporated herein
      by reference.4.6
            Hemoxymed,
      Inc. 2003 Stock Option Plan filed as Appendix B to the Company’s
      definitive revised information statement on Schedule 14C filed on August
      29, 2003 and incorporated herein by reference.#4.7
            Form
      of warrant agreement, filed as Exhibit 4.1 to the Company’s quarterly
      report on Form 10-QSB for the quarter ended September 30, 2007, and
      incorporated herein by reference.10.1
            Agreement
      and Plan of Merger made as of April 16, 2001, by and among the Company,
      Ophidian Holdings, Inc., a wholly owned subsidiary of the Company, and
      Hemoxymed, Inc., filed as Exhibit A to the Company's Information Statement
      on Schedule 14f-1, SEC File No. 005-55419, filed on August 8, 2001 and
      incorporated herein by reference.10.2
            Agreement
      and Plan of Merger made as of September 10, 2002, by and among the
      Company, Molecular Geriatrics Acquisition, Inc., a wholly owned subsidiary
      of the Company, and Molecular Geriatrics Corporation, filed as Exhibit 2.1
      to the Company's Current Report on Form 8-K filed on September 23, 2002
      and incorporated herein by reference.10.3
            License
      and Collaborative Research Agreement, dated October 1, 1992 between
      Molecular Geriatrics Corporation and Albert Einstein College of Medicine,
      including Amendment Agreement dated July 1, 1993 filed as Exhibit 10.3 to
      the Company’s Annual Report on Form 10-KSB for the year ended December 31,
      2002 filed on March 31, 2003 (the “2002 10-KSB”) and incorporated herein
      by reference.10.4
            License
      and Collaborative Research Agreement, dated February 1, 1994 between
      Molecular Geriatrics Corporation and Albert Einstein College of Medicine
      filed as Exhibit 10.4 to the Company’s 2002 10-KSB and incorporated herein
      by reference.10.5
            Amendment
      Agreement, dated March 24, 2002 between Molecular Geriatrics Corporation
      and Albert Einstein College of Medicine filed as Exhibit 10.5 to the
      Company’s 2002 10-KSB and incorporated herein by
  reference.10.6
            Second
      Amendment Agreement, dated September 21, 2002 between Molecular Geriatrics
      Corporation and Albert Einstein College of Medicine filed as Exhibit 10.6
      to the Company’s 2002 10-KSB, and incorporated herein by
      reference.10.7
            Consulting
      Agreements with Dr. Peter Davies, dated October 13, 1992, October 13,
      1992, and January 31, 1994 filed as Exhibit 10.7 to the Company’s 2002
      10-KSB and incorporated herein by reference.10.8
            Lease
      Agreement, dated November 22, 1996, along with First Amendment to Lease,
      dated May 2, 1997, and Lease Extension, dated March 18, 2002 between
      Molecular Geriatrics Corporation and Arthur J. Rogers & Co filed as
      Exhibit 10.10 to the Company’s 2002 10-KSB and incorporated herein by
      reference.10.9
            Form
      of Registration rights Agreement, filed as Exhibit 4.4 to the Company's
      February 2004 8-K and incorporated herein by reference.10.10
            Form
      of Warrant, filed as Exhibit 4.5 to the Company's February 2004 8-K and
      incorporated herein by reference.10.11
            Placement
      Agent Warrant, filed as Exhibit 4.6 to the Company's February 2004 8-K and
      incorporated herein by reference.10.12
            Collaboration
      Agreement, dated November 27, 2006, between Applied NeuroSolutions, Inc.
      and Eli Lilly and Company, filed as Exhibit 10.22 to the Company’s annual
      report on Form 10-KSB for the year ended December 31, 2006 and
      incorporated herein by reference (Portions of this exhibit have been
      omitted pursuant to a request for confidential
  treatment.)10.13
            Agreement
      and Plan of Merger, dated as of April 27, 2006, by and between Applied
      NeuroSolutions, Inc. and APNS Merger Corp., filed as Exhibit 10.1 to the
      Company’s Current Report on Form 8-K, dated April 25, 2006, filed on May
      1, 2006 and incorporated herein by reference.10.14
            Letter
      Agreement, dated as of January 25, 2007, between Applied NeuroSolutions,
      Inc. and Bruce N. Barron filed as Exhibit 10.26 to the Company’s annual
      report on Form 10-KSB for the year ended December 31, 2006 and
      incorporated herein by reference.10.15
            Third
      Amendment Agreement, dated October 30, 2006 between Applied
      NeuroSolutions, Inc. and Albert Einstein College of Medicine, filed as
      Exhibit 10.27 to the Company’s annual report on Form 10-KSB for the year
      ended December 31, 2006 and incorporated herein by
    reference.10.16
            Lease
      Extension, dated April 23, 2007, between Applied NeuroSolutions, Inc. and
      Arthur J. Rogers & Co., filed as Exhibit 10.16 to the Company’s annual
      report on Form 10-KSB for the year ended December 31, 2007 and
      incorporated herein by reference.10.17
            Employment
      Agreement, dated as of March 17, 2008 but effective as of August 29, 2006,
      between Applied NeuroSolutions, Inc. and Ellen R. Hoffing, filed as
      Exhibit 10.17 to the Company’s annual report on Form 10-KSB for the year
      ended December 31, 2007 and incorporated herein by reference.
      #10.18
            Form
      of letter agreement between Applied NeuroSolutions, Inc. and certain
      warrant holders filed as Exhibit 10.1 to the Company’s quarterly report on
      Form 10-QSB for the quarter ended June 30, 2007 and incorporated herein by
      reference.10.19
            Purchase
      Agreement, dated September 28, 2007, by and between Applied
      NeuroSolutions, Inc. and SF Capital Partners Ltd., filed as Exhibit 10.1
      to the Company’s quarterly report on Form 10-QSB for the quarter ended
      September 30, 2007, and incorporated herein by
  reference.10.20
            Registration
      Rights Agreement, dated September 28, 2007, by and between Applied
      NeuroSolutions, Inc. and SF Capital Partners Ltd., filed as Exhibit 10.2
      to the Company’s quarterly report on Form 10-QSB for the quarter ended
      September 30, 2007, and incorporated herein by
  reference.10.21
            Convertible
      Note Purchase Agreement, dated as of December 31, 2008, by and between
      Applied NeuroSolutions, Inc. and investors identified therein, filed as
      exhibit 10.1 to the Company’s Current Report on Form 8-K, dated December
      31, 2008, filed on January 7, 2009, and incorporated herein by
      reference.10.22
            Form
      of Convertible Promissory Note, filed as exhibit 10.2 to the Company’s
      Current Report on Form 8-K, dated December 31, 2008, filed on January 7,
      2009, and incorporated herein by reference.10.23
            Consulting
      Agreement, dated as of December 1, 2008, by and between Applied
      NeuroSolutions, Inc. and Dr. Peter Davies. *10.24
            Fourth
      Amendment Agreement, dated December 1, 2008, between Applied
      NeuroSolutions, Inc. and Albert Einstein College of Medicine.
      *14
            Code
      of Ethics, amended as of January 1, 2009. *16.1
            Letter
      from KPMG to the SEC dated October 25, 2004, filed as Exhibit 16.1 to the
      Company’s Current Report on Form 8-K, dated October 25, 2004, filed on
      October 25, 2004 and incorporated herein by reference.16.2
            Letter
      from KPMG to the SEC dated November 5, 2004, filed as Exhibit 16.2 to
      Amendment No. 1 to the Company’s Current Report on Form 8-K/A, dated
      October 25, 2004, filed on November 5, 2004 and incorporated herein by
      reference.23.1
            Consent
      of Virchow, Krause & Company, LLP.*31.1
            Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002. *31.2
            Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002. *32.1
            Certification
      of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002. *32.2
            Certification
      of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002. *








* Exhibit
filed herewith.





#
Management contract or compensatory plan or arrangement.








78


SIGNATURE
PAGE








In accordance with Section 13 or 15(d)
of the Exchange Act, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.








APPLIED
NEUROSOLUTIONS, INC.





Dated:
March 26, 2009


By: /s/ DAVID
ELLISON


Chief Financial
Officer


(Principal
Financial


and Accounting
Officer)














In accordance with the Exchange Act,
this report has been signed by the following persons on behalf of the registrant
in the capacities and on the dates indicated.





March 26,
2009                                                                                                By:/s/ Ellen R.
Hoffing


Ellen R.
Hoffing


President,
Chief Executive Officer


Chairman &
Director


(Principal
Executive Officer)








March 26,
2009                                                                                                 By:/s/ David
Ellison


David Ellison


Chief Financial
Officer


(Principal Financial and


Accounting Officer)








March 26,
2009                                                                                                   By:/s/ Alan L.
Heller


Alan L. Heller


Director








March 26,
2009                                                                                                       
By:/s/ Edward A.
Ogunro


Edward A. Ogunro


Director








March 26,
2009                                                                                                   By: /s/ Gary C.
Parks


Gary C. Parks


Director





March 26,
2009                                                                                                                  
 By: /s/ David C.
Tiemeier


David C. Tiemeier


Director