**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**


**FORM
      10-KSB**


(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, 2005





[
      ]
      TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITES 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
      or
      Other Jurisdiction of   (IRS
      Employer


Incorporation
      or Organization)    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)





Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act. [ ]





Check
      whether the issuer (1) filed all reports required to be filed by section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days.


Yes X No
      __





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of registrant's knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB. [ ]





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


Yes
      __ No X





State
      issuer's revenues for its most recent fiscal year: $480,000





As
      of
      April 21, 2006, the aggregate market value of voting common stock held by
      non-affiliates of the Registrant (80,223,730 shares) was approximately
      $10,400,000. The aggregate market value was computed by reference to the "Close"
      price of such common equity as of that date.





As
      of
      April 21, 2006, the issuer had 94,591,625 shares of Common Stock
      outstanding. ****








**INDEX**





**Page****PART
                I**Item
                1.
            Description
                of business
            1Item
                2.
            Description
                of property
            19Item
                3.
            Legal
                proceedings
            19Item
                4.
            Submission
                of matters to a vote of security holders
            19**PART
                II**Item
                5.
            Market
                for common equity and related stockholder matters
            19Item
                6.
            Management’s
                discussion and analysis or plan of operation
            21Item
                7.
            Financial
                statements
            30Item
                8.
            Changes
                in and disagreements with accountants on accounting and financial
                disclosure
            55Item
                8a.
            Controls
                and procedures
            55Item
                8b.
            Other
                information
            55**PART
                III**Item
                9.
            Directors,
                executive officers, promoters and control persons; compliance with
                section
                16(a) of the exchange act
            56Item
                10.
            Executive
                compensation
            59Item
                11.
            Security
                ownership of certain beneficial owners and management and related
                stockholder matters
            62Item
                12.
            Certain
                relationships and related transactions
            63Item
                13.
            Exhibits
            63Item
                14.
            Principal
                accountant fees and services
            67SIGNATURES
            
            69CERTIFICATIONS
            
            70





i


**PART
      I**








*This
      Form 10-KSB contains forward-looking statements. For this purpose, any
      statements contained in this Form 10-KSB 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,"
      "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
      1. Risk factors related to our business". 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-KSB, references to "APNS," the "Company," the "Registrant,"
      "we," “our” or "us" refer to Applied NeuroSolutions, Inc. unless the context
      otherwise indicates.*





**ITEM
      1.**  **DESCRIPTION
      OF BUSINESS**





We
      are
      Applied NeuroSolutions, Inc. (“APNS”), a development stage biopharmaceutical
      company. We had two wholly-owned operating subsidiaries, which we dissolved
      during 2004. The assets of these dissolved subsidiaries were transferred to
      us.




One
      of
      the wholly-owned operating subsidiaries we dissolved 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 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,
      although unmet or underserved, medical needs. We are not currently funding
      the
      development of this technology.




In
      partnership with a team of distinguished scientists at Albert Einstein College
      of Medicine (“AECOM”), we are primarily engaged in the research and development
      of diagnostics and novel therapeutic targets for the treatment of Alzheimer's
      disease in humans. 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 four million people in the
      U.S.
      have Alzheimer’s disease and the national cost of caring for people with
      Alzheimer’s is thought to be $100 billion annually.





We
      are
      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. We have experienced
      significant operating losses since our inception. As of December 31, 2005,
      we
      had an accumulated deficit of approximately $41.2 million. We expect to incur
      operating losses over the next several years as our research and development
      efforts and pre-clinical and clinical testing activities continue. We need
      to
      raise additional capital to continue our operations beyond August
      2006.





In
      December 2004, we announced a non-exclusive license agreement with bioMérieux,
      S.A., a leading international diagnostics group, with the aim of bringing to
      market on a worldwide basis what is expected to be the first definitive biologic
      test for the diagnosis of AD. The licensing agreement, including all milestones,
      could be worth in excess of $5 million in milestone payments, plus substantial
      annual royalties. There can be no assurances that any milestones will be
      achieved or that we will receive any additional payments from this agreement.
      The agreement granted bioMérieux an option to further evaluate our technology
      before it elected to continue the agreement. The option period was extended
      and
      we are currently negotiating terms of a collaborative research
      agreement.





Subject
      to obtaining sufficient funding, we would expect to begin the clinical testing
      for our lead product, a cerebrospinal fluid (“CSF”) based diagnostic test to
      detect whether a person has AD. In 2005, we submitted our Pre-IDE documents
      to
      the FDA and had our Pre-IDE meeting with the FDA. We are currently revising
      our
      clinical protocol based on our discussions with the FDA and our consultants.


1




We
      are
      developing a second-generation, serum-based diagnostic test to detect
      Alzheimer’s disease that will be easier to perform and less expensive to use. In
      January 2006, we entered into a research agreement with Nanosphere, Inc., a
      nanotechnology-based molecular diagnostics company, to assist us in the
      development of a second-generation diagnostic test for AD.




We
      are
      currently evaluating our options to maximize the value of our diagnostic
      technology, including evaluating out-licensing opportunities.




We
      are
      also involved in the discovery and development of novel therapeutic targets
      for
      the treatment of Alzheimer’s disease based upon a unique theory developed by
      Peter Davies, Ph.D., 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, we are involved in the discovery of a unique
      therapeutic target that may represent a common intracellular phosphorylation
      pathway leading to the development of abnormal, destructive brain structures
      characteristic of AD.




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








**Alzheimer's
      Disease Background**





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 affecting an estimated four million
      people in the United States, and approximately ten 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 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 plaque is 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.





Our
      core
      technology in the AD field is based on exclusive licenses with AECOM covering
      all diagnostic and therapeutic applications in the field of AD discovered in
      Dr.
      Peter Davies’ laboratories. Dr. Davies’ research has demonstrated that AD is
      caused by a group of 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, to a molecule) 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 Alzheimer’s
      disease process.





Articles
      published in the scientific journals *Nature* (co-authored
      by Dr. Peter Davies) ** and *Proceedings of the National Academy of Sciences* have
      described research showing that a mutation in the gene that codes for tau is
      associated with dementia. The research described in the articles demonstrates
      that abnormal tau represents an appropriate target for research on
      neurodegenerative diseases, such as Alzheimer’s disease. Applied NeuroSolutions
      scientists and Dr. Davies have been applying their expertise in research
      directed towards abnormal tau for many years and have developed a vast array
      of
      proprietary antibodies which are being used in the development of a diagnostic
      to detect, and therapeutics to treat, Alzheimer’s disease.


2








**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 a brain scan to rule out other conditions (such as stroke,
      brain tumor, or depression) with similar symptoms. The definitive AD predictive
      accuracy of such exams is generally in the range of 75-85% 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 currently runs anywhere from $1,000
      - $4,000. A simple, predictive, accurate and cost effective diagnostic assay
      would therefore meet a tremendous medical need. According to a report by the
      research organization, Datamonitor, the market for an AD diagnostic test could
      be up to $160 million in the U.S. for a cerebrospinal fluid (CSF) test and
      significantly higher for a serum test, which could potentially be utilized
      as a
      routine screening test.




Our
      approach to meeting this need revolves around several approaches. These
      approaches include: (i) the detection of hyperphosphorylated tau in
      cerebrospinal fluid (CSF) and serum of AD patients and (ii) the detection of
      autoantibodies to phosphorylated tau in serum. Competitive diagnostics in
      development include approaches to differentiate AD patients from normal patients
      by attempting to measure: (i) normal tau, or total tau in CSF, (ii) neural
      thread protein in CSF and/or urine, or (iii) amyloid derived diffusible ligands
      (ADDL’s) in CSF.





We
      have
      completed the development of a prototype diagnostic assay utilizing CSF. To
      date, we have completed numerous pre-clinical studies comprising in excess
      of
      3,500 CSF samples utilizing this assay. These studies were designed to test
      the
      assay’s ability 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. These studies have
      shown the ability of the assay to correctly identify the patients diagnosed
      with
      AD with an overall sensitivity and specificity in the 85% to 95% range. The
      studies have been published, or have been submitted for publication, in peer
      reviewed scientific journals such as *Neuroscience
      Letters* , *Archives
      of Neurology* ,
      and *American
      Journal of Psychiatry* .
      In
      addition, a study was completed addressing the relationship between phosphotau
      levels in CSF and natural AD progression. We have shown with our assay that
      phosphotau concentrations in CSF declined over time during the clinical course
      of AD and correlate well with the degree of cognitive impairment. A synopsis
      of
      the study has been published in *Annals
      of Neurology* .





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 ptau 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
      study
      published in the December 2005 edition of *Neuroscience
      Letters* and a
      study published 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.





While
      results in the above noted pre-clinical studies suggest that our phosphotau
      assay may represent an effective, very early, biochemical marker for AD, the
      results may not be predictive of results that may be obtained in later clinical
      studies. The assay detects a characteristic feature of pathophysiology, may
      allow one to track disease progression, and accurately discriminates between
      AD
      patients and neurological controls. Pharmaceutical companies have expressed
      interest in utilizing our CSF phosphotau assay as a biomarker in the clinical
      development of therapeutics to treat AD.





3


In
      January 2003, we announced that we entered into a Research Agreement with Pfizer
      under which we performed certain research services under a fee for service
      contract for Pfizer. We entered into a similar contract research agreement
      with
      Novartis in November 2003. In July 2004 and October 2005, we entered into
      additional contract research agreements. These agreements are unrelated to
      the
      development of any of our potential products or technologies. While providing
      useful data to validate our CSF phosphotau assay, these research agreements,
      however, are not collaboration agreements and do not provide us with any future
      milestone or royalty payments (for example, in the event that Novartis or
      Pfizer’s products are brought to market) or rights to future agreements with
      these companies. Furthermore, these agreements are not financially material
      to
      the success of our business, but are evidence, however, of our ability to enter
      into working relationships with major pharmaceutical companies. We cannot
      provide any assurances that these agreements will lead to future agreements
      with
      Pfizer, Novartis or any other major pharmaceutical company or biotechnology
      company.





In
      December 2004, we announced a non-exclusive license agreement with bioMérieux,
      S.A., a leading international diagnostics group, with the aim of bringing to
      market on a worldwide basis what is expected to be the first definitive biologic
      test for the diagnosis of AD. The licensing agreement, including all milestones,
      can be worth in excess of $5 million, plus substantial royalties. There can
      be
      no assurances that any milestones will be achieved or that we will receive
      any
      additional payments from this agreement. The agreement granted bioMérieux an
      option to further evaluate our technology before it elected to continue the
      agreement. The option period was extended and we are currently negotiating
      terms
      of a collaborative research agreement.





In
      2005
      we submitted our Pre-IDE documents to the FDA and had a Pre-IDE meeting with
      the
      FDA. We are currently revising our clinical protocol based on our discussions
      with the FDA and our consultants.





In
      2005,
      we continued to make improvements to the effectiveness and ease-of-use of our
      CSF based diagnostic test, including a significant reduction in the tests
      incubation time.





Subject
      to obtaining sufficient funding, we would expect to begin the clinical testing
      for our cerebrospinal fluid (CSF) based diagnostic test to detect AD. We are
      currently evaluating our options to maximize the value of our diagnostic
      technology, including evaluating out-licensing opportunities.





Before
      actual approval for general sale by the FDA, 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. We have
      had
      discussions with a reference laboratory for distribution of our diagnostic
      under
      a CLIA arrangement, however, we have not signed an agreement with a reference
      lab





We
      are
      developing a second-generation, serum-based diagnostic test to detect
      Alzheimer’s disease that will be easier to perform and less expensive to use. In
      January 2006, we entered into a research agreement with Nanosphere, Inc., a
      nanotechnology-based molecular diagnostics company, to assist us in the
      development of a second-generation diagnostic test for AD. In addition, we
      are
      also looking to meet the need for a biochemical marker to detect AD by
      detecting, in serum, autoantibodies to a protein associated with Alzheimer’s
      disease. We have developed prototype assays detecting these autoantibodies
      in
      serum, with a specificity and sensitivity of approximately 74%. The assay has
      the ability to distinguish the presence of autoantibodies to the AD protein
      in
      individuals diagnosed as having AD from non-demented control individuals. We
      are
      currently in the process of refining the serum-based diagnostic
      prototype.








**Therapeutic
      Program**





We
      are
      working to discover and develop novel therapeutics to treat AD. Dr. Davies
      is
      preparing newer monoclonal antibodies that could aide in the discovery of the
      first therapeutic to stop the progression of Alzheimer’s disease. The basis for
      this work is the discovery of a novel initiation point that is common to the
      ultimate development of both the neurofibrillary tangles and amyloid plaques.
      The screening of novel compounds designed to intervene in this common pathway
      is
      contemplated with the aim of potentially halting the progression of AD. Screens
      to prove validation are in progress. A patent application was filed in 2005
      covering Dr. Davies developments.





4


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. All of these drugs are primarily acetylcholinesterase inhibitors
      and
      are only beneficial in treating symptoms associated with AD in a minority of
      AD
      patients. Despite the problems with the currently approved therapeutics, market
      research data indicate that these drugs sell over $2 billion annually. The
      therapeutic market is estimated to be $15 billion for effective
      therapeutics.







**Transgenic
      Mice Model**





To
      date,
      no accepted animal model for AD has been developed. However, Dr. Peter Davies,
      through collaboration with a researcher at Nathan Klein Institute (“NKI”), has
      developed a transgenic mouse that develops 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, which accompanies the tau pathology. These
      transgenic mice could be used for testing the efficacy of therapeutic compounds.
      AECOM and an agency of the State of New York that oversees NKI each have a
      50%
      interest in these transgenic mice. Through our license agreements with AECOM,
      we
      have rights to AECOM’s 50% interest in these transgenic mice. We and NKI plan to
      offer these mice to researchers and will share in any revenue derived from
      any
      license according to the percentage of ownership. The terms of our agreement
      with NKI with respect to the transgenic mice were finalized in March 2005.
      We
      and NKI are currently negotiating a license agreement for a patent which covers
      aspects of transgenic mice that could be relevant to our transgenic
      mouse.





**Sales
      and Marketing**





We
      currently have no sales and marketing personnel to sell on a commercial basis
      any of our proposed products. If and when we are ready to commercially launch
      a
      product, we will either contract with or hire qualified sales and marketing
      personnel or more likely, we will seek a joint marketing partner to assist
      us
      with this function.





Under
      our
      agreement with bioMérieux, if bioMérieux elects to continue the agreement they
      will have a non-exclusive world-wide license to, among other things, market
      and
      sell our CSF-based diagnostic test and/or our serum-based diagnostic
      test.





**Research
      and Product Development**





We
      expect
      to spend a significant amount of our financial resources on research and
      development activities and clinical testing activities. We incurred costs of
      approximately $1,891,000 in 2005 and $1,546,000 in 2004 on research and
      development activities. Since we are not yet engaged in the commercial
      distribution of any products and we have no revenues from the sale of our
      products, these research and development costs must be financed by us. We
      estimate that we are currently spending approximately $140,000 to $160,000
      per
      month on research and development activities. This excludes the non-cash effect
      of variable 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
      and
      our development schedule. Results of preclinical studies, clinical trials,
      regulatory decisions and competitive developments may significantly influence
      the amount of our research and development expenditures. In addition, if we
      continue the clinical development of our CSF-based diagnostic to detect AD,
      research and development spending will significantly increase.





**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, hire
      additional personnel with manufacturing experience and comply with the extensive
      Good Manufacturing Practices (GMP) regulations of the FDA and other regulations
      applicable to such a facility or we will most likely rely upon third-party
      manufacturers to manufacture our proposed products in accordance with these
      regulations. Under our agreement with bioMérieux, if bioMérieux elects to
      continue the agreement they will have a non-exclusive world-wide license to,
      among other things, manufacture themselves (and not through a third party)
      our
      CSF-based diagnostic test and/or our serum-based diagnostic test.


5





**Competition**





Companies
      in the pharmaceutical and biotechnology fields are subject to intense
      competition. The Company competes with numerous larger companies that have
      substantially greater financial and other resources and longer experience than
      that of the Company. The principal factors affecting the biotechnology market
      include scientific and technological factors, the availability of patent and
      other protection for technology and products, the ability and length of time
      required to obtain governmental approval for testing, manufacturing, marketing
      and physician acceptance. Companies that complete clinical trials, obtain
      regulatory approvals and commence commercial sales of their products before
      the
      Company will 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 the Company. There can be no
      assurance that developments by other biotechnology companies will not render
      our
      products or technologies obsolete or noncompetitive or that we will be able
      to
      keep pace with technological developments of our competitors.





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 corporate alliances to
      enhance the likelihood of success, obtain required regulatory approvals and
      manufacture and successfully market our products either directly by us or
      through agreements with biotechnology or pharmaceutical companies.








*Diagnostics*





Based
      upon the fact that there is currently no FDA-approved biochemical diagnostic
      to
      detect Alzheimer's disease ("AD"), our CSF-based diagnostic to detect AD, if
      successfully developed, would compete against the current practice of
      psychometric testing and imaging. In the event that we were able to market
      our
      diagnostic to detect AD, it would be much cheaper for patients to utilize
      (approximately $200 to $400) as compared to the current practice of psychometric
      testing and imaging (approximately $1,000 to $4,000).





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 are both developing
      diagnostic tests for AD. Much of our knowledge of potential competitors and
      their diagnostic tests comes from our review of published articles in scientific
      journals. Recent articles 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 to be superior to others by virtue of its unique
      ability to recognize early stage AD and to distinguish it from other brain
      disorders.








*Therapeutics*





The
      only
      current strategy available for the pharmaceutical management of AD in the U.S.
      is symptomatic treatment through the use of acetylcholinesterase (AchE)
      inhibitors, of which there are five currently marketed by some of the largest
      pharmaceutical companies, including; Aricept (Pfizer), Exelon (Novartis),
      Reminyl (Johnson & Johnson), Tacrine (Pfizer), and Memantine (Forest Labs).
      Despite limited clinical effectiveness and a poor safety and side effect profile
      of one of them, sales in the U.S. in 2005 are estimated to be in excess of
      $2
      billion, according to *BioPortfolio,
      Ltd.* ,
      a
      web-based biotechnology information resource.


6





According
      to *BioPortfolio,
      Ltd,* the
      market for AD therapy is expected to grow to 21 million patients by 2010 in
      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
      200 potential drugs 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 opportunity
      for therapeutics to be discovered utilizing our novel therapeutic
      approach.





The
      principal factors affecting the biotechnology market include scientific and
      technological factors, the availability of patent and other protection for
      technology and products, the ability and length of time required to obtain
      governmental approval for testing, manufacturing, marketing and physician
      acceptance. Most competitors have substantially greater capital resources,
      research and development capabilities, manufacturing and marketing resources
      and
      experience than us. These companies may represent significant long-term
      competition for us. Our competitors may succeed in developing products that
      are
      more effective or less costly than any that may be developed by us, or that
      gain
      regulatory approval prior to our products.





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 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 effect than products being developed by us. These competing
      products may be more effective and less costly than the products developed
      by
      us.





**Patents,
      licenses, trade secrets and proprietary rights**





Our
      success depends and will continue to depend, in part, upon our ability to
      maintain 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 maintaining a strong competitive position through the filing
      and
      prosecution of patents where available, and through maintaining some of our
      science as trade secrets.





Patent
      applications have been filed in the U.S. for composition of matter and use
      of
      compounds to treat AD, method of use, as well as applications covering aspects
      of the diagnostic assay technologies 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.





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 a monoclonal
      antibody that is encompassed by the claims of two U.S. patents it owns. In
      that
      email, Innogenetics also referred to another U.S. patent which was recently
      granted to Innogenetics and which is directed to a method for the differential
      diagnosis of Alzheimer’s disease from other neurological diseases. Innogenetics
      believes this latter patent also claims the CSF diagnostic test we are
      developing. 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
      have
      reviewed the two monoclonal antibody 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 two Innogenetics patents. Similarly,
      we do not believe our activities have infringed or will infringe the rights
      of
      Innogenetics under this third patent, and we would seek either to negotiate
      a
      suitable arrangement with them or vigorously contest any claim of infringement.
      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 continue to have
      discussions with Innogenetics concerning some form of a potential business
      relationship.


7








**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 AECOM's Alzheimer's disease technology for diagnostic and
      therapeutic applications for as long as we continue to fund the technology.
      These Agreements were amended in March 2002 and again in September 2002 to
      reduce and restructure past and future amounts due. 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  Amount





2006 $425,000


2007 75,000


2008 500,000





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 any aspects
      of the AD technology 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.





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.


8





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 and require the expenditure of substantial
      resources. We will require significant additional funds in the future to finance
      the clinical testing process if we are to develop any therapeutic products
      on
      our own.





In
      vitro
      diagnostic products have a different path to marketing clearance, 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 assay 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. The
      Company has submitted preliminary information to the FDA (step 1 above) and
      had
      a face-to-face meeting with the FDA. Adjustments to the preliminary information
      submitted to the FDA are currently being made. Subject to obtaining adequate
      financing, an IDE submission for approval (step 2 above) would follow and the
      clinical study (step 3 above), including evaluation of the data, would be
      completed within twelve to fifteen months after the IDE approval stage. Clinical
      trial data is used to evaluate the clinical sensitivity, how often the test
      is
      correct in recognizing diseased patients, of an in vitro diagnostic test. Before
      actual approval for general sale by the FDA, 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. Whether
      the
      Company 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 clearance has been obtained, clearance of a product by regulatory
      authorities in foreign countries must be obtained prior to the commencement
      of
      commercial sales of the product in such countries. The requirements governing
      the conduct of clinical trials and product clearance vary widely from country
      to
      country, and the time required for clearance may be longer or shorter than
      that
      required for FDA clearance. 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 are currently pursuing a CE Mark
      for
      European countries.





**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 to comply with health and safety
      regulations in the future.





9





**Employees**





As
      of
      March 31, 2006, we had nine full-time employees, five 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 contract with University
      academic research laboratories and scientific consultants that specialize in
      various aspects of drug development. In the future, we may hire additional
      research and development personnel in addition to utilizing consultants.








**Risk
      factors related to our business**





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-KSB. You should consider carefully the
      following risk factors, together with all of the other information included
      in
      this Annual Report on Form 10-KSB. 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.





As
      of
      December 31, 2005, we had only $1,663,740 of cash on hand. Since we do not
      expect to generate significant revenues from operations in 2006, we will be
      required to raise additional capital in financing transactions in order to
      satisfy our expected cash expenditures. We expect to raise such additional
      capital by selling shares of our capital stock or by borrowing money. However,
      such additional capital may not be available to us at acceptable terms or at
      all. Further, if we sell additional shares of our capital stock, your ownership
      position in our Company will be subject to dilution. In the event that we are
      unable to obtain additional capital, we may be forced to reduce our operating
      expenditures or to cease operations altogether.





We
      have
      had net losses for each of the years ended December 31, 2005 and 2004, and
      we
      have an accumulated deficit of $41.2 million as of December 31, 2005. 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 auditors,
      these conditions raise substantial doubt about our ability to continue as a
      going concern. Furthermore, since we do not expect to generate any significant
      revenues for the foreseeable future, our ability to continue as a going concern
      depends, in large part, on our ability to raise additional capital through
      equity or debt financing transactions. If we are unable to raise additional
      capital, we may be forced to discontinue our business.





*We
      are a development stage company without any products currently in clinical
      trials*





We
      are a
      development stage company. Our development of a diagnostic product which detects
      Alzheimer’s disease utilizing cerebrospinal fluid (CSF) has completed the
      pre-clinical stage. Our other potential 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. Many of 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. 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 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,
      2005, we had an accumulated deficit of approximately $41.2 million. We expect
      to
      incur operating losses over the next several years as our research and
      development efforts and pre-clinical and clinical testing activities 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 successfully commercialize our approved products, to complete
      development of our other proposed products, to obtain required regulatory
      approvals and to manufacture and market our products.





10





*We
      need to raise additional capital by August 2006, 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 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 as of December 31, 2005, 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 August 31, 2006. We will need additional funding prior to August 2006
      to
      cover operations, and to fund clinical costs of any products in development,
      and
      to expand our therapeutic program. If additional funding is not obtained, we
      will not be able to fund clinical costs of any programs, and we may have to
      significantly minimize or eliminate our therapeutic program, 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 evaluating out-licensing opportunities.





*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 drugs and biologics through
      lengthy and detailed clinical testing procedures, and other costly and time
      consuming compliance procedures relating to 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.





Diagnostic
      products have a different path to marketing clearance than that for
      pharmaceutical products. Diagnostic regulatory studies generally proceed in
      two
      steps, a proof of principle clinical study and a validation study. Given the
      rapidly changing regulatory environment, it is uncertain whether we will be
      able
      to market our diagnostic kits for Alzheimer’s disease under these regulatory
      categories, or obtain final FDA approval for a kit for specific claims. Clinical
      trials for diagnostic products, including the FDA submission and approval
      process, generally take 2 to 3 years to complete.





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.





11


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 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. These actions could result in:





·
            product
                recalls or seizures;


·
            fines
                and penalties;


·
            injunctions;


·
            criminal
                prosecution;


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


·
            enhanced
                exposure to product liabilities.








*Our
      technologies are subject to licenses and termination of the 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 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 and satisfy
      performance obligations 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. The agreements require
      that we commit certain sums annually for research and development of the
      licensed products. We are currently in compliance with our license agreements,
      however, we will need to raise additional capital in order to meet our
      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.





*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 industry places 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. We currently hold and maintain
      12 issued United States patents and various related foreign patents. One of
      the
      issued United States patents is for our Alzheimer's diagnostic technology,
      eight
      of the issued United States patents are for our Alzheimer's therapeutic
      technology and three of the issued United States patents are for our blood
      oxygenation technology. One of the issued AD patents is assigned to AECOM and
      is
      licensed to the Company, eight of the issued AD patents are assigned to the
      Company, and the three blood oxygenation patents are assigned to the Company.
      We
      currently have eight patent applications filed, three have Alzheimer's
      diagnostic applications, four have Alzheimer's therapeutic applications, and
      one
      has both Alzheimer's diagnostic and therapeutic applications. The patents are
      both owned by us and subject to our license agreements with AECOM. The issued
      United States Alzheimer's technology patents expire between 2014 and 2019.
      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.


12





The
      ability to develop our technologies and to commercialize products will depend
      on
      avoiding 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 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.





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 a monoclonal
      antibody that is encompassed by the claims of two U.S. patents it owns. In
      that
      email, Innogenetics also referred to another U.S. patent which was recently
      granted to Innogenetics and which is directed to a method for the differential
      diagnosis of Alzheimer’s disease from other neurological diseases. Innogenetics
      believes this latter patent also claims the CSF diagnostic test we are
      developing. 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
      have
      reviewed the two monoclonal antibody 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 two Innogenetics patents. Similarly,
      we do not believe our activities have infringed or will infringe the rights
      of
      Innogenetics under this third patent, and we would seek either to negotiate
      a
      suitable arrangement with them or vigorously contest any claim of infringement.
      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 marketing a future diagnostic product and could
      have a material adverse impact on our Company. We are currently in discussion
      with Innogenetics concerning some form of a potential business
      relationship.





We
      also
      rely on trade secrets and unpatentable know-how that we seek to protect, in
      part, by confidentiality agreements with our employees, consultants, suppliers
      and licensees. These agreements may be breached, and we might not have adequate
      remedies for any breach. If this were to occur, our business and competitive
      position would suffer. None of our employees, scientific advisors or
      collaborators has any rights to publish scientific data and information
      generated in the development or commercialization of our products without our
      approval. 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 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.





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.


13








*We
      lack 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 the reagents and materials necessary to conduct
      our
      preclinical activities related to our diagnostic product, 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 validation clinical testing of our products and for larger scale
      production if marketing approval is obtained.





While
      we
      are in discussions with a contract manufacturer, we do not have any
      manufacturing agreements. We cannot assure that any outside manufacturer we
      select will perform suitably or will remain in the contract manufacturing
      business, in which instances we would need to find a replacement manufacturer
      or
      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 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
      lack marketing and sales staff to sell our products and we must rely on third
      parties, such as large pharmaceutical companies, 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
      corporate partners or other entities for the marketing and sale of our proposed
      products. We do not currently have any agreements with corporate partners or
      other entities to provide sales and marketing services. 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. The failure to develop those
      capabilities, either externally or internally, will adversely affect future
      sales of our proposed products.








*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
      Peter Davies, Ph.D., the scientific founder, John F. DeBernardis, Ph.D.,
      President and Chief Executive Officer, as well as our other officers and
      directors. Our consulting agreements with Dr. Davies were renewed through
      November 2008, and we have employment agreements with Dr. DeBernardis, Daniel
      Kerkman, Ph.D., Vice President of R & D, and David Ellison, Chief Financial
      Officer and Corporate Secretary, through October 31, 2007. 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,
      would 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 and management personnel, namely Daniel J. Kerkman, Ph.D., Vice
      President of R&D, and David Ellison, Chief Financial Officer and Corporate
      Secretary, and our ability to identify, hire and retain additional staff. We
      face intense competition for qualified employees and consultants. Large
      pharmaceuctical companies and our 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 cannot match the packages
      offered by such competitors and large pharmaceutical companies, and we may
      have
      difficulty attracting suitable replacements.





14


We
      expect
      that our potential expansion into areas and activities requiring additional
      expertise, such as clinical trials, governmental approvals, contract and
      internal manufacturing and sales and marketing, will place additional
      requirements on our management. We expect these demands will 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.








*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.








*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 our therapeutic 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 our 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 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 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.








*We
      must rely on third party relationships to develop, produce and market our
      product without which we will fail*





We
      do not
      possess all the resources necessary to complete the development, clinical
      testing, 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 these resources.
      Our success may depend on obtaining such relationships. This business
      strategy is to utilize the expertise and resources of third parties in a number
      of areas including:


15





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


·
            preparing
                submissions seeking regulatory approvals


·
            manufacture
                of kits and solutions


·
            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, who we may
      not
      be able to control as effectively as our own personnel. We
      cannot
      be sure that any present or future collaborative agreements will be successful. If
      these
      third parties 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 commercializing our products. To
      the
      extent we choose not to, or are not able to, establish such arrangements, we
      could experience increased capital requirements.





We
      do not
      have the ability to conduct all facets of our clinical trials independently.
      We
      intend to rely on 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:





·
            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 carry out their contractual
                duties


·
            third
                parties may not meet expected deadlines







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








*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 regulatory approval which is necessary 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 pre-clinical
      studies and clinical trials that the product is safe and effective for use
      in
      each target indication. If our products fail in clinical trials, this may have
      a
      significant negative impact on our company.





In
      addition, the results from pre-clinical testing and early clinical trials may
      not be predictive of results obtained in later clinical trials. There can be
      no
      assurance that our clinical trials will demonstrate sufficient safety and
      effectiveness 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:





·
            patient
                population size


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


·
            patient
                proximity to clinical sites


·
            eligibility
                criteria for the study







We
      believe our planned procedures for enrolling patients are appropriate. However,
      delays in patient enrollment would increase costs and delay ultimate sales,
      if
      any, of our products.








16


*We
      may experience delays, limitations and other problems in obtaining regulatory
      approval for our products*





The
      regulatory process takes many years and requires the expenditure of substantial
      resources. 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.





We
      have
      filed with the FDA a Pre-Investigational Device Exemption (“Pre-IDE”)
      application with respect to our CSF-based diagnostic test and we have had our
      Pre-IDE meeting with the FDA. It is uncertain when we will file a Pre-IDE for
      our serum-based diagnostic test. We have not filed any Investigation New Drug
      (“IND”) with respect to our AD therapeutic in discovery, and the timing of such
      filing in the future is uncertain.





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. Failure to comply with regulatory requirements
      could, among other things, result in:





·
            fines


·
            suspension
                of regulatory approvals


·
            operating
                restrictions and criminal prosecution.









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.





*Our
      stock price may fluctuate significantly due to reasons unrelated to our
      operations, our products or our financial results. Because we must raise
      additional funds by August 2006, our stock price may decrease if we have to
      issue a large number of shares of common stock to raise funds.*





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 2004 and 2005 fiscal years and the three- month period ended March
      31, 2006, the highest price of our stock was $0.59 and the lowest price of
      our
      stock during the same period was $0.14. We have sufficient cash to last through
      August 2006, and will need to raise additional funds prior to August 2006.
      In
      order to raise additional funds, we may have to sell a significant number of
      shares of our common stock and/or 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 actual issuance of, a substantial number
      of additional shares of common stock may cause our stock price to
      decrease.








17


*Our
      share price may decline due to a large number of shares of our common stock
      eligible for sale in the public markets*





As
      of
      March 31, 2006, we have outstanding 94,591,625 shares of Common Stock, without
      giving effect to shares of Common Stock issuable upon exercise of (i) warrants
      issued in the February 2004 Offering, exercisable for 41,604,795 shares of
      our
      common stock (at an exercise price of $0.30 per share), (ii) the Placement
      Agent's warrants, exercisable for 3,200,000 shares of our common stock (at
      an
      exercise price of $0.30 per share), (iii) 13,614,057 options granted under
      the
      Company’s stock option plan and (iv) 4,359,847 other warrants previously issued.
      Of such outstanding shares of Common Stock, all are freely tradeable, except
      for
      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 and issue additional shares of our common stock in
      2006.








*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 dispose of, 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). 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
      internal controls may not be adequate*





Although
      we have performed an internal review of our controls and procedures and deemed
      them to be effective, Section 404 of the Sarbanes Oxley Act of 2002 (“Section
      404”) requires significant additional procedures and review processes. Section
      404 requires that we evaluate and report on our system of internal controls
      beginning with our Annual Report on Form 10-KSB for the year ending December
      31,
      2007. In addition, our independent auditors must report on management’s
      evaluation of those controls. The additional costs associated with this process
      may be significant. Our internal controls under Section 404 may not be adequate.
      We are beginning the process of documenting and testing our system of internal
      controls to provide the basis for our report. However, at this time, due to
      ongoing evaluation and testing, no assurance can be given that there may not
      be
      significant deficiencies or material weaknesses that would be required to be
      reported.





18





**ITEM
      2.**  **DESCRIPTION
      OF PROPERTY**





We
      lease
      approximately 7,500 square feet of office and laboratory space in Vernon Hills,
      Illinois at an annual rental of approximately $125,000.  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.








**PART
      II**





**ITEM
      5.**  **MARKET
      FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**





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 bid quotations for our
      common stock, and our predecessor’s common stock, from January 1, 2004 through
      December 31, 2005, and for each of the quarterly periods indicated as reported
      by the OTC Bulletin Board. Bid quotations reflect interdealer prices without
      retail markup, markdown, or commission and may not represent actual
      transactions.





**High**
            
            
            **Low**2004:First
                quarter
            
            $
            0.59
            
            $
            0.24Second
                quarter
            
            
            0.34
            
            
            0.20Third
                quarter
            
            
            0.23
            
            
            0.15Fourth
                quarter
            
            
            0.38
            
            
            0.142005:First
                quarter
            
            $
            0.31
            
            $
            0.20Second
                quarter
            
            
            0.42
            
            
            0.23Third
                quarter
            
            
            0.37
            
            
            0.26Fourth
                quarter
            
            
            0.39
            
            
            0.30





As
      of
      March 31, 2006, we had approximately 1,500 record holders of our common
      stock.





No
      dividends were paid in 2004 and 2005. There are no restrictions on the payment
      of dividends. We do not intend to pay dividends for the foreseeable
      future.





19


All
      securities of APNS that were issued or sold by us, since March 15, 2001, have
      been registered with the SEC. 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 and an S-8 registration statement
      in
      December 2004.





**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 options to acquire common stock. The incentive
      stock options granted under the Plan are intended to meet the requirements
      of
      Section 422 of the Internal Revenue Code of 1986. The exercise price of each
      option is no less than the market price of the Company’s 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
      2005,
      our compensation committee approved 4,345,136 stock options to employees,
      directors and consultants. The stock options granted in 2005 increased the
      total
      outstanding stock options to 14,384,772. This is in excess of the 12,000,000
      options allowed under the current stock option plan. In September 2005, the
      Board of Directors approved an increase in the options to be issued under the
      plan to 20,000,000. The Company will be seeking shareholder approval for an
      increase in the maximum allowable options under the plan.





The
      following table summarizes outstanding options under our Stock Option Plan
      as of
      December 31, 2005. Options granted in the future under 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
            
            
            12,000,000
            
            $
            0.20
            
            
            -0-Equity
                compensation plans
              not
                approved by security
              holders
            
            
            2,384,772(1)
            
            $
            0.30
            
            
            5,615,228(2)Total
            
            
            14,384,772
            
            $
            0.22
            
            
            5,615,228








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





(1)  On
      September 13, 2005, the Company’s Board of Directors approved an increase in the
      size of our 2003 Stock Option Plan from 12,000,000 shares to 20,000,000 shares.
      During 2005, the Compensation Committee granted an aggregate of 4,345,136
      options. The Company is seeking to secure stockholder approval of the increase
      in the number of options under the 2003 Plan and the grant of 2,552,565 options
      to executive officers and 1,050,000 options to the Company’s independent
      directors made subsequent to the Board of Director’s approval of the Plan
      Amendment.





(2)  Prior
      to,
      and without giving effect to, the stockholder approval of the Plan Amendment
      and
      the subsequent grants of options to executive officers and independent
      directors.








20


**ITEM
      6.**  **MANAGEMENT’S
      DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**





**General**





We
      are a
      development stage biopharmaceutical company engaged in the development of
      diagnostics to detect, and therapeutics to treat, Alzheimer's disease. Our
      principal development programs, and plan of operation for each, are as
      follows:




·
            *CSF-Based
                Diagnostic*-
                Subject to obtaining appropriate funding, we expect to begin the
                clinical
                testing for our lead product, a cerebrospinal fluid (“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
                cerebrospinal fluid (“CSF”) of AD patients, has achieved an overall
                sensitivity and specificity in the range of 85% to 95%. This is based
                on
                extensive testing differentiating AD patients from patients with
                other
                neurological diseases, patients with other relevant forms of dementia
                and
                normal controls. In 2005, we submitted our Pre-IDE documents to the
                FDA
                and had our Pre-IDE meeting with the FDA.




·
            *Serum-Based
                Diagnostic*-
                We are developing a second-generation, serum-based diagnostic test
                to
                detect AD that will be easier to perform and less expensive to use.
                In
                January 2006, we entered into a research agreement with Nanosphere,
                Inc.,
                a nanotechnology-based molecular diagnostics company, to assist us
                in the
                development of a second-generation diagnostic test for AD. The potential
                U.S. market for the serum-based test, which could be utilized as
                a general
                screening test for AD, is estimated to be in excess of $1 billion.
                In
                addition, we are also looking to meet the need for a biochemical
                marker to
                detect AD by detecting, in serum, autoantibodies to a protein associated
                with Alzheimer’s disease. We have developed prototype assays detecting
                these autoantibodies in serum, with a specificity and sensitivity
                of
                approximately 74%. The assay has the ability to distinguish the presence
                of autoantibodies to the AD protein in individuals diagnosed as having
                AD
                from non-demented control individuals. We are currently in the process
                of
                refining the serum-based diagnostic prototype.





·
            *AD
                Therapeutic Compound Screening Assay*-
                We are also involved in the discovery and development of novel therapeutic
                targets for treatment of Alzheimer’s disease based upon a unique theory
                developed by Peter Davies, Ph.D., our founding scientist and the
                Burton P.
                and Judith Resnick Professor of Alzheimer’s Disease Research at Albert
                Einstein College of Medicine (“AECOM”). As a result of Dr. Davies’
                research, we are involved in the discovery and development of a unique
                therapeutic target that may represent a common intracellular
                phosphorylation pathway leading to the development of abnormal,
                destructive brain structures characteristic of AD. This would target
                a
                component of the biological pathway that leads to the development
                of the
                two principal AD pathologies, neurofibrillary tangles and amyloid
                plaques.
                A patent application was filed in 2005 covering Dr. Davies developments.
                More importantly, the assay may allow high-throughput testing of
                compounds
                that inhibit this disease-causing pathway leading potentially to
                the
                discovery of the first drugs to stop the progression of Alzheimer's
                disease. Initial results using this screening assay have identified
                active
                compounds that are the subject of further
                development.





·
            *Transgenic
                Mice -*Through
                a collaboration between Dr. Davies, and a researcher at Nathan Kline
                Institute, a transgenic mouse has been developed that models the
                tau
                pathology of Alzheimer’s disease. These transgenic mice are the first
                animal model known to develop paired helical filaments (PHF’s), the
                building blocks of neurofibrillary tangles, and could be useful in
                testing
                the efficacy of therapeutic compounds. We are currently exploring
                opportunities to license the use of the transgenic mice to pharmaceutical
                companies. AECOM and an agency of the State of New York that oversees
                NKI
                each have a 50% interest in these transgenic mice. Through our licenses
                with AECOM, we have rights to AECOM’s 50% interest in these transgenic
                mice. We and NKI plan to offer these mice to researchers and will
                share in
                any revenue derived from any license according to their percentage
                of
                ownership. The terms of our arrangement with NKI with respect to
                the
                transgenic mice were finalized in March 2005. We and NKI are currently
                negotiating a license agreement for a patent which covers aspects
                of
                transgenic mice that could be relevant to our transgenic
                mouse.





21


We
      incurred research and development costs of $1,742,782 in 2005 and $1,545,469
      in
      2004, excluding non-cash costs related to variable accounting for stock options
      and other costs associated with the issuance of equity instruments. Virtually
      all of our research and development costs are internal costs and license costs
      which are not specifically allocated to any of our research and development
      projects. We
      anticipate that our cash balances as of December 31, 2005, coupled with
      anticipated funds to be received from operations, will be sufficient to cover
      our planned research and development activities, general operating expenses,
      and
      limited expenditures regarding our CSF-based diagnostic assay clinical costs
      through August 31, 2006. We will need additional funding prior to August 2006
      to
      cover operations, and to fund the majority of the remaining clinical costs
      for
      the CSF-based diagnostic as well as clinical costs of any additional products
      in
      development, and to expand our therapeutic program. If additional funding is
      not
      obtained, we will not be able to fund clinical costs of any programs, and we
      will have to minimize or eliminate our therapeutic program. 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.





As
      of
      December 31, 2005, we had cash of $1,663,740. These funds should be sufficient
      to satisfy our cash requirements through August 2006. The cash on hand will
      be
      used for
      ongoing research and development, working capital, advancement of the FDA
      regulatory process for the CSF-based diagnostic, general corporate purposes
      and
      possibly for acquisitions of complementary companies or
      technologies.





We
      do not
      anticipate the purchase, lease or sale of any significant property and equipment
      during 2006. We do not anticipate any significant changes in our employee count
      during 2006.





**Plan
      of Operation**




Our
      strategic plan involves focusing Company resources, and establishing priorities,
      to maximize the return to the shareholders. In order to accomplish this
      objective, it is expected that we will focus on the projects in the pipeline
      that are closest to commercialization. Thus, our primary concentration has
      been
      advancing the commercialization of the CSF diagnostic to detect AD.




We
      will
      need additional funding prior to August 2006 to cover operations, and to fund
      the majority of the remaining clinical costs for the CSF-based diagnostic as
      well as clinical costs of any additional products in development, and to expand
      our therapeutic program. If additional funding is not obtained, we will not
      be
      able to fund clinical costs of any programs, and we will have to minimize or
      eliminate our therapeutic program, 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 evaluating
      out-licensing opportunities.




Simultaneous
      with these efforts, we plan to commit additional resources to furthering the
      completion of the development of the serum-based diagnostic to detect AD. We
      also plan to continue to advance the discovery and preclinical development
      of
      the AD therapeutic target program, directed towards the identification of a
      novel lead compound. It is anticipated that we would subsequently license the
      lead compound and/or the AD screen to a large pharmaceutical
      company.




In
      December 2004, we announced a non-exclusive license agreement with bioMérieux,
      S.A., a leading international diagnostics group, with the aim of bringing to
      market on a worldwide basis a definitive biologic test for the diagnosis of
      AD.
      The licensing agreement, including all milestones, can be worth in excess of
      $5
      million, plus substantial royalties. There can be no assurances that any
      milestones will be achieved or that we will receive any additional payments
      from
      this agreement. The agreement granted bioMérieux an option to further evaluate
      our technology before going forward. The option period was extended and we
      are
      currently negotiating terms of a collaborative research agreement.





We
      do not
      expect significant revenues from our CSF-based diagnostic to detect AD or any
      other of our programs in the near term. There can be no assurance that adequate
      funds on acceptable terms will be available in the future when we need them.
      If
      at any time we are unable to obtain sufficient additional investment capital,
      we
      will be required to delay, restrict or eliminate some or all of our research
      or
      development programs, dispose of assets or technology or cease
      operations.


22





**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 the Company dissolving its subsidiaries
      in
      2004. All significant intercompany balances and transactions have been
      eliminated. The
      preparation of these financial statements requires 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 its more significant judgments and estimates used in preparation of
      its
      consolidated financial statements.





*Revenue
      Recognition*





We
      generate revenues from research agreements and 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. 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 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. The Company has entered into arrangements whereby the Company
      will
      obtain research reimbursement in the form of funds received to partially
      reimburse the Company 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 its
      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.





*Equity
      Compensation*





We
      apply
      the intrinsic value-based method of accounting prescribed by Accounting
      Principles Board Opinion No. 25, and related interpretations, in accounting
      for
      its fixed plan stock options awarded to employees. Accordingly, compensation
      expense is recorded on the grant date only if the current market price of the
      underlying stock exceeds the exercise price.





23


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 its 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 7.







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





**Revenues**





We
      recognized $480,000 of revenues in 2005 from the completion of one research
      agreement and the completion of the evaluation period in a collaborative
      agreement. We recognized $253,000 of revenues in 2004 from the completion of
      one
      research agreement and miscellaneous revenues.





**Research
      and development**





Research
      and development expenses consist primarily of compensation of personnel and
      related benefits and taxes, funding of research related to license agreements,
      scientific consultant expenses, laboratory supplies and overhead costs. Research
      and development expenses for the year ended December 31, 2005 increased 22%
      or
      $344,621 from $1,546,158 for the year ended December 31, 2004, to $1,890,779
      for
      the year ended December 31, 2005. Below is a summary of our most significant
      research and development expenses:





IncreaseExpense
            
            
            2005
            
            
            2004
            
            
            (Decrease)Compensation,
                taxes and benefits
            
            $
            874,702
            
            $
            773,932
            
            $
            100,770Research
                funding and scientific consulting
            
            
            483,074
            
            
            402,400
            
            
            80,674Regulatory
                consulting
            
            
            259,660
            
            
            69,890
            
            
            189,770French
                subsidiary expense
            
            
            -
            
            
            193,117
            
            
            (193,117
            )Rent,
                telephone and utilities
            
            
            108,190
            
            
            105,338
            
            
            2,852Variable
                accounting for stock options
            
            
            98,472
            
            
            689
            
            
            97,783Expense
                for stock options and other equity instruments issued
            
            
            49,525
            
            
            -
            
            
            49,525Other
                research and development expenses, net of reimbursements
            
            
            17,156
            
            
            792
            
            
            16,364Total
                Research and Development Expenses
            
            $
            1,890,779
            
            $
            1,546,158
            
            $
            344,621





We
      have
      certain equity instruments that meet the criteria of variable accounting whereby
      additional compensation expense is recognized if the share price of our common
      stock increases, which may be reversed if the price subsequently declines.
      Included in research and development expense in 2005, was non-cash compensation
      expense of $98,472 for variable accounting for stock options compared to $689
      in
      2004. The increase was also caused by a large increase in regulatory consultant
      costs due to our discussions to advance our CSF-based AD diagnostic through
      the
      FDA clinical process, an
      increase in compensation and related costs due to higher than typical
      compensation increases in mid-2004 due to minimal increases over the last few
      years as funding was very tight. In addition, increases were given to certain
      employees who took on additional responsibilities after our former CEO resigned
      in September 2004. Research funding and scientific consulting increased due
      to
      increases in our AECOM agreements. Other stock based compensation increased
      due
      to stock options issued to consultants in 2005. This increase was offset by
      the
      reduction of French subsidiary expense due to the costs to terminate the
      activities of the French subsidiary in 2004. Our management estimates that
      it
      has been expending approximately $140,000 to $160,000 per month for research
      and
      development activities. This excludes the non-cash effect of variable accounting
      for its equity instruments. This amount is anticipated to increase substantially
      in 2006, if adequate funding is obtained and our CSF-based AD diagnostic
      progresses through clinical trials towards regulatory approval, and the level
      of
      activity in our other development programs increases. The amount of our actual
      research and development expenditures, however, may fluctuate from
      quarter-to-quarter and year-to-year depending on: (1) the resources available;
      (2) our development schedule; (3) results of studies, clinical trials and
      regulatory decisions; and (4) competitive developments.


24








**General
      and administration**


General
      and administrative expenses consist primarily of compensation of personnel
      and
      related benefits and taxes, legal and accounting expenses, and occupancy related
      expenses. General and administrative expenses for the year ended December 31,
      2005 decreased 23% or $388,160, from $1,651,915 for the year ended December
      31,
      2004 to $1,263,755 for the year ended December 31, 2005. Below is a summary
      of
      our most significant general and administrative expenses:








IncreaseExpense
            
            2005
            
            2004
            
            (Decrease)Compensation,
                taxes and benefits
            
            $
            351,753
            
            $
            512,815
            
            
            ($161,062
            )Consulting
            
            
            231,331
            
            
            354,804
            
            
            (123,473
            )Professional
                fees
            
            
            262,816
            
            
            332,005
            
            
            (69,189
            )Rent,
                telephone and utilities
            
            
            52,084
            
            
            47,729
            
            
            4,355Variable
                accounting for stock options
            
            
            121,480
            
            
            849
            
            
            120,631Expense
                for stock options and other equity instruments issued
            
            
            27,532
            
            
            -
            
            
            27,532Expense
                for warrants issued and converted to shares of stock
            
            
            -
            
            
            234,202
            
            
            (234,202
            )Amortization
                of deferred financing fee
            
            
            -
            
            
            6,458
            
            
            (6,458
            )Other
                general and administrative expenses
            
            
            216,759
            
            
            163,053
            
            
            53,706Total
                General and Administrative Expenses
            
            $
            1,263,755
            
            $
            1,651,915
            
            
            ($388,160
            )





We
      have
      certain equity instruments that meet the criteria of variable accounting whereby
      additional compensation expense is recognized if the share price of our common
      stock increases, which may be reversed if the price subsequently declines.
      Included in general and administrative expense in 2005, was non-cash
      compensation expense of $121,480 for variable accounting for stock options
      compared to $849 in 2004. Other general and administrative expenses increased
      due to a $49,000 increase in D & O insurance in 2005 due to a full year of
      coverage and increased coverage in 2005. Other
      stock based compensation increased due to stock options issued to consultants
      in
      2005. The
      majority of the expense decreases in 2005 were due to expenses incurred for
      our
      funding in February 2004. Consulting fees decreased due to approximately
      $200,000 of equity compensation given to consultants in 2004, which was
      partially offset by additional consultants in 2005. Professional fees decreased
      due to additional legal and accounting fees for additional filings in 2004
      and
      assistance with negotiations with corporate partners. Patent costs decreased
      due
      to a freedom to operate study performed by our patent counsel in 2004. Warrants
      were issued in conjunction with the fund raising activities in 2004.
      Compensation, taxes and benefits decreased due to our former CEO resigning
      in
      September 2004. This decrease was partially offset by higher
      than typical compensation increases in mid-2004 due to minimal increases over
      the last few years as funding was very tight, and an increases given to certain
      employees who took on additional responsibilities after our former CEO
      resigned.  Management
      estimates that it has been expending approximately $90,000 to $100,000 per
      month
      for general and administrative activities, not including the non-cash effect
      of
      variable accounting for its equity instruments and other non-cash equity
      expenses. This amount is anticipated to remain steady in 2006.








**Other
      income and expense**





Interest
      expense for the year ended December 31, 2005 decreased 96% or $15,493, from
      $16,081 for the year ended December 31, 2004, to $588 for the year ended
      December 31, 2005. The decrease is primarily due to higher interest expense
      associated with convertible investor bridge loans that were converted to equity
      in February 2004 as part of the February 2004 financing. Interest income for
      the
      year ended December 31, 2005 increased 47% or $17,495, from $36,986 for the
      year
      ended December 31, 2004 to $54,481 for the year ended December 31, 2005. The
      increase is primarily due to the increase in interest rates on available
      balances offsetting the decrease in available balances.


25





The
      remaining items included in other (income) expense for the year ended December
      31, 2004 relate to fund raising expenses and other non-cash accounting
      consequences from the February 2004 private placement and the related bridge
      loan conversion. The
      accounting was required by 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," due to the terms of our agreements for the
      private placement it completed in February 2004, specifically related to the
      potential penalties if we did not timely register the common stock underlying
      the warrants issued in the transaction, which did not occur until July 28,
      2004.
      The adjustments for EITF Issue No. 00-19 had no impact on our working capital,
      liquidity, or business operations.





The
      fair
      value of the warrants issued were estimated using the Black-Scholes
      option-pricing model with the following assumptions: no dividends; risk-free
      interest rate of 3.20%; a contractual life of 5 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 in the first
      quarter of 2004, 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
      September 30, 2004 and estimated to be $2,646,853 at September 30, 2004 with
      the
      decrease in fair value due to the decrease in the market value of our common
      stock. The decrease in fair value of the warrants of $472,935 from June 30,
      2004
      to July 28, 2004 (the date the registration statement became effective) was
      recorded as non-operating income in our 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.





We
      paid
      the placement agent and its sub-agents $560,000 in cash as fees for services
      performed in conjunction with the private placement. We also incurred $85,946
      in
      other legal and accounting fees. We also issued a five-year warrant to purchase
      3.2 million shares of our common stock 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%; a contractual life of 5 years and volatility
      of 75%. We 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, we
      initially recorded $621,171 of issuance costs as an offset to the liability
      for
      common stock warrants related to these fund raising activities in our
      consolidated balance sheet. We further recorded $10,353 of amortization expenses
      from these issue costs as “Costs of fund raising activities” in the statement of
      operations.





We
      currently do not hedge foreign exchange transaction exposures. As of December
      31, 2005, we do not have any assets and liabilities denominated in foreign
      currencies.








**Net
      loss**





We
      incurred a net loss of $2,620,641 for the year ended December 31, 2005 compared
      to a net loss of $2,800,526 for the year ended December 31, 2004. The primary
      reason for the decrease in the net loss in 2005 was the revenues recognized
      from
      research agreements in 2004. In addition, net other income increased due to non-cash
      accounting consequences from the February 2004 private placement and the related
      bridge loan conversion, and the decrease in interest expense, as described
      above. T he
      expense for variable accounting for stock options increased $218,414, from
      $1,538 in 2004 to $219,952 in 2005.








26


**Capital
      resources and liquidity**





To
      date,
      we have raised equity and convertible debt financing and received research
      agreement 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 $36.6 million from private equity and
      convertible debt financings. We have also received approximately $1.9 million
      from research agreements and grant revenues.





Our
      cash
      and cash equivalents were $1,663,740 and $3,565,590 at December 31, 2005 and
      2004, respectively. The decrease in our cash balance is due to the continued
      use
      of the proceeds from our financing in February 2004.





We
      used
      cash in operating activities of $2,516,610 for the year ended December 31,
      2005
      versus cash used in operating activities of $3,554,884 for the year ended
      December 31, 2004. This decrease primarily reflects the reduction of liabilities
      in 2004 from the proceeds of our financing in February 2004. Cash used in
      investing activities was negligible in 2005 and 2004. Net cash provided by
      financing activities was $672,749 for the year ended December 31, 2005 versus
      net cash provided by financing activities of $7,066,318 for the year ended
      December 31, 2004. This decrease primarily reflects additional funds raised
      in
      the financing in February 2004.





We
      have
      incurred recurring losses since our inception and expect to incur substantial
      additional research and development costs prior to reaching profitability.
      We
      raised $8,000,000 (net proceeds of $7,354,054) in February 2004. The cash
      balances remaining at December 31, 2005 are expected to fund our operations
      through August 31, 2006.





We
      incurred research and development costs of $1,742,782 in 2005 and $1,545,469
      in
      2004, excluding non-cash costs related to variable accounting for stock options
      and other costs associated with the issuance of equity instruments. The majority
      of our research and development costs are internal costs and license costs
      which
      are not specifically allocated to any of our research and development projects. We
      anticipate that our cash balances as of December 31, 2005, coupled with
      anticipated funds received from operations, will be sufficient to cover our
      planned research and development activities, general operating expenses, and
      CSF-based diagnostic assay clinical costs through August 31, 2006. We will
      need
      additional funding prior to August 2006 to cover operations, and to fund
      clinical costs of any additional products in development, and to expand our
      therapeutic program. If additional funding is not obtained, we will not be
      able
      to fund clinical costs of any other programs, and will have to minimize or
      eliminate our therapeutic program, and possibly discontinue all our product
      development and/or operations. We are currently evaluating our options to
      maximize the value of our diagnostic technology, including evaluating
      out-licensing opportunities.





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 complete the commercialization
      of
      all of our proposed research projects. Therefore, we will need to raise
      substantial additional capital prior to August 2006 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 that we believe
      may be beneficial to our business. We expect to continue to 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.








27


**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, and 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.





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
            
            2006
              Year
                1
            
            2007
              Year
                2
            
            2008
              Year
                3
            
            2009
              Year
                4
            
            2010
              Year
                5
            
            TotalOperating
                Leases
            
            $
            102,000
            
            $
            34,000
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            136,000Consulting
                Agreements with initial terms greater than one-year
            
            
            108,000
            
            
            108,000
            
            
            99,000
            
            
            -
            
            
            -
            
            
            315,000Commitments
                Under
              License
                Agreement with
              AECOM
            
            
            425,000
            
            
            475,000
            
            
            500,000
            
            
            -
            
            
            -
            
            
            1,400,000Total
                Contractual Cash
              Obligations
            
            $
            635,000
            
            $
            617,000
            
            $
            599,000
            
            $
            -
            
            $
            -
            
            $
            1,851,000





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 any aspects
      of the AD technology that exceeds the minimum obligations reflected in the
      annual license maintenance payments.





**Recently
      issued accounting statements**




The
      Financial Accounting Standards Board (FASB) has issued 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 effective for the
      Company starting with the quarter ending March 31, 2006. Early adoption is
      encouraged and retroactive application of the provisions of SFAS 123R to the
      beginning of the fiscal year that includes the effective date is permitted,
      but
      not required. The Company estimates that the expense associated with SFAS 123R
      will be approximately $285,000 in 2006. See the Stock Option Plan discussion
      above for information related to the pro forma effects on the Company’s reported
      net income (loss) and net income (loss) per common share of applying the fair
      value recognition provisions of the previous Statement of Financial Accountings
      Standards (SFAS) 123, *Accounting
      for Stock-Based Compensation* ,
      to
      stock-based employee compensation.




28


In
      June
      2005, the Financial Accounting Standards Board (FASB) issued Statement of
      Financial Accounting Standards (SFAS) No. 154, “Accounting Changes and Error
      Corrections”, a replacement of APB Opinion No. 20 and FASB Statement No. 3. The
      statement applies to all voluntary changes in accounting principle, and changes
      the requirements for accounting for and reporting of a change in accounting
      principle. SFAS No. 154 requires retrospective application to prior periods’
financial statements of a voluntary change in accounting principle unless it
      is
      impracticable. SFAS No. 154 is effective for accounting changes and corrections
      of errors made in fiscal years beginning after December 15, 2005. Earlier
      application is permitted for accounting changes and corrections of errors made
      occurring in fiscal years beginning after June 1, 2005. The statement does
      not
      change the transition provisions of any existing accounting pronouncements,
      including those that are in a transition phase as of the effective date of
      this
      statement. The Company does not expect the adoption of SFAS No. 154 to have
      a
      material effect on its financial statements.





29


**ITEM
                7.**
            **FINANCIAL
                STATEMENTS**











**APPLIED
      NEUROSOLUTIONS, INC.**


**(a
      development stage company)**




**FINANCIAL
      STATEMENTS**











**Contents**





**Page**Report
                of Independent Registered Public Accounting Firm
            31Consolidated
                Balance Sheets as of December 31, 2005 and 2004
            32Consolidated
                Statements of Operations for the Years Ended December 31, 2005 and
                2004,
                and for the Cumulative Period From March 14, 1992 (inception) to
                December
                31, 2005
            33Consolidated
                Statements of Stockholders’ Equity/(Deficit) for the Years Ended December
                31, 2005, and 2004 and for the Cumulative Period From March 14, 1992
                (inception) to December 31, 2005
            34Consolidated
                Statements of Cash Flows for the Years Ended December 31, 2005, and
                2004
                and for the Cumulative Period From March 14, 1992 (inception) to
                December
                31, 2005
            37Notes
                to Consolidated Financial Statements for the Years Ended December
                31,
                2005, and 2004 and for the Cumulative Period From March 14, 1992
                (inception) to December 31, 2005
            39




















30


REPORT
      OF
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM











To
      the
      Shareholders, Audit Committee and Board of Directors


Applied
      NeuroSolutions, Inc.


Vernon
      Hills, Illinois




We
      have audited the accompanying consolidated balance
      sheets of Applied NeuroSolutions, Inc. as of December 31, 2005 and 2004, and
      the
      related consolidated statements of operations, stockholders' equity/(deficit)
      and cash flows for the years then ended.  These consolidated financial
      statements are the responsibility of the company's management.  Our
      responsibililty 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.  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. as of December 31, 2005 and 2004 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 financial statements have been
      prepared assuming that the Company will continue as a going concern.  As
      discussed in Note 1(c) to the 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 financial statements do not include any adjustments that might
      result from the outcome of this uncertainty.








/s/
      VIRCHOW, KRAUSE & COMPANY, LLP





Chicago,
      Illinois


March 27 ,
      2006







































































31


**APPLIED
      NEUROSOLUTIONS, INC.**


**(a
      development stage company)**




**CONSOLIDATED
      BALANCE SHEETS**


**December
                31,****2005**
            
            
            **2004****Assets**Current
                assets:Cash
            
            $
            1,663,740
            
            $
            3,565,590Accounts
                receivable2
            
            
            46,580
            
            
            353,550Prepaids
                and other current assets
            
            
            150,848
            
            
            25,539Total
                current assets
            
            
            1,861,168
            
            
            3,944,679Property
                and equipment:Equipment
                and leaseholds
            
            
            2,160,741
            
            
            2,102,752Accumulated
                depreciation and amortization
            
            
            (2,099,531
            )
            
            (2,076,670
            )Net
                property and equipment
            
            
            61,210
            
            
            26,082Other
                assets:Deposits
            
            
            15,493
            
            
            15,493Total
                other assets
            
            
            15,493
            
            
            15,493Total
                assets
            
            $
            1,937,871
            
            $
            3,986,254**Liabilities
                and Stockholders’ Equity / (Deficit)**Current
                liabilities:Accounts
                payable
            
            $
            103,447
            
            $
            108,007Capital
                lease payable, current portion
            
            
            1,211
            
            
            4,385Deferred
                research agreement revenues
            
            
            94,200
            
            
            450,000Accrued
                consultant fees
            
            
            18,900
            
            
            36,300Accrued
                vacation wages
            
            
            65,311
            
            
            45,171Other
                accrued expenses
            
            
            37,829
            
            
            77,709Total
                current liabilities
            
            
            320,898
            
            
            721,572Long
                term liabilities:Capital
                lease payable, net of current portion
            
            
            -
            
            
            1,211Total
                long term liabilities
            
            
            -
            
            
            1,211Stockholders'
                equity / (deficit) (See Note 10):Preferred
                stock,par
                value $0.0025: none issued and outstanding
            
            
            -
            
            
            -Common
                stock,par
                value $0.0025: 94,520,878 and 90,765,106 issued shares, 94,497,584
                and
                90,741,812 outstanding shares
            
            
            236,244
            
            
            226,855Treasury
                stock, 23,294 shares held in treasury
            
            
            (10,614
            )
            
            (10,614
            )Additional
                paid in capital
            
            
            42,604,668
            
            
            41,639,914Deficit
                accumulated during the development stage
            
            
            (41,213,325
            )
            
            (38,592,684
            )Total
                stockholders' equity / (deficit)
            
            
            1,616,973
            
            
            3,263,471Total
                liabilities and stockholders' equity / (deficit)
            
            $
            1,937,871
            
            $
            3,986,254*See
                accompanying notes to consolidated financial
                statements.*


32


**APPLIED
      NEUROSOLUTIONS, INC.**


**(a
      development stage company)**




**CONSOLIDATED
      STATEMENTS OF OPERATIONS**





**Year
                Ended December 31,**
            
            **Period
                from March 14, 1992 (inception) to December 31,****2005**
            
            
            **2004**
            
            
            
            
            
            **2005**Research
                agreement revenues
            
            $
            480,000
            
            $
            253,000
            
            
            
            
            $
            1,233,000Grant
                revenues
            
            
            -
            
            
            -
            
            
            
            
            
            669,022Total
                revenues
            
            
            480,000
            
            
            253,000
            
            
            
            
            
            1,902,022Operating
                expenses:Research
                and development
            
            
            1,890,779
            
            
            1,546,158
            
            
            
            
            
            27,261,979General
                and administrative
            
            
            1,263,755
            
            
            1,651,915
            
            
            
            
            
            12,228,962Loss
                on impairment of intangible assets
            
            
            -
            
            
            -
            
            
            
            
            
            411,016Loss
                on writedown of leasehold improvements
            
            
            -
            
            
            -
            
            
            
            
            
            1,406,057Total
                operating expenses
            
            
            3,154,534
            
            
            3,198,073
            
            
            
            
            
            41,308,014Operating
                loss
            
            
            (2,674,534
            )
            
            (2,945,073
            )
            
            
            
            
            (39,405,992
            )Other
                (income) expense:Interest
                expense
            
            
            588
            
            
            16,081
            
            
            
            
            
            485,445Interest
                income
            
            
            (54,481
            )
            
            (36,986
            )
            
            
            
            
            (796,206
            )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
            
            
            -
            
            
            62,582
            
            
            
            
            
            62,582Loss
                on extinguishments of debt
            
            
            -
            
            
            4,707,939
            
            
            
            
            
            4,707,939Gain
                on derivative instruments, net
            
            
            -
            
            
            (4,894,163
            )
            
            
            
            
            (4,894,163
            )Net
                other (income) expense
            
            
            -
            
            
            -
            
            
            
            
            
            63,720Total
                other (income) expense
            
            
            (53,893
            )
            
            (144,547
            )
            
            
            
            
            1,807,333Net
                loss
            
            
            (2,620,641
            )
            
            (2,800,526
            )
            
            
            
            
            (41,213,325
            )Less:
                Fair value of induced preferred stock conversion.........................
            
            
            -
            
            
            -
            
            
            
            
            
            (1,866,620
            )Net
                loss attributable to common shareholders..............................
            
            $
            (2,620,641
            )
            $
            (2,800,526
            )
            
            
            
            $
            (43,079,945
            )Basic
                and diluted loss per common share:Net
                loss attributable to common shareholders per share - basic
            
            $
            (0.03
            )
            $
            (0.03
            )
            
            
            
            $
            (1.87
            )Net
                loss attributable to common shareholders per share -
                diluted
            
            $
            (0.03
            )
            $
            (0.03
            )
            
            
            
            $
            (1.87
            )Weighted
                average shares - basic
            
            
            92,881,909
            
            
            87,080,086
            
            
            47,701,098
            
            
            23,013,485Weighted
                average shares - diluted
            
            
            92,881,909
            
            
            87,080,086
            
            
            47,701,098
            
            
            23,013,485*See
                accompanying notes to consolidated financial
                statements*


33






**APPLIED
      NEUROSOLUTIONS, INC.**




**(a
      development stage company)**




**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY / (DEFICIT)**




**FOR
      THE PERIOD FROM MARCH 14, 1992 (INCEPTION) TO DECEMBER 31,
      2005**








**Shares**
            **Common**
              **Stock**
            **Treasury**
              **Stock**
            **Additional**
              **Paid
                in**
              **Capital**
            **Deficit
                Accumulated During the Development****Stage**
            **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
            -
            987,280


34





**Shares**
            **Common**
              **Stock**
            **Treasury**
              **Stock**
            **Additional**
              **Paid
                in**
              **Capital**
            **Deficit
                Accumulated During the Development****Stage**
            **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)


35





**Shares**
            **Common**
              **Stock**
            **Treasury**
              **Stock**
            **Additional**
              **Paid
                in**
              **Capital**
            **Deficit
                Accumulated During the Development****Stage**
            **Total**
              **Stockholders’**
              **Equity**
              **(Deficit)****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
            -
            677,134Issuance
                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)
            $1,616,973


*See
      accompanying notes to consolidated financial statements*


36






**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,****2005**
            **2004**
            
            **2005****Cash
                flows from operating activities:**Net
                loss
            $(2,620,641)
            $(2,800,526)
            
            $(41,213,325)Adjustments
                to reconcile net loss to net cash
              used
                in operating activities:Depreciation
                and amortization
            22,861
            13,423
            
            2,584,624Non-cash
                expense for equity compensation
            -
            434,202
            
            2,379,241Non-cash
                expense for equity compensation
              to
                employees and directors
            297,009
            1,535
            
            1,129,381Non-cash
                interest expense
            -
            14,844
            
            105,046Amortization
                of deferred financing costscosts
            -
            6,458
            
            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
            -
            4,707,939
            
            4,707,939Non-cash
                income for gain on derivative
              instrument,
                net
            -
            (4,894,163)
            
            (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
            -
            62,582
            
            62,582Changes
                in assets and liabilities:Accounts
                receivable
            306,970
            (302,820)
            
            156,710Prepaids
                and other assets
            (125,309)
            26,810
            
            (151,623)Accounts
                payable
            (4,560)
            (193,301)
            
            200,051Deferred
                research agreement revenues
            (355,800)
            175,000
            
            94,200Accrued
                wages
            -
            (293,310)
            
            -Accrued
                collaborator payments
            -
            (253,667)
            
            -Accrued
                consultant fees
            (17,400)
            (173,800)
            
            43,900Accrued
                vacation wages
            20,140
            (4,755)
            
            65,311Other
                accrued expenses
            (39,880)
            (81,335)
            
            189,979Net
                cash used in operating activities
            (2,516,610)
            (3,554,884)
            
            (30,378,333)**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 andleasehold
                improvements
            (57,989)
            (18,609)
            
            (4,037,754)Net
                cash used in investing activitiesActivities
            (57,989)
            (18,609)
            
            (4,377,583)


37





**Year
                Ended December 31,**
            
            **Period
                from March 14, 1992 (inception) to December
                31,****2005**
            **2004**
            
            **2005****Cash
                flows from financing activities:**Proceeds
                from issuance of Preferred Stock
            -
            -
            
            12,193,559Proceeds
                from issuance of units, net of issuance costs
            -
            7,354,054
            
            18,971,031Proceeds
                from exercise of warrants
            677,134
            -
            
            677,134Deferred
                financing costs incurred
            -
            -
            
            (111,000)Advances
                from (repayments to) director and shareholders
            -
            (200,000)
            
            120,000Principal
                payments under capital lease
            (4,385)
            (3,736)
            
            (10,555)Proceeds
                from issuance of promissory loans payable
            -
            -
            
            4,438,491Payments
                to shareholders for registration statement penalties
            -
            (84,000)
            
            (84,000)Payments
                to repurchase Common Stock
            -
            -
            
            (10,614)Payments
                received on employee stock purchase notes receivable
            -
            -
            
            235,610Net
                cash provided by financing activities
            672,749
            7,066,318
            
            36,419,656Net
                increase (decrease) in cash
            (1,901,850)
            3,492,825
            
            1,663,740Cashbeginning of period
            3,565,590
            72,765
            
            -Cashend
                of period
            $1,663,740
            $3,565,590
            
            $1,663,740**Supplemental
                cash flow information:**Cash
                paid for interest
            $588
            $1,237
            
            $42,057**Supplemental
                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 under capital lease
            $-
            $-
            
            $11,766Issuance
                of stock for promissory loans payable
            $-
            $2,473,991
            
            $2,473,991Issuance
                of stock for accrued interest on promissory loans payable
            $-
            $136,188
            
            $136,188*See
                accompanying notes to consolidated financial
                statements.*


38







**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”) is a development stage biopharmaceutical company.
      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, although
      unmet
      or underserved, 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 achieving profitable operations. In
      the
      opinion of management, the Company anticipates its’ cash balances as of December
      31, 2005, coupled with anticipated funds to be received from operations, will
      be
      adequate to fund operations through August 31, 2006. The Company will
      need
      additional funding prior to August 2006 to cover operations, and to fund the
      majority of the remaining clinical costs for the CSF-based diagnostic as well
      as
      clinical costs of any additional products in development, and to expand its’
therapeutic program. If additional funding is not obtained, the Company will
      not
      be able to fund clinical costs of any programs, and the Company will have to
      minimize or eliminate its therapeutic program, 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 evaluating
      out-licensing opportunities. This would have a material adverse effect on the
      Company’s operations and its’ prospects. The
      Company intends to seek such additional funding through private and/or public
      financing or through collaborative or other arrangements with corporate
      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.





39


(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*





The
      Company generates revenues from research agreements 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. 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”.








(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 remaining useful life or the
      remaining 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. The
      Company has entered into arrangements whereby the Company will obtain research
      reimbursements in the form of funds received to partially reimburse the Company
      for costs expended. For the years ended December 31, 2005 and 2004, the Company
      has recorded reimbursements of $76,750 and $128,817 against research and
      development expense, respectively.





(h)  *Income
      Taxes*





Under
      the
      asset and liability method of 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.








40





(i)  *Stock
      Option Plan*




The
      Company applies the intrinsic-value-based method of accounting prescribed by
      Accounting Principles Board (APB) Opinion No. 25, *Accounting
      for Stock Issued to Employees,* and
      related interpretations including FASB Interpretation No. 44, *Accounting
      for Certain Transactions involving Stock Compensation, an interpretation of
      APB
      Opinion No. 25* ,
      to
      account for its fixed-plan stock options. Under this method, compensation
      expense is recorded on the date of grant only if the current market price of
      the
      underlying stock exceeded the exercise price. Statement of Financial Accounting
      Standards (SFAS) No. 123, *Accounting
      for Stock-Based Compensation* (SFAS
      No.
      123) ** and
      SFAS
      Statement No. 148, *Accounting
      for Stock-Based Compensation - Transition and Disclosure, an amendment of SFAS
      Statement No. 123,* established accounting and disclosure requirements using a fair-value-based
      method of accounting for stock-based employee compensation plans. As permitted
      by existing accounting standards, the Company has elected to continue to apply
      the intrinsic-value-based method of accounting described above, and has adopted
      only the disclosure requirements of SFAS No. 123, as amended. The following
      table illustrates the effect on net income if the fair-value-based method had
      been applied to all outstanding and unvested awards in each period .









The
      weighted average estimated fair value of the options granted in 2005 and 2004
      was $0.17 and $0.10, respectively, based on the Black-Scholes valuation model
      using the following assumptions:






2005
              2004Risk-free
                  interest rate
              3.73%
              3.00%Dividend
                  yield
              0.00%
              0.00%Expected
                  volatility
              75.00%
              75.00%


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 Services* which
      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 3).




41


For
      its
      fixed awards with pro-rata vesting provisions, the Company calculates any
      compensation expense recorded in the consolidated financial statements or
      included in the pro-forma net loss required by the disclosure only provisions
      of
      SFAS No. 123 on a straight-line basis.





(j)  *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.





(k)  *Computation
      of Net Loss Attributable to Common Shareholder per Share*





Net
      loss
      attributable to common shareholder per share is computed based upon the weighted
      average number of common shares 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.





For
      each
      period, net loss attributable
      to common shareholder 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 antidilutive. The Company had 14,384,772 stock options and 49,164,642
      warrants outstanding to issue common stock at December 31, 2005. The Company
      had
      10,039,636 stock options and 52,947,998 warrants outstanding to issue common
      stock at December 31, 2004.





(l)  *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 approximate their fair values due to the nature and
      short-term maturity of these instruments.




**** (m)  *Recent
      Accounting Pronouncements*




The
      Financial Accounting Standards Board (FASB) has issued 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 effective for the
      Company starting with the quarter ending March 31, 2006. Early adoption is
      encouraged and retroactive application of the provisions of SFAS 123R to the
      beginning of the fiscal year that includes the effective date is permitted,
      but
      not required. The Company estimates that the expense associated with SFAS 123R
      will be approximately $285,000 in 2006. See the Stock Option Plan discussion
      above for information related to the pro forma effects on the Company’s reported
      net income (loss) and net income (loss) per common share of applying the fair
      value recognition provisions of the previous Statement of Financial Accountings
      Standards (SFAS) 123, *Accounting
      for Stock-Based Compensation* ,
      to
      stock-based employee compensation.




In
      June
      2005, the Financial Accounting Standards Board (FASB) issued Statement of
      Financial Accounting Standards (SFAS) No. 154, *Accounting
      Changes and Error Corrections* ,
      a
      replacement of APB Opinion No. 20 and FASB Statement No. 3. The statement
      applies to all voluntary changes in accounting principle, and changes the
      requirements for accounting for and reporting of a change in accounting
      principle. SFAS No. 154 requires retrospective application to prior periods’
financial statements of a voluntary change in accounting principle unless it
      is
      impracticable. SFAS No. 154 is effective for accounting changes and corrections
      of errors made in fiscal years beginning after December 15, 2005. Earlier
      application is permitted for accounting changes and corrections of errors made
      occurring in fiscal years beginning after June 1, 2005. The statement does
      not
      change the transition provisions of any existing accounting pronouncements,
      including those that are in a transition phase as of the effective date of
      this
      statement. The Company does not expect the adoption of SFAS No. 154 to have
      a
      material effect on its financial statements.





42


**Note
      2 - Property and Equipment**





Property
      and equipment consist of the following:





December
                    31, 2005
                
                
                December
                    31, 2004Equipment
                
                $
                2,064,362
                
                $
                2,006,373Equipment
                    held under capital lease
                
                
                11,766
                
                
                11,766Leasehold
                    improvements
                
                
                84,613
                
                
                84,6132,160,741
                
                
                2,102,752Lease
                    accumulated depreciation and amortization
                
                
                (2,099,531
                )
                
                (2,076,670
                )$
                61,210
                
                $
                26,082


Depreciation
      and amortization expense amounted to $22,861 and $13,423 for the years ended
      December 31, 2005 and 2004, respectively.








**Note
      3 - 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 4).





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
      4).
      Total compensation expense of $351,811 was recognized upon the conversion of
      all
      the warrants in 2002. Of these warrants, 220,945 remain outstanding at December
      31, 2004, with an exercise price of $0.15 per share. These warrants expire
      in
      December 2006.





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 2007.





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 expire 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.





43


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).





As
      of
      December 31, 2005, the Company has reserved 49,164,642 shares of Common Stock
      for the exercise and conversion of the warrants described above.








**Note
      4 - 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 10).





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.





44


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 10 for an explanation of the Company’s
      authorized shares.





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.





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.





45


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 2004. 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 5 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.





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





46


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 5 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 5 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.





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.





47


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





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,
      2005, no Preferred Stock is outstanding. The Company has reserved 49,164,642
      shares of Common Stock for the exercise and conversion of the warrants described
      above. Warrants were issued in connection with the initial public offering
      of
      APNS’s predecessor in May 1998. These warrants expired, unexercised in May
      2003.





**Note
      5 - 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.





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.





48


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 Board of Directors granted 4,045,136 options exercisable at $0.285
      per
      share which vest one-fourth immediately and one-fourth per year beginning in
      April 2006. Non-employees were granted 200,000 of these options. Compensation
      expense of $31,870 was recorded to reflect the fair value of options issued
      to
      non-employees.





In
      September 2005, the Board of Directors granted 150,000 options exercisable
      at
      $0.36 per share which vest 100,000 immediately and 25,000 in September 2006
      and
      25,000 in September 2007.





In
      November 2005, the Board of Directors granted 150,000 options exercisable at
      $0.38 per share which vest 100,000 immediately and 25,000 in November 2006
      and
      25,000 in November 2007.





As
      of
      December 31, 2005, 14,384,772 options were outstanding (9,856,670 were fully
      vested and exercisable) at prices ranging from $0.15 to $5.30 per share. The
      4,345,136 stock options granted to employees, directors and consultants in
      2005
      increased the total outstanding stock options to 14,384,772. This is in excess
      of the 12,000,000 options allowed under the current stock option plan. In
      September 2005, the Board of Directors approved an increase in the options
      to be
      issued under the plan to 20,000,000. The Company will be seeking shareholder
      approval for an increase in the maximum allowable options under the
      plan.





A
      summary
      of the status of, and changes in, the Company’s stock option plan as of and for
      the years ended December 31, 2005 and 2004, is presented below for all stock
      options issued to employees, directors and non-employees:




2005
            
            2004Options
            
            Weighted-
              Average-Exercise
              Price
            
            Options
            
            Weighted-
              Average
                Exercise
              PriceOutstanding
                at beginning of year
            
            
            10,039,636
            
            $
            0.19
            
            
            9,919,636
            
            $
            0.19Granted
            
            
            4,345,136
            
            
            .29
            
            
            120,000
            
            
            .17Reduction
                inexercise
                price
            
            
            -
            
            
            -
            
            
            -
            
            
            -Exercised
            
            
            -
            
            
            -
            
            
            -
            
            
            -Forfeited
            
            
            -
            
            
            -
            
            
            -
            
            
            -Outstanding
                atend
                of year
            
            
            14,384,772
            
            $
            0.22
            
            
            10,039,636
            
            $
            0.19Options
                exercisable atend
                of year
            
            
            9,856,670
            
            
            
            
            
            7,173,373







49


December
                    31, 2005Exercise
                    Price
                Number
                    Outstanding at
                  December
                    31, 2005
                Weighted
                    Average Remaining ContractualLife
                Number
                    Exercisable at
                  December
                    31, 2005$0.15
                9,790,370
                6.3
                    years
                8,456,1200.17
                120,000
                8.8
                    years
                60,0000.285
                4,045,136
                9.3
                    years
                1,011,2840.36
                150,000
                9.8
                    years
                100,0000.38
                150,000
                9.9
                    years
                100,0001.00
                39,741
                0.1
                    years
                39,7411.50
                14,814
                5.1
                    years
                14,8142.00
                25,019
                1.9
                    years
                25,0195.30
                49,692
                0.1
                    years
                49,69214,384,772
                
                9,856,670





**Note
      6 - 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 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,
      2005
      and 2004 were $48,410 and $58,339, respectively.





**Note
      7 - 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, 2005, the Company has net
      operating loss and research and development credit carryforwards for Federal
      income tax purposes of approximately $35,500,000 and $895,000, respectively.
      These carryforwards expire between 2007 and 2025. Changes in the Company's
      ownership may cause annual limitations on the amount of loss and credit
      carryforwards that can be utilized to offset income in the future.





The
      net
      deferred tax assets as of December 31, 2005 and 2004 are summarized as
      follows:




December
                  31, 2005
              December
                  31, 2004Deferred
                  tax assets:Depreciation
              $210,000
              $230,000Net
                  operating loss carryforwards
              14,200,000
              13,300,000Tax
                  credit carryforwards
              890,000
              825,00015,300,000
              14,355,000Valuation
                  allowance
              (15,300,000)
              (14,355,000)Net
                  deferred income taxes
              $-
              $


The
      net
      change in the valuation allowance during 2005 and 2004 was an increase of
      $945,000 and $1,185,000, respectively.





50





**Note
      8 - 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.





Future
      minimum lease payments as of December 31, 2005 under the terms of the operating
      lease for the facility in Vernon Hills, Illinois are as follows:





Year
                    Ending December 31,
                Amount2006
                $102,0002007
                34,000





Rental
      expense, including allocated operating costs and taxes, was $123,308 and
      $119,716 for the years ended December 31, 2005 and 2004,
      respectively.





Capital
      Lease


The
      Company purchased a telephone system under the terms of a capital lease in
      March
      2003. The lease calls for thirty six monthly payments of $414 through March
      2006.





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. In March 2002, the Company renegotiated
      various terms of the AECOM agreements. In addition, the new agreement reduced
      and restructured future maintenance and funding payments.





Total
      expense for these outside research, collaboration and license agreements,
      included in research and development expenses, was $375,074 and $294,400 for
      the
      years ended December 31, 2005 and 2004, respectively.





The
      Company has consulting agreements with its founding scientist at AECOM, which
      have been renewed through November 2008, but in some instances, may be
      terminated at an earlier date by the Company and the consultant. Expense for
      the
      consulting agreements, included in research and development expenses, was
      $108,000 and $108,000 for the years ended December 31, 2005 and 2004,
      respectively.





Future
      minimum payments, as of December 31, 2005, under the above agreements are as
      follows:





Year
                  ending December 31,
              
              
              Collaborations
              
              
              Consulting2006
              
              $
              425,000
              
              $
              108,0002007
              
              
              475,000
              
              
              108,0002008
              
              
              500,000
              
              
              99,000Total
              
              $
              1,400,000
              
              $
              315,000





The
      Company is obligated to pay AECOM $500,000 each year after 2008 that the
      Agreements are still in effect. In addition, the Company is obligated to pay
      AECOM a percentage of all revenues received from selling and/or licensing any
      aspects of the AD technology that exceeds the minimum obligations reflected
      in
      the annual license maintenance payments. The Company can terminate the Agreement
      at any time with sixty days written notice, but would be required to 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.





51


Employment
      Agreements


John
      F.
      DeBernardis, Ph.D., the President and Chief Executive Officer, is employed
      pursuant to an agreement through October 31, 2007 that provides for a minimum
      base salary of $282,000 per year.





Daniel
      J.
      Kerkman, Ph.D., the Vice President of R & D, is employed pursuant to an
      agreement through October 31, 2007 that provides for a minimum base salary
      of
      $189,000 per year.





David
      Ellison, the Chief Financial Officer and Corporate Secretary, is employed
      pursuant to an agreement through October 31, 2007 that provides for a minimum
      base salary of $174,000 per year.





These
      agreements provide for severance pay, if the officer is terminated without
      cause, of the greater of i)one-year compensation, or ii)compensation for the
      remaining term of the agreement.





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 our technologies and to commercialize products will depend
      on
      avoiding patents of others. While we are aware of patents issued to competitors,
      as of December 31, 2005, we are not aware of any claim of patent infringement
      against us.





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 a monoclonal antibody that is encompassed by the claims of
      two
      U.S. patents it owns. In that email, Innogenetics also referred to another
      U.S.
      patent which was recently granted to Innogenetics and which is directed to
      a
      method for the differential diagnosis of Alzheimer’s disease from other
      neurological diseases. Innogenetics believes this latter patent also claims
      the
      CSF diagnostic test the Company is developing. Innogenetics also informed the
      Company that it could be amenable to entering into a licensing arrangement
      or
      other business deal with APNS regarding its patents.





The
      Company has reviewed the two monoclonal antibody 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, the Company believes
      that its CSF diagnostic test does not infringe the claims of these two
      Innogenetics patents. Similarly, the Company does not believe its activities
      have infringed or will infringe the rights of Innogenetics under this third
      patent, and the Company would seek either to negotiate a suitable arrangement
      with them or vigorously contest any claim of infringement. 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 outcome of any litigation. An adverse decision
      could prevent the Company from possible marketing a future diagnostic product
      and could have a material adverse impact on the Company’s business. The Company
      is currently in discussion with Innogenetics concerning some form of a potential
      business relationship.








**Note
      9 - Segments**





The
      Company operates in one business segment, biopharmaceutical product research
      and
      development, primarily in the fields of Alzheimer’s disease and tissue
      oxygenation. Prior to the Merger, the Company operated in one geographic
      segment, the Midwest region of the United States. Subsequent to the Merger,
      the
      Company also operated in France through the first quarter of 2004. A summary
      of
      operations for 2005 and 2004 by geographic segment is set forth
      below.





52


Operating
                  Loss:
              2005
              2004United
                  States
              ($2,620,641)
              ($2,607,409)France
              -
              (193,117)Identifiable
                  assets:United
                  States
              $1,937,871
              $3,986,254France
              -
              -$1,937,871
              $3,986,254







**Note
      10 - Authorized Shares**





The
      Company recently discovered 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 for the
      Company. 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, which in turn
      calls into question the status of any shares issued after such amendments.
      Such
      shares may be deemed issued in excess of the Company's 22,400,000 authorized and
      outstanding shares of common stock. Because the holders of the Series A
      preferred stock have informed the Company of their agreement with each other
      to
      vote the Series A preferred shares in favor of the Merger Agreement, the
      Company, based on the advice of the Company’s corporate counsel and Delaware law
      counsel, will continue to treat the over-issued shares of common stock in the
      same manner as the remaining outstanding shares of the Company's common stock.
      Consequently, based on the foregoing, the Company has 94,591,625 shares of
      the
      common stock outstanding as of March 31, 2006.





To
      remedy
      this technical error, the Company was advised by the Company’s corporate counsel
      and Delaware law counsel, that the best, most practical, least time-consuming
      and least expensive approach would be to correct the 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.





Two
      other
      approaches presented to the Company involved the approval of amendments to
      the
      Company’s certificate of incorporation to cure the prior amendments that were
      adopted by stockholder consent. Under the amendment approaches, the Company
      would have had to secure the vote of a majority of the original 22,400,000
      shares of common stock that had been issued under the Company’s certificate of
      incorporation in effect prior to the both 2001 and 2003 amendments. These
      approaches would not have required the Company to create and issue the Series
      A
      preferred stock but, as described below, were neither feasible nor cost
      effective.





To
      obtain
      the approval of a majority of the original 22,400,000 shares of common stock,
      the Company would need to have located the current holders of a majority of
      those original shares (i.e., at least 11,200,001 shares). The Company identified
      the holders of the original 22,400,000 shares as of October 2001, but many
      of
      those holders have since traded their shares in the public market. Consequently,
      the Company was unable to locate the current holders of the requisite majority
      of shares.





53


The
      alternative approach would be to seek and obtain the approval of a significantly
      high number of votes from the common stockholders to assure that a majority
      of
      the original 22,400,000 shares of common stock has approved the amendment to
      the
      certificate of incorporation. In this approach, the Company would need to secure
      the vote of approximately 83.39 million shares of common stock, or 88.2% of
      the
      outstanding shares of common stock. The Company’s Board of Directors concluded
      that the approval of an amendment in this manner was neither cost effective
      nor
      time efficient, and ultimately would not be in the best interests of the
      stockholders. The Board’s decision was based on a variety of factors, including
      the cost and time that would be incurred to solicit the large number of
      beneficial stockholders of the Company’s common stock, the expense of engaging a
      proxy solicitation firm, the historically low proxy voting rates by
      non-institutional stockholders and the Company’s need to clear up its
      capitalization rapidly in order to commence with an urgently-needed capital
      raising process. Based on the foregoing, the Board of Directors elected to
      correct the technical errors by means of the subsidiary-parent
      merger.





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.
      To
      strictly limit the use of this Series A preferred stock, the shares 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. This approach
      would ensure that the Company's certificate of incorporation, after correction,
      would be exactly as stockholders previously approved it on prior occasions,
      albeit inadvertently by means of a technically invalid method of written
      consent. The Company's authorized common stock under Article IV of the amended
      and restated certificate of incorporation will be 200 million shares. If
      proposal three is approved by a majority vote of the common stockholders, the
      authorized common stock under Article IV of the amended and restated certificate
      of incorporation will be 400 million shares. Following the merger transaction
      and the correction of the certificate of incorporation to affirm the previous
      actions of the Company's stockholders, the Company will redeem and cancel the
      shares of the Series A preferred stock at nominal cost of $100.





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


The
      Company’s annual meeting is anticipated to be in early June 2006.


54


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







None.








**ITEM
      8A. CONTROLS AND PROCEDURES**




(a) *Disclosure
      Controls and Procedures.* Our
      management, with the participation of our Chief Executive Officer and Chief
      Financial Officer, has evaluated the effectiveness of the Company's disclosure
      controls and procedures (as such term is 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. Based on such
      evaluation, our Chief Executive Officer and Chief Financial Officer have
      concluded that, as of the end of such period, the Company's disclosure controls
      and procedures are effective.




(b) *Internal
      Controls Over Financial Reporting.* There
      have not been any changes in the Company's internal controls over financial
      reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under
      the Exchange Act) during our most recent fiscal quarter that have materially
      affected, or are reasonably likely to materially affect, the Company's internal
      controls over financial reporting.





**ITEM
      8B. OTHER INFORMATION**





**Authorized
      Shares**


The
      Company recently discovered 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 for the
      Company. 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, which in turn
      calls into question the status of any shares issued after such amendments.
      Such
      shares may be deemed issued in excess of the Company's 22,400,000 authorized
      and
      outstanding shares of common stock. Because the holders of the Series A
      preferred stock have informed the Company of their agreement with each other
      to
      vote the Series A preferred shares in favor of the Merger Agreement, the
      Company, based on the advice of the Company’s corporate counsel and Delaware law
      counsel, will continue to treat the over-issued shares of common stock in the
      same manner as the remaining outstanding shares of the Company's common stock.
      Consequently, based on the foregoing, the Company has 94,591,625 shares of
      the
      common stock outstanding as of March 31, 2006.








To
      remedy
      this technical error, the Company was advised by the Company’s corporate counsel
      and Delaware law counsel, that the best, most practical, least time-consuming
      and least expensive approach would be to correct the 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.





Two
      other
      approaches presented to the Company involved the approval of amendments to
      the
      Company’s certificate of incorporation to cure the prior amendments that were
      adopted by stockholder consent. Under the amendment approaches, the Company
      would have had to secure the vote of a majority of the original 22,400,000
      shares of common stock that had been issued under the Company’s certificate of
      incorporation in effect prior to the both 2001 and 2003 amendments. These
      approaches would not have required the Company to create and issue the Series
      A
      preferred stock but, as described below, were neither feasible nor cost
      effective.





55


To
      obtain
      the approval of a majority of the original 22,400,000 shares of common stock,
      the Company would need to have located the current holders of a majority of
      those original shares (i.e., at least 11,200,001 shares). The Company identified
      the holders of the original 22,400,000 shares as of October 2001, but many
      of
      those holders have since traded their shares in the public market. Consequently,
      the Company was unable to locate the current holders of the requisite majority
      of shares.





The
      alternative approach would be to seek and obtain the approval of a significantly
      high number of votes from the common stockholders to assure that a majority
      of
      the original 22,400,000 shares of common stock has approved the amendment to
      the
      certificate of incorporation. In this approach, the Company would need to secure
      the vote of approximately 83.39 million shares of common stock, or 88.2% of
      the
      outstanding shares of common stock. The Company’s Board of Directors concluded
      that the approval of an amendment in this manner was neither cost effective
      nor
      time efficient, and ultimately would not be in the best interests of the
      stockholders. The Board’s decision was based on a variety of factors, including
      the cost and time that would be incurred to solicit the large number of
      beneficial stockholders of the Company’s common stock, the expense of engaging a
      proxy solicitation firm, the historically low proxy voting rates by
      non-institutional stockholders and the Company’s need to clear up its
      capitalization rapidly in order to commence with an urgently-needed capital
      raising process. Based on the foregoing, the Board of Directors elected to
      correct the technical errors by means of the subsidiary-parent
      merger.





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.
      To
      strictly limit the use of this Series A preferred stock, the shares 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. This approach
      would ensure that the Company's certificate of incorporation, after correction,
      would be exactly as stockholders previously approved it on prior occasions,
      albeit inadvertently by means of a technically invalid method of written
      consent. The Company's authorized common stock under Article IV of the amended
      and restated certificate of incorporation will be 200 million shares. If
      proposal three is approved by a majority vote of the common stockholders, the
      authorized common stock under Article IV of the amended and restated certificate
      of incorporation will be 400 million shares. Following the merger transaction
      and the correction of the certificate of incorporation to affirm the previous
      actions of the Company's stockholders, the Company will redeem and cancel the
      shares of the Series A preferred stock at nominal cost of $100.





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


The
      Company’s annual meeting is anticipated to be in early June 2006.





**PART
      III**





**ITEM
      9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
      WITH
      SECTION 16(A) OF THE EXCHANGE ACT**





Our
      executive officers and directors as of December 31, 2005, and their ages as
      of
      March 31, 2006, are as follows:





**Name**
            
            **Age**
            
            **Position**Bruce
                N. Barron
            
            51
            
            Chairman
                of the Board of Directors; Class I DirectorJohn
                F. DeBernardis, Ph.D
            
            58
            
            President,
                Chief Executive Officer & Class Director IIDavid
                Ellison
            
            44
            
            Chief
                Financial Officer & Corporate SecretaryDaniel
                J. Kerkman, Ph.D
            
            54
            
            Vice
                President, R & DJay
                B. Langner (1)(2)
            
            76
            
            Class
                II DirectorMichael
                Sorell, M.D. (1) (3)
            
            58
            
            Class
                III DirectorRobert
                S. Vaters (2)(3)
            
            45
            
            Class
                III Director







(1)
            Member
                of the Audit Committee


(2)
            Member
                of the Compensation and Stock Option
                Committee


(3)
            Member
                of Nominating Committee





56


*Bruce
      N. Barron,* has been
      Chairman of the Board since August 1999, and was Chief Executive Officer of
      the
      Company from April 1995 through September 2004. Previously, he had been
      President of the Company from April 1995 to August 1999. He had also been Chief
      Financial Officer of the Company from September 1993 on a part-time basis and
      on
      a full-time basis from April 1994 to April 1995. He has also been a director
      of
      the Company since June 1994. Mr. Barron has been a Class I director since
      September 10, 2002. Mr. Barron is currently a partner and manager of a private
      equity/venture capital fund and has been a director of ClaimForce, Inc. since
      February 2006. From 1989 until June 1994, Mr. Barron was a director and Vice
      Chairman and Chief Executive Officer of Xtramedics, Inc. and from 1988 to 1989,
      a Vice President of Finance, in all instances on a part-time basis. Xtramedics
      was merged into Athena Medical Corp. in June, 1994. From 1985 to August, 1993,
      Mr. Barron was a director and Vice President of Finance and Chief Financial
      Officer of Gynex Pharmaceuticals, Inc. in addition to serving in various other
      capacities, including Vice Chairman from 1988 to 1989, in all instances on
      a
      part-time basis. Gynex was acquired by BioTechnology General Corp. (now Savient
      Pharmaceuticals) in August, 1993. From 1985 to 1992, Mr. Barron also served
      as a
      director and part-time executive officer of Pharmatec, Inc. (now Pharmos Corp.)
      in various capacities including President, Chief Executive Officer, Chief
      Financial Officer, and Vice President. Mr. Barron was a member of the Board
      of
      Directors of Trimedyne, Inc., a publicly-traded manufacturer of lasers for
      use
      in various medical applications from 1985 until February, 2001.





*John
      F. DeBernardis, Ph.D.* ,
      has
      been President and Chief Executive Officer of the Company since October 2004,
      and had been the President and Chief Operating Officer from August 1999 until
      October 2004. Dr. DeBernardis has been a Class II director since September
      10,
      2002. He joined the Company in August 1993, as Director of Chemistry and
      Pharmacology, was promoted to Vice President of Discovery, and then promoted
      to
      Senior Vice President, Research and Development. He was Secretary of the Company
      from April 1995 to August 1999, and was appointed a director of the Company
      in
      November 1995. Prior to joining the Company, Dr. DeBernardis spent sixteen
      years
      at Abbott Laboratories, where he began his career as a research chemist and
      progressively earned several promotions, ending with his position as the Area
      Head of Cardiovascular Research within the Pharmaceutical Products Division
      supervising an 85 person staff. During his tenure, a number of IND candidates
      were identified. Dr. DeBernardis received his Ph.D. degree from the University
      of Pittsburgh in 1974 and worked two years as an NIH postdoctoral fellow in
      the
      Department of Chemistry at MIT. He is co-author on 70 scientific publications
      and holds 35 U.S. patents.





*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.





*Daniel
      J. Kerkman, Ph.D.* ,
      joined
      the Company in August 1993 as Group Leader of Chemistry and now serves in his
      role of Vice President, Research and Development. Prior to joining the Company,
      Dr. Kerkman spent thirteen years at Abbott Laboratories where he began his
      career as a research chemist initially in the cardiovascular area followed
      by
      several positions within both the immunoscience and neuroscience areas. A series
      of promotions ended with his position as the Project Leader in Adrenergic
      research within the Pharmaceutical Products Division supervising a 35 person
      staff. During his tenure, a number of IND candidates were identified. Dr.
      Kerkman received his Ph.D. degree from MIT in 1979 and worked one year as a
      postdoctoral fellow in the Department of Chemistry at MIT. He is co-author
      on
      more than 40 scientific publications and holds 16 U.S. patents.





*Jay
      B. Langner,* was
      appointed as a Class II director in July 2005. Since 1985, Mr. Langner has
      served as the Chairman of the Board of Trustees of Montefiore Medical Center.
      Located in The Bronx, NY, Montefiore Medical Center is the University Hospital
      for the Albert Einstein College of Medicine (AECOM) and one of the largest
      health care systems in the United States. From 1961 to 2003, he served as
      Chairman and CEO of the Hudson General Corporation, which was sold to Luftansa
      Airlines in 1999. Mr. Langner began his career in 1954, serving as president
      of
      Langner Leasing Corporation.





57


*Michael
      Sorell, MD* ,
      was
      appointed as a Class III director of the Company in June 2004. Dr. Sorell has
      been President, CEO and Director of Neurologix, Inc. since September 2004 and
      has been the Managing Member of MS Capital since 1996. Previous positions have
      included Associate of Clinical Research at Schering-Plough Corporation from
      1983
      to 1985; a Biotechnology and Pharmaceuticals Analyst at Morgan Stanley from
      1986
      to 1992 and an Emerging Growth Strategist at Morgan Stanley from 1994 to 1996;
      and a Portfolio Manager and Managing Member of MSX Life Sciences from 1992
      to
      1994. Dr. Sorell also serves as a member of the Board of Directors of SCOLR,
      Inc., a publicly traded drug delivery company.





*Robert
      S. Vaters* ,
      a
      nominee for director, has served as a Class III director since October 2005.
      Mr.
      Vaters is currently a General Partner in Med Opportunity Partners, a New York
      based private equity firm. Previously, from November 2004 to March 2006, Mr.
      Vaters was Executive Vice President, Strategy and Corporate Development of
      Inamed Corporation after serving as Inamed's Chief Financial Officer
      from August 20, 2002 to November 2004. From September 2001 to
      August 2002, Mr. Vaters worked on a variety of private
      merchant banking transactions. He was Executive Vice President and Chief
      Operating Officer at Arbinet Holdings, Inc., a leading telecom capacity
      exchange from January 2001 to July 2001. He served as Chief Financial
      Officer at Arbinet from January 2000 to December 2000. Prior to that
      he was at Premiere Technologies from July 1996 through January 2000,
      where he held a number of senior management positions, including Executive
      Vice
      President and Chief Financial Officer, Managing Director of the Asia Pacific
      business based in Sydney, Australia and Chief Financial Officer of Xpedite
      Systems Inc., formerly an independent public company that was purchased by
      Premiere. Additional experience includes Senior Vice President, Treasurer of
      Young and Rubicam Inc., a global communications firm with operations in 64
      countries. From 1995 to 1998, Mr. Vaters was also an independent board
      member and chairman of the audit committee of Rockford Industries, a public
      company providing healthcare equipment financing.








**Board
      of directors committees and other information**





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.





**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, except for Mr. Robert Vaters and Mr. Jay Langner, each of whom
      filed his Form 3 late, Preston Tsao (a former director who resigned in July
      2005), who filed a Form 4 late in March 2005, and Dr. Michael Sorell, who filed
      a Form 4 late in April 2005.





**Committees**





In
      November 2005, the Board of Directors appointed Jay B. Langner and Dr. Michael
      Sorell to 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 which may come before
      it
      or as directed by the Board of Directors. Our Board of Directors has determined
      that Mr. Langner is an “audit committee financial expert” within the applicable
      definition of the Securities and Exchange Commission. Each of Mr. Langner and
      Dr. Sorell qualify as independent directors under
      Rule 10A-3 of the Securities Exchange Act of 1934 and as defined in NASD
      Marketplace Rule 4200(15).





58


In
      November 2005, the Board of Directors appointed Robert S. Vaters and Jay B.
      Langner 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. Vaters and Mr. Langner 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 2005, the Board of Directors appointed Dr. Michael Sorell and Robert
      S.
      Vaters to the Nominating Committee. The
      Nominating Committee participates in identifying qualified individuals to become
      directors and determining the composition of the Board and its committees.
      Each
      of Dr. Sorell and Mr. Vaters qualify as independent directors under Rule 10A-3
      of the Securities Exchange Act of 1934 and as defined in NASD Marketplace Rule
      4200(15).





**Code
      of Ethics**





Effective
      June 1, 2005, we have 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.








**ITEM
                10.**
            **EXECUTIVE
                COMPENSATION**








**Executive
      compensation**





The
      following table sets forth all compensation awarded to, earned by, or paid
      for
      services in all capacities during 2005, 2004 and 2003 by our Chief Executive
      Officer, President and Chief Operating Officer, Vice-President of R & D, and
      Chief Financial Officer.





Annual
            Compensation
            
            Long
                Term
            CompensationName
                and
              Principal
                Position
            Year
            Salary
            Bonus
            Other
              Annual
              Compensation
            Restricted
              Stock
              Awards
            Securities
              Underlying
              Options
            All
              Other
              CompensationBruce
                N. Barron
              CEO(1)
            2005
              2004
              2003
            N/A
              $249,767
              $228,600
            N/A
              $0
              $0
            N/A
              $0
              $0
            N/A
              0
              0
            N/A
              0
              1,700,000
            N/A
              $0
              $0John
                F. DeBernardis
              Pres.
                & CEO(2)
            2005
              2004
              2003
            $292,500
              $244,600
              $217,600
            $0
              $0
              $0
            $0
              $0
              $0
            0
              0
              0
            1,039,241(3)
              0
              1,500,000
            $0
              $0
              $0Daniel
                Kerkman
              V.P.
                of R & D
            2005
              2004
              2003
            $195,750
              $191,509
              $151,600
            $0
              $0
              $0
            $0
              $0
              $0
            0
              0
              0
            735,045(3)
              0
              400,000
            $0
              $0
              $0David
                Ellison
              CFO
            2005
              2004
              2003
            $180,750
              $135,600
              $103,600
            $0
              $0
              $0
            $0
              $0
              $0
            0
              0
              0
            778,279(3)
              0
              500,000
            $0
              $0
              $0





59


(1)
      Mr.
      Barron was CEO of the Company through September 2004. Mr.
      Barron was paid $48,000 as compensation for consulting services rendered to
      the
      Company in 2005. He also received a grant of 200,000 options for his services
      as
      a director of the Company.


(2)
      Dr.
      DeBernardis has been President and CEO of the Company since October 2004. He
      was
      previously President and COO.


(3)
      Stock
      options granted in 2005 are subject to shareholder approval of an increase
      in
      the stock option plan.





The
      following tables summarize (i) the options granted in 2005 to the executive
      officers named in the Summary Compensation Table above, (ii) the potential
      value
      of these options at the end of the option term assuming certain levels of
      appreciation of our common stock, (iii) the number of shares acquired by such
      named executive officers upon the exercise of options in 2005 and the value
      realized thereon, and (iv) the number and value of all options held by such
      executive officers at the end of fiscal 2005





**OPTION/SAR
      GRANTS IN 2005**





Name
            Number
                of Securities Underlying OptionsGranted
                (#)
            %
                of Total Options Granted to Employees inFiscal
                Year(%)
            Base
                Price($/Share)
            Exercise
                orExpiration
                Date
            5%
                ($)
            10%
                ($)John
                F. DeBernardis
            1,039,241
            23.9%
            $0.285
            4/25/15
            $14,809
            $29,618Daniel
                Kerkman
            735,045
            16.9%
            $0.285
            4/25/15
            $10,474
            $20,949David
                Ellison
            778,279
            17.9%
            $0.285
            4/25/15
            $11,090
            $22,181


**_____________**





(1)  The
      Company did not grant any stock appreciation rights (SARs) in 2005.




(2)  The
      dollar amounts under these columns are the result of calculations at the 5%
      and
      10% compounded annual appreciation rates prescribed by the SEC and, therefore,
      are not intended to forecast possible future price appreciation, if any, of
      our
      common stock.








**AGGREGATED
      OPTION EXERCISES IN 2005**


**AND
      FISCAL YEAR END STOCK OPTION VALUES**





Name
            Number
                of Shares Acquired Upon Exercise
              __(#)__
            Value
                Realized
              ___($)__
            Number
                of Securities Underlying
              Unexercised
                Options
              At
                Year End(#)
            Value
                of Unexercised
              In-the-Money
              Options($)(1)Exercisable
            Unexercisable
            Exercisable
            UnexercisableJohn
                F. DeBernardis, Ph. D.
            0
            0
            2,394,483
            1,154,430
            $419,877
            $114,119Daniel
                Kerkman, Ph.D.
            0
            0
            926,010
            651,284
            $151,134
            $49,321David
                Ellison
            0
            0
            868,584
            708,710
            $138,764
            $55,584


**_____________**         ****




(1)
            Based
                on the closing price for our common stock on December 31, 2005 of
                $0.34
                per share.








60


**Employment
      agreements**





John
      F.
      DeBernardis, Ph.D., the President and Chief Executive Officer, is employed
      pursuant to an agreement through October 31, 2007 that provides for a minimum
      base salary of $282,000 per year.





Daniel
      J.
      Kerkman, Ph.D., the Vice President of R & D, is employed pursuant to an
      agreement through October 31, 2007 that provides for a minimum base salary
      of
      $189,000 per year.





David
      Ellison, the Chief Financial Officer and Corporate Secretary, is employed
      pursuant to an agreement through October 31, 2007 that provides for a minimum
      base salary of $174,000 per year.





These
      agreements provide for severance pay, if the officer is terminated without
      cause, of the greater of i)one-year compensation, or ii)compensation for the
      remaining term of the agreement.








**Compensation
      of directors**





Directors
      receive annual option grants as compensation for their service as members of
      the
      board of directors. 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. Mr.
      Barron received $48,000 in 2005 to compensate him for his time spent advising
      the Company on various matters.





**Stock
      option plans**





As
      of
      December 31, 2002, our Board of Directors approved the Hemoxymed, Inc. (now
      called Applied NeuroSolutions, Inc.) Stock Option Plan. This plan is identical
      to the MGC pre-merger stock option plan, with an increase in the number of
      options in the plan to 12,000,000. Shareholder approval was obtained in 2003.
      A
      registration statement, Form S-8, was filed in December 2004, registering the
      stock option plan.





On
      September 13, 2005, our Board of Directors approved an increase in the number
      of
      options in the plan from 12,000,000 to 20,000,000. Stockholder approval has
      not
      yet been obtained.





On
      January 31, 1996 our Board of Directors approved an amendment to increase the
      number of options available under the Plan to 1,500,000. On October 7, 1996,
      our
      Board of Directors approved an amendment to increase the number of options
      in
      the Plan to 2,000,000. On November 16, 2000 our Board of Directors approved
      an
      amendment to increase the number of options in the Plan to 4,000,000. On October
      22, 2001 our Board of Directors approved an amendment to increase the number
      of
      options in the Plan to 7,000,000.





As
      of
      December 31, 2005, 14,384,772 options were outstanding (9,856,670 were fully
      vested and exercisable) at prices ranging from $0.15 to $5.30 per share. In
      2005, our compensation committee approved 4,345,136 stock options to employees,
      directors and consultants. The stock options granted in 2005 increased the
      total
      outstanding stock options to 14,384,772. This is in excess of the 12,000,000
      options allowed under the current stock option plan. In September 2005, the
      Board of Directors approved an increase in the options to be issued under the
      plan to 20,000,000. The Company will be seeking shareholder approval for an
      increase in the maximum allowable options under the plan.








61


**ITEM
      11. 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
      March 24, 2006, 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 March 31, 2006, a total of 94,591,625
      shares of the Company’s common stock was outstanding.


Name
                of Beneficial Owner
            Amount
                and nature
              of
                beneficial ownership
            Percent
              of
                Class (1)Bruce
                N. Barron (3)
            3,269,066(5)
            3.4%John
                F. DeBernardis, Ph.D. (2)
            2,585,790(6)
            2.7%Jay
                B. Langner (3)
            450,000(7)
            *Robert
                S. Vaters (3)
            100,000(8)
            *Michael
                Sorell, MD (3)
            87,500(9)
            *Daniel
                J. Kerkman, Ph.D. (4)
            998,687(10)
            1.0%David
                Ellison (4)
            1,074,122(11)
            1.1%Special
                Situations Private Equity Fund, LP
              527
                Madison Avenue, Suite 2600
              New
                York, NY 10022
            9,325,000(12)
            9.3%Richard
                Stone
            4,656,439(13)
            4.8%Benjamin
                Family Trusts
            7,464,762(14)
            7.9%MicroCapital
                LLC
              623
                Fifth Avenue, Suite 2502
              New
                York, NY 10022
            4,995,700(15)
            5.1%All
                Directors and Officers as a group
              (7
                persons)
            8,565,165(16)
            8.7%





*
      Indicates ownership of less than 1.0%





(1)  Based
      on
      94,591,625 shares of common stock outstanding as of March 24, 2006, plus each
      person’s currently exercisable warrants and/or options.




(2)  Director
      and officer.




(3)  Director.




(4)  Officer.




(5)  Consists
      of 877,403 shares of common stock and 2,391,663 shares of common stock issuable
      upon the exercise of currently exercisable stock options.




(6)  Consists
      of 353,050 shares of common stock and 2,232,740 shares of common stock issuable
      upon the exercise of currently exercisable stock options.




(7)  Consists
      of 350,000 shares of common stock, and 100,000 shares of common stock issuable
      upon the exercise of currently exercisable stock options.




(8)  Consists
      of 100,000 shares of common stock issuable upon the exercise of currently
      exercisable stock options.




(9)  Consists
      of 87,500 shares of common stock issuable upon the exercise of currently
      exercisable stock options.




(10)  Consists
      of 175,785 shares of common stock and 822,902 shares of common stock issuable
      upon the exercise of currently exercisable stock options.




62


(11)  Consists
      of 205,537 shares of common stock and 868,585 shares of common stock issuable
      upon the exercise of currently exercisable stock options.




(12)  Consists
      of 3,325,000 shares of common stock and 6,000,000 shares of common stock
      issuable upon the exercise of currently exercisable warrants. MG Advisors,
      L.L.C. (“MG”) is the general partner of and investment adviser to the Special
      Situations Private Equity Fund, L.P., (“Private Equity Fund”). Austin W. Marxe
      and David M. Greenhouse are the principal owners of MG and are principally
      responsible for the selection, acquisition and disposition of the portfolio
      securities by MG on behalf of the Private Equity Fund.




(13)  Consists
      of 2,558,476 shares of common stock, 533,206 shares of common stock issuable
      upon the exercise of currently exercisable stock options and 1,564,757 shares
      of
      common stock issuable upon the exercise of currently exercisable
      warrants.




(14)  Consists
      of 4,526,944 shares of common stock and 2,937,818 shares of common stock
      issuable upon the exercise of currently exercisable warrants held by various
      family trusts. The trustees of these various family trusts are U.S. Trust
      Company of New York, 114 W. 47 th St,
      8 th Floor,
      New York, NY 10036 with respect to family trusts holding 6,762,060 shares of
      common stock (including shares of common stock issuable upon the exercise of
      warrants) and Stuart M. Benjamin, 4302 Peachway Drive, Durham, NC 27705 with
      respect to family trusts holding 702,702 shares of common stock (including
      shares of common stock issuable upon the exercise of warrants).




(15)  Consists
      of 1,392,757 shares of common stock and 2,000,000 shares of common stock
      issuable upon the exercise of warrants held by MicroCapital Fund LP, 602,943
      shares of common stock and 1,000,000 shares of common stock issuable upon the
      exercise of warrants held by MicroCapital Fund Ltd. MicroCapital LLC is a
      registered investment adviser for MicroCapital Fund LP, MicroCapital Fund Ltd.
      and Price Trust UTA Dated 10/5/84. Ian P. Ellis controls MicroCapital LLC by
      virtue of being its Managing Member and a majority owner




(16)  Consists
      of 1,961,775 shares of common stock, and 6,603,390 shares of common stock
      issuable upon the exercise of currently exercisable stock options.





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





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
                13.**
            **EXHIBITS**





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





63


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, 2005 and
                2004


·
            Consolidated
                Statements of Operations for the years ended December 31, 2005 and
                2004
                and for the period from March 14, 1992 (inception) to December 31,
                2005


·
            Consolidated
                Statements of Stockholders’ Equity/(Deficit) for the years ended December
                31, 2005 and 2004 and for the period from March 14, 1992 (inception)
                to
                December 31, 2005


·
            Consolidated
                Statements of Cash Flows for the years ended December 31, 2005 and
                2004
                and for the period from March 14, 1992 (inception) to December 31,
                2005


·
            Notes
                to Consolidated Financial Statements for the years ended December
                31, 2005
                and 2004 and for the period from March 14, 1992 (inception) to December
                31, 2005





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.





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**
              **Description**3.1
              Certificate
                  of Incorporation, filed as Exhibit C to the Company Proxy Statement
                  on
                  Schedule 14A filed on February 23, 1999 (the "Proxy Statement"),
                  and hereby incorporated 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
                  hereby incorporated 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 hereby incorporated by reference.3.2
              Company
                  Bylaws, filed as Exhibit D to the February 1999 Proxy Statement
                  and hereby
                  incorporated 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 hereby incorporated 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 hereby incorporated
                  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 hereby incorporated
                  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 hereby incorporated 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 hereby incorporated
                  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 hereby incorporated
                  by reference.
  64
  
 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
                  hereby incorporated 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 hereby incorporated 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 hereby incorporated
                  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 hereby
                  incorporated 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 hereby incorporated 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 hereby incorporated 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 hereby incorporated 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 hereby incorporated by
                  reference.10.9
              Consulting
                  Agreement with Prism Ventures LLC, dated September 10, 2002 filed
                  as
                  Exhibit 10.12 to the Company’s Annual Report on Form 10-KSB for the year
                  ended December 31, 2003 filed on March 19, 2004 (the “2003 10-KSB”), and
                  hereby incorporated by reference.10.10
              Consulting
                  Agreement with Equity Communications, LLC, dated June 20, 2003,
                  along with
                  amendment dated December 15, 2003, and hereby incorporated by reference.10.11
              Employment
                  Agreement, dated November 1, 2004, between Applied NeuroSolutions,
                  Inc.
                  and John F. DeBernardis, and hereby incorporated by
                  reference.10.12
              Employment
                  Agreement, dated November 1, 2004, between Applied NeuroSolutions,
                  Inc.
                  and Daniel J. Kerkman, and hereby incorporated by
                  reference.10.13
              Employment
                  Agreement, dated November 1, 2004, between Applied NeuroSolutions,
                  Inc.
                  and David Ellison, and hereby incorporated by
                  reference.10.14
              License
                  Agreement, dated December 13, 2004, between Applied NeuroSolutions,
                  Inc.
                  and bioMérieux, SA, and hereby incorporated by
                  reference.10.15
              Amendment
                  “A”, dated December 30, 2003, to Consulting Agreement with Equity
                  Communications, LLC, dated June 20, 2003 filed as Exhibit 10.11
                  to the
                  Company’s 2003 10-KSB and hereby incorporated by
                  reference.10.16
              Purchase
                  Agreement, dated as of January 28, 2004, by and between the Company
                  and
                  Special Situations Private Equity Fund L.P., filed as Exhibit 4.1
                  to the
                  Company's Current Report on Form 8-K, SEC File No. 001-13835, filed
                  on
                  February 13, 2004 (“February 2004 8-K”), and hereby incorporated by
                  reference.
  65
  
 10.17
              Form
                  of Unit Purchase Agreement, filed as Exhibit 4.2 to the February
                  2004 8-K,
                  and hereby incorporated by reference.10.18
              Bridge
                  Loan Holder Consent, filed as Exhibit 4.3 to the February 2004
                  8-K, and
                  hereby incorporated by reference.10.19
              Form
                  of Registration rights Agreement, filed as Exhibit 4.4 to the Company's
                  February 2004 8-K, and hereby incorporated by
                  reference.10.20
              Form
                  of Warrant, filed as Exhibit 4.5 to the Company's February 2004
                  8-K, and
                  hereby incorporated by reference.10.21
              Placement
                  Agent Warrant, filed as Exhibit 4.6 to the Company's February 2004
                  8-K,
                  and hereby incorporated by reference.14
              Code
                  of Ethics*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 hereby incorporated 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 hereby incorporated
                  by
                  reference.21
              Subsidiaries
                  of the Company. *23.1
              Consent
                  of Virchow, Krause & Company,
                  LLP.*
 
 *
        Exhibit
        filed herewith.
 
 
 (b)
        Reports on Form 8-K filed by the Company during the last quarter covered
        by this
        Report.
 
 A
        report
        on Form 8-K was filed in October 2005 concerning the appointment of a Robert
        S.
        Vaters as a director.
 
 A
        report
        on Form 8-K was filed in December 2005 concerning the signing of a renewal
        of
        consulting agreements with Dr. Peter Davies.
  66





67


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





The
      following is a summary of the fees billed to us by Virchow, Krause &
Company, LLP (2005 and 2004) and KPMG LLP (2005 and 2004) for professional
      services rendered for the fiscal years ended December 31, 2005 and
      2004:


Fiscal
                  2005
              Fiscal
                  2004Fee
                  Category
              Fees
              FeesAudit
                  Fees
              $71,980
              $54,519Audit
                  Related Fees
              8,350
              22,000Tax
                  Fees
              -
              -All
                  Other Fees
              -
              -Total
                  Fees
              $80,330
              $76,519




*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 (and were previously provided by KPMG 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. These services include preparation of federal and state income tax
      returns.





*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 audit,
      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 2005 and 2004 were pre-approved by
      the
      Audit Committee.




68


**EXHIBIT
      21**





**SUBSIDIARIES
      OF APPLIED NEUROSOLUTIONS, INC.**








None.
      During 2004, we dissolved our two subsidiaries, Molecular Geriatrics Corporation
      and Hemoxymed Europe, SAS and their assets were transferred to us.


69


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:
      April 24, 2006


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.





April
      24,
      2006      By: /s/
      John F. DeBernardis


John
      F.
      DeBernardis


President,
      Chief Executive Officer


&
      Director


(Principal
      Executive Officer)





April
      24,
      2006      By: /s/
      David Ellison


David
      Ellison


Chief Financial Officer


(Principal Financial and


Accounting Officer)








April
      24,
      2006      By: /s/
      Bruce N. Barron


Bruce N. Barron


Chairman & Director











April
      24,
      2006      By: /s/
      Michael Sorell


Michael
      Sorell


Director








April
      24,
      2006      By: /s/
      Jay B. Langner


Jay B. Langner


Director





April
      24,
      2006      By: /s/
      Robert S. Vaters


Robert S. Vaters


Director






70