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, 2004

                                       OR

[ ]   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 (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 is not  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. [ ]

State issuer's revenues for its most recent fiscal year: $253,000

As of March 18, 2005, the aggregate market value of voting common stock  held by
non-affiliates   of  the  Registrant   (66,076,635   shares)  was  approximately
$19,000,000. The aggregate market value was computed by reference to the "Close"
price of such common equity as of that date.

As of March  18,  2005,  the  issuer  had  91,013,552  shares  of  Common  Stock
outstanding.

<PAGE>

                                      INDEX

<TABLE>
<CAPTION>
                                                                                                          Page
<S>              <C>                                                                                      <C>
PART I
    Item 1.      Description of business....................................................................1
    Item 2.      Description of property...................................................................18
    Item 3.      Legal proceedings.........................................................................18
    Item 4.      Submission of matters to a vote of security holders.......................................18

PART II
    Item 5.      Market for common equity and related stockholder matters..................................19
    Item 6.      Management's discussion and analysis or plan of operation.................................21
    Item 7.      Financial statements......................................................................31
    Item 8.      Changes in and disagreements with accountants on accounting and financial disclosure........
                                                                                                           55
    Item 8a.     Controls and procedures...................................................................55
    Item 8b.     Other information.........................................................................56

PART III
    Item 9.      Directors, executive officers, promoters and control persons; compliance with
                 section 16(a) of the exchange act ........................................................56
    Item 10.     Executive compensation....................................................................58
    Item 11.     Security ownership of certain beneficial owners and management............................60
    Item 12.     Certain relationships and related transactions............................................62
    Item 13.     Exhibits..................................................................................63
    Item 14.     Principal accountant fees and services....................................................66

SIGNATURES                                                                                                 70
CERTIFICATIONS                                                                                             71
</TABLE>


                                        i
<PAGE>

                                     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 a diagnostic  test to detect,  and novel  therapeutics  to treat,
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 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 raised
gross proceeds of $8,000,000  ($7,354,054  net of commissions and legal fees) in
February 2004 to advance our various programs, including clinical development of
our most advanced  programs.  We have experienced  significant  operating losses
since our inception.  As of December 31, 2004, we had an accumulated  deficit of
approximately  $38.6 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.

      In December  2004, we announced a  non-exclusive  license  agreement  with
bioMerieux,  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  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  grants  bioMerieux an option to further evaluate
our technology before it elects to continue the agreement.

      We expect to begin in 2005 the clinical  testing for our lead  product,  a
cerebrospinal fluid ("CSF") based diagnostic test to detect whether a person has
AD. It is anticipated that the Premarket Approval Application ("PMA") process,


                                       1
<PAGE>

including the final clinical study,  will commence in the third quarter of 2005.
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.

      We are also involved in the discovery and  development of  therapeutics to
treat 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  that may
represent the first therapy able to stop the progression of AD.


      We  have  also  been  involved  in the  development  of a  novel  platform
technology  for  increasing  the amount of oxygen  carried to the body's tissues
using  either a  patient's  own red blood  cells or banked  blood.  In 2004,  we
decided  to  suspend  development  of this  technology  and may  seek to sell or
license out this technology.

      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 an exclusive  license 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


                                       2
<PAGE>

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.


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 75-80%,  however,  some AD
centers claim  accuracy of diagnosing AD in 85% of the cases they see.  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.

      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 2,900 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  publication  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%.

      While results  included in the above noted  pre-clinical  studies  suggest
that our phosphotau assay may represent an excellent  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.

      In January  2003, we announced  that we entered into a Research  Agreement
with Pfizer  under which the Company is  performing  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, we entered into
a third  contract  research  agreement.  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


                                       3
<PAGE>

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
bioMerieux,  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
grants  bioMerieux  an option to further  evaluate our  technology  before going
forward.

      We are about to begin the  clinical  testing for our  cerebrospinal  fluid
(CSF)  based  diagnostic  test to detect  AD. It is  anticipated  that the final
clinical study will commence in the third quarter of 2005.

      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 are in discussions  with a reference  laboratory for distribution of
its diagnostic under a CLIA arrangement.

      Our second approach to meeting the need for a biochemical marker to detect
AD  revolves  around  the  detection  in serum of  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

      Our long-range goal is to discover and develop novel therapeutics to treat
AD.  Work is being  conducted  utilizing  an  in-vitro  screen  Dr.  Davies  has
developed that could lead to the discovery of the first  therapeutic to stop the
progression of Alzheimer's  disease.  The basis for this screen is the discovery
of a  pathway  that is  common to the  development  of both the  neurofibrillary
tangles and amyloid  plaques.  The screen has been designed to intervene in this
common  pathway,  potentially  halting the  progression  of AD. To date this new
screen has been utilized to examine a library of natural product  extracts.  The
screening  activity has resulted in the  discovery of a number of extracts  that
are active in the screen.  These extracts  represent the first "hits" identified
by the screen. Additional, secondary screens to prove validation are in progress
and are expected to be completed by the end of the second quarter of 2005. Based
on the completion of the next phase of the discovery process,  it is anticipated
that a lead compound can be chosen for pre-clinical evaluation within one year.

      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  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 $1 billion annually.


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 new transgenic  mice could be used for testing the efficacy of therapeutic


                                       4
<PAGE>

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 their percentage of ownership.  The terms
of our agreement with NKI with respect to the transgenic  mice were finalized in
March 2005.


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 most likely, we expect to seek a joint marketing partner
to assist us with this function.

      Under our agreement with bioMerieux,  if bioMerieux 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 $1,546,000 in 2004, $1,828,000 in 2003, and $1,682,000 in
2002 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  $130,000 to $150,000 per
month on  research  and  development  activities.  This  excludes  the 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,  when we
begin 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  bioMerieux,  if bioMerieux
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.

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.


                                       5
<PAGE>

      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,  develop
proprietary products, attract and retain scientific personnel,  obtain patent or
other protection for its 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 $2,000 to $10,000).

      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 its  review of  published
articles in  scientific  journals.  Recent  articles  indicate  that tests being
developed by these  companies and others are unable to 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.

      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 screens.

      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  biotechnology
companies   will  not  render  our   products   or   technologies   obsolete  or
noncompetitive  or  that  we will  be  able  to  keep  pace  with  technological


                                       6
<PAGE>

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. Patent Cooperation Treaty (P.C.T.) applications have been filed abroad.

      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 have recently had a very preliminary  discussion with Innogenetics
concerning some form of a potential business relationship.


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
                           ----                        ------

                           2005                       $375,000
                           2006                        425,000
                           2007                        475,000
                           2008                        500,000


                                       7
<PAGE>

      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  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.

      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.


                                       8
<PAGE>

      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 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 submitted preliminary  information to the FDA (step 1 above)
in August 2004. An IDE  submission  for approval  (step 2 above) would follow in
the second  quarter of 2005,  while the  clinical  study (step 3 above) would be
completed within eight to twelve months after the IDE 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.

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.

Employees

      As of March 18, 2005, we had eight 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.


                                       9
<PAGE>

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  cerebral  spinal 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, 2004, we had an accumulated deficit of approximately $38.6 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  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.


We may not be able to obtain  financing  in the future or we may only be able to
obtain financing 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:

o     continued  scientific  progress in the  research  and  development  of our
      technologies;
o     our ability to establish  and  maintain  collaborative  arrangements  with
      others for product development;
o     progress with pre-clinical and clinical trials;
o     the time and costs involved in obtaining regulatory approvals;
o     the costs  involved in preparing,  filing,  prosecuting,  maintaining  and
      enforcing patent claims;
o     competing technological and market developments;
o     changes in our existing research relationships; and
o     effective product commercialization activities and arrangements.

We  anticipate  that our cash  balances as of December  31,  2004,  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 April 30, 2006. We will need
additional funding during the second quarter of 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.

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.


                                       10
<PAGE>

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 1 to 2 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
set backs often include:

o     Failure to comply  with the  regulations  applicable  to such  testing may
      delay, suspend or cancel our clinical trials,
o     The FDA might not accept the test results,
o     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
o     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
o     The data derived from clinical  trials may be unsuitable for submission to
      the FDA or other regulatory agencies.

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:

o     product recalls or seizures;
o     fines and penalties;
o     injunctions;
o     criminal prosecution;
o     refusals to approve new products and withdrawal of existing approvals; and
o     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,  if we  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.


                                       11
<PAGE>

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 seven patent
applications filed, three have Alzheimer's diagnostic  applications,  three 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.

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
have recently had a very  preliminary  discussion with  Innogenetics  concerning
some form of a potential business relationship.


                                       12
<PAGE>

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.


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 have begun to search for 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.


                                       13
<PAGE>

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 until February
1, 2006, and we have employment agreements with Dr. DeBernardis, Daniel Kerkman,
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.

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


                                       14
<PAGE>

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:

      o     performing various activities  associated with pre-clinical  studies
            and clinical trials
      o     preparing submissions seeking regulatory approvals
      o     manufacture of kits and solutions
      o     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:

      o     we are not able to locate acceptable contractors to run this portion
            of our clinical trials
      o     we can not enter into favorable agreements with them
      o     third  parties  may not  successfully  carry out  their  contractual
            duties
      o     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


                                       15
<PAGE>

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:

      o     patient population size
      o     the nature of the protocol to be used in the trial
      o     patient proximity to clinical sites
      o     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.

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. It is uncertain when
we will file a Pre-IDE for our  serum-based  diagnostic  test. We have not filed
any  New  Drug  Applications  ("NDA")  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:

      o     fines
      o     suspension of regulatory approvals
      o     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.


                                       16
<PAGE>

Our stock price may  fluctuate  significantly  due to reasons  unrelated  to our
operations, our products or our financial results

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 2003 and 2004 fiscal  years and the two month  period
ended February 28, 2005, the highest price of our stock was $0.59 and the lowest
price of our stock during the same period was $0.10.

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 18,  2005,  the Company  has  outstanding  approximately  90,700,000
shares of Common Stock, without giving effect to shares of Common Stock issuable
upon  exercise of (i) warrants  issued in the February 2004  Offering,  (ii) the
Placement  Agent's  warrants,  (iii) options  granted under the Company's  stock
option  plan and (iv) 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 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.


                                       17
<PAGE>

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,  2006.  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.


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 $120,000. We believe
that we can acquire additional space, if needed, on acceptable terms.

      Prior to 2004,  we leased  approximately  2,000 square feet of  laboratory
space in Lyon,  France at an annual  rental of 12,715  Euros,  or  approximately
$16,000.  The lease ended on December 31, 2003. We exited this laboratory  space
in France in early 2004.

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.


                                       18
<PAGE>

                                     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, 2003
through  December 31, 2004, 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
2003:
   First quarter.................................       $   0.30     $   0.10
   Second quarter................................           0.25         0.10
   Third quarter.................................           0.32         0.15
   Fourth quarter................................           0.44         0.22

2004:
   First quarter.................................       $   0.59     $   0.24
   Second quarter................................           0.34         0.20
   Third quarter.................................           0.23         0.15
   Fourth quarter................................           0.38         0.14


      As of March 18,  2005,  we had  approximately  600  record  holders of our
common stock.

      No dividends were paid in 2003 and 2004.  There are no restrictions on the
payment of  dividends.  We do not intend to pay  dividends  for the  foreseeable
future.

      The  securities  of APNS that were  issued or sold by us,  since March 15,
2001 and were not  registered  with the SEC are  described  below.  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.

      In January 2004, we issued 200,000 warrants to Equity  Communications LLC,
in lieu of compensation, for investor relations and business consulting services
valued at $42,705. These warrants have an exercise price of $0.20 per share, and
expire in  January  2009.  The  Company's  issuance  of the  warrants  to Equity
Communications  was made  pursuant to an  exemption  under  Section  4(2) of the
Securities Act of 1933.

      In February 2004, we issued to accredited  investors  32,000,000 shares of
common stock and five year warrants to purchase an additional  32,000,000 shares
of our common stock for $0.30 per share for $8,000,000  ($7,340,000 proceeds net
of commissions and legal fees). Upon closing the private  placement,  accredited
investors holding  convertible bridge loans,  converted those loans plus accrued
interest at  conversion  rate of $0.25 per share and 1.1 warrants into shares of
our common stock and  warrants.  We issued to those  accredited  investors  upon
conversion of the  convertible  debt  10,440,714  shares of our common stock and
11,484,795  five-year  warrants to purchase  shares of our common stock at $0.30
per share.  In connection with this  transaction,  we also paid to the placement
agent, and selected  dealers,  commissions of $560,000 in cash and issued to the
placement agent, and selected dealers,  five-year warrants to purchase 3,200,000
shares of our common stock at $0.30 per share.


                                       19
<PAGE>

      In February  2004,  we issued  400,000  shares of common stock and 400,000
warrants to Sunrise Securities, in lieu of compensation,  for financial advisory
and business  consulting  services  valued at $269,426.  These  warrants have an
exercise  price of $0.30 per share,  and expire in February  2009. The Company's
issuance of the shares of common stock and the warrants to these consultants was
made pursuant to an exemption under Section 4(2) of the Securities Act of 1933.

      In February  2004,  we issued  100,000  shares of common  stock to Virtual
Concepts,  in  lieu  of  compensation,   for  financial  advisory  and  business
consulting  services valued at $40,000.  The Company's issuance of the shares of
common stock to Virtual Concepts was made pursuant to an exemption under Section
4(2) of the Securities Act of 1933.

      In November  2004, we issued  100,000  shares of common stock to Dr. Peter
Davies,  our  founding  scientist,  in  lieu  of  compensation,  for  scientific
consulting  services valued at $25,000.  The Company's issuance of the shares of
common stock to Dr. Davies was made pursuant to an exemption  under Section 4(2)
of the Securities Act of 1933.

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.

      The following table summarizes  outstanding options under our Stock Option
Plan as of December 31, 2004.  Options  granted in the future under the Plan are
within the  discretion of our  Compensation  Committee  and therefore  cannot be
ascertained at this time.

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
                                            (a)                      (b)                       (c)
                                                                                      Number of Securities
                                                                                     Remaining Available for
                                                                                      Future Issuance Under
                                  Number of Securities to     Weighted-Average         Equity Compensation
                                  be Issued Upon Exercise     Exercise Price of    Plans (excluding securities
         Plan Category            of Outstanding Options     Outstanding Options    Reflected in column (a))
---------------------------------------------------------------------------------------------------------------
<S>                               <C>                        <C>                   <C>
Equity compensation plans
approved by security holders           10,039,636                    $0.19                  1,960,364
---------------------------------------------------------------------------------------------------------------

Equity compensation plans
not approved by security
holders                                       -0-                    N/A                         -0-
---------------------------------------------------------------------------------------------------------------

                 Total                 10,039,636                    $0.19                 1,960,364
---------------------------------------------------------------------------------------------------------------
</TABLE>

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


                                       20
<PAGE>

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:

      o     CSF-Based  Diagnostic - We are about 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.  It is  anticipated  that the PMA
            process,  including the final clinical  study,  will commence in the
            third quarter of 2005.

      o     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. 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.  This
            diagnostic,  based upon the  detection of an immune  response to the
            development of AD associated  proteins in the blood, has achieved an
            overall sensitivity and specificity in the mid-70% range. We believe
            that because of the  convenience of testing blood,  this  diagnostic
            has the  potential  to  become a  screening  test  with  very  broad
            application.

      o     AD Therapeutic  Compound  Screening  Assay - We are also involved in
            the discovery and development of  therapeutics to treat  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
            that may represent the first therapy able to stop the progression of
            AD.  This  screening  assay  targets a component  of the  biological
            pathway  that  leads  to the  development  of the two  principal  AD
            pathologies,  neurofibrillary  tangles  and  amyloid  plaques.  More
            importantly,  the assay allows 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.  We
            hope to select a lead compound for  pre-clinical  testing within one
            year.

      o     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 incurred  research  and  development  costs of  $1,545,469  in 2004 and
$1,486,365 in 2003,  excluding  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,
2004,  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 April
30, 2006. We will need  additional  funding during the second quarter of 2006 to


                                       21
<PAGE>

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.  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, 2004, we had cash of $3,565,590.  These funds should be
sufficient to satisfy our cash requirements through March 2006. The cash on hand
will be used for ongoing research and development,  working capital, advancement
of the CSF-based  diagnostic into the FDA regulatory process,  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 2005. We do not anticipate any significant changes
in our employee count during 2005.

Plan of Operation

      Due to the  successful  completion of the financing in February  2004, the
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 the initial  priority  will be to focus on the
projects  in the  pipeline  that are  closest to  commercialization.  Thus,  our
initial  concentration  will be on advancing  the  commercialization  of the CSF
diagnostic to detect AD.

      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  program  utilizing  the  in-vitro  screen,
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
bioMerieux,  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  grants  bioMerieux an option to
further evaluate our technology before going forward.

      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.

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  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


                                       22
<PAGE>

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 its 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.

      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, 2004 Compared to Year Ended December 31, 2003


                                       23
<PAGE>

Revenues

      The Company recognized $253,000 of revenues in 2004 from the completion of
one research agreement and miscellaneous  revenues.  No revenues were recognized
in 2003.

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, 2004
decreased 15% or $282,127 from  $1,828,285 for the year ended December 31, 2003,
to $1,546,158  for the year ended  December 31, 2004.  Below is a summary of our
most significant research and development expenses:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
                                                                                                         Increase
---------------------------------------------------------------------------------------------------------------------
                                Expense                                       2004          2003        (Decrease)
                                -------                                       ----          ----        ----------
---------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>            <C>            <C>
Compensation, taxes and benefits                                              $773,932       $600,879       $173,053
---------------------------------------------------------------------------------------------------------------------
Research funding and consulting                                                472,290        571,210       (98,920)
---------------------------------------------------------------------------------------------------------------------
French subsidiary expense                                                      193,117        178,608         14,509
---------------------------------------------------------------------------------------------------------------------
Rent, telephone and utilities                                                  105,338        105,294             44
---------------------------------------------------------------------------------------------------------------------
Variable accounting for stock options                                              689        270,455      (269,766)
---------------------------------------------------------------------------------------------------------------------
Expense for stock options and other equity instruments issued                        -         71,465       (71,465)
---------------------------------------------------------------------------------------------------------------------
Other research and development expenses, net of reimbursements                     792         30,374       (29,582)
                                                                                   ---         ------       --------
---------------------------------------------------------------------------------------------------------------------
Total Research and Development Expenses                                     $1,546,158     $1,828,285     ($282,127)
                                                                            ==========     ==========     ==========
---------------------------------------------------------------------------------------------------------------------
</TABLE>

      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 2004, was
non-cash  compensation expense of $689 for variable accounting for stock options
compared  to $270,455 in 2003.  The  decrease  was also caused by an expense for
equity instruments issued in 2003 of $71,465. None were issued in 2004. Research
funding and consulting  decreased due to the end of a research agreement in 2003
with University of British Columbia, that was partially offset by a full year of
regulatory  consulting  fees in 2004. This decrease was offset by an increase in
compensation and related costs due to an increase in scientific  headcount,  one
added in September 2003 and one added in February 2004, plus higher than typical
compensation  increases  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. French subsidiary  expense increased in 2004 due to the costs to
terminate  the  activities  of the  French  subsidiary.  There  will be no costs
related to the French subsidiary going forward. Our management estimates that it
has been expending approximately $130,000 to $150,000 per month for research and
development activities.  This excludes the effect of variable accounting for its
equity instruments. This amount is anticipated to increase substantially in 2005
as our CSF-based  diagnostic  assay  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.



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, 2004 increased 21% or $287,469,  from $1,364,446 for the year
ended  December  31, 2003 to  $1,651,915  for the year ended  December 31, 2004.
Below is a summary of our most significant general and administrative expenses:


                                       24
<PAGE>

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
                                                                                                         Increase
---------------------------------------------------------------------------------------------------------------------
                                Expense                                       2004          2003        (Decrease)
                                -------                                       ----          ----        ----------
---------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>            <C>             <C>
Compensation, taxes and benefits                                              $512,815       $444,759        $68,056
---------------------------------------------------------------------------------------------------------------------
Consulting                                                                     354,804         63,500        291,304
---------------------------------------------------------------------------------------------------------------------
Professional fees                                                              332,005        135,983        196,022
---------------------------------------------------------------------------------------------------------------------
Rent, telephone and utilities                                                   47,729         43,502          4,227
---------------------------------------------------------------------------------------------------------------------
Variable accounting for stock options                                              849        333,645      (332,796)
---------------------------------------------------------------------------------------------------------------------
Expense for stock options and other equity instruments issued                        -          9,509        (9,509)
---------------------------------------------------------------------------------------------------------------------
Expense for warrants issued and converted to shares of stock                   234,202        193,130         41,072
---------------------------------------------------------------------------------------------------------------------
Amortization of deferred financing fee                                           6,458        104,542       (98,084)
---------------------------------------------------------------------------------------------------------------------
Other general and administrative expenses                                      163,053         35,876        127,177
                                                                               -------         ------        -------
---------------------------------------------------------------------------------------------------------------------
Total General and Administrative Expenses                                   $1,651,915     $1,364,446       $287,469
                                                                            ==========     ==========       ========
---------------------------------------------------------------------------------------------------------------------
</TABLE>

      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 2004,
was  non-cash  compensation  expense of $849 for variable  accounting  for stock
options compared to a $333,645 charge in 2003.  Financing fees were paid in 2003
and were being  amortized over the life of the related  convertible  debt.  This
resulted in amortization  expense of $6,458 in 2004 and $104,542 in 2003.  These
decreases were offset by an increase in consulting expense due to a full year of
consulting  agreements  in 2004,  additional  consultants  added  in  2004,  and
approximately  $200,000 of equity  compensation  given to  consultants  in 2004.
Professional  fees increased in 2004 due to additional legal and accounting fees
for additional  filings in 2004 and assistance with  negotiations with corporate
partners.  Patent costs increase due to a freedom to operate study  performed by
our patent counsel and increased  intellectual property activity.  Compensation,
taxes and benefits increased due to higher than typical  compensation  increases
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. Other general
and  administrative  expenses  increased  in  2004,  primarily  due to a  market
research  project in 2004 and the correction in 2003 of prior year  overaccruals
in  franchise   taxes.   Management   estimates   that  it  has  been  expending
approximately  $60,000 to  $100,000  per month for  general  and  administrative
activities,  not  including  the effects of variable  accounting  for its equity
instruments  and other non-cash equity  expenses.  This amount is anticipated to
remain steady in 2005.

Other income and expense

      Interest  expense for the year ended  December 31, 2004  decreased  85% or
$92,960,  from $109,041 for the year ended December 31, 2003, to $16,081 for the
year ended December 31, 2004.  The decrease is primarily due to higher  interest
expense  associated  with  convertible  investor  bridge loans in 2003 that were
converted  to equity in February  2004 as part of the February  2004  financing.
Interest  income was $36,986 in 2004 due to earnings on excess cash  balances in
savings accounts after the February 2004 financing, and was negligible in 2003.

      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


                                       25
<PAGE>

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.  Our
assets and liabilities denominated in foreign currencies are immaterial.

Net loss

      We incurred a net loss of $2,800,526  for the year ended December 31, 2004
compared to a net loss of $3,301,420  for the year ended  December 31, 2003. The
primary  reason  for the  decrease  in the net  loss  in 2004  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.  The expense for variable  accounting  for stock
options decreased $602,562, from $604,100 in 2003 to $1,538 in 2004.

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

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, 2003
increased 9% or $145,876 from  $1,682,409  for the year ended December 31, 2002,
to $1,828,285  for the year ended  December 31, 2003.  Below is a summary of our
most significant research and development expenses:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
                                                                                                         Increase
---------------------------------------------------------------------------------------------------------------------
                                Expense                                       2003          2002        (Decrease)
                                -------                                       ----          ----        ----------
---------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>            <C>           <C>
Compensation, taxes and benefits                                              $600,879       $630,440      ($29,561)
---------------------------------------------------------------------------------------------------------------------
Research funding and consulting                                                571,210        825,663      (254,453)
---------------------------------------------------------------------------------------------------------------------
French subsidiary expense                                                      178,608         20,736        157,872
---------------------------------------------------------------------------------------------------------------------
Rent, telephone and utilities                                                  105,294        104,114          1,180
---------------------------------------------------------------------------------------------------------------------
Variable accounting for stock options                                          270,455              -        270,455
---------------------------------------------------------------------------------------------------------------------
Expense for stock options and other equity instruments issued                   71,465         68,540          2,925
---------------------------------------------------------------------------------------------------------------------
Other research and development expenses, net of reimbursements                  30,374         32,916        (2,542)
                                                                                ------         ------        -------
---------------------------------------------------------------------------------------------------------------------
Total Research and Development Expenses                                     $1,828,285     $1,682,409       $145,876
                                                                            ==========     ==========       ========
---------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       26
<PAGE>

      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 2003, was
non-cash  compensation  expense of $270,455  for variable  accounting  for stock
options  compared  to no charge in 2002.  The  increase  was also  caused by the
inclusion of our French subsidiary's  operating expenses for a full year in 2003
following the merger of the Company and MGC in the third  quarter of 2002.  This
increase was offset by a decrease in costs related to ongoing  research with our
licensor  (AECOM)  in 2003.  The  agreements  with  AECOM  were  amended in 2002
resulting in additional  collaborator  funding in 2002. Our management estimates
that it has been  expending  approximately  $130,000 to  $150,000  per month for
research  and  development  activities.  This  excludes  the effect of  variable
accounting  for its equity  instruments.  This amount is anticipated to increase
substantially  in 2004 as our  CSF-based  diagnostic  assay  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.

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, 2003 increased 16% or $190,765,  from $1,173,681 for the year
ended  December  31, 2002 to  $1,364,446  for the year ended  December 31, 2003.
Below is a summary of our most significant general and administrative expenses:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
                                                                                                         Increase
---------------------------------------------------------------------------------------------------------------------
                                Expense                                       2003          2002        (Decrease)
                                -------                                       ----          ----        ----------
---------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>            <C>            <C>
Compensation, taxes and benefits                                              $444,759       $445,920       ($1,161)
---------------------------------------------------------------------------------------------------------------------
Consulting and professional fees                                               199,483        204,385        (4,902)
---------------------------------------------------------------------------------------------------------------------
Rent, telephone and utilities                                                   43,502         46,175        (2,673)
---------------------------------------------------------------------------------------------------------------------
Variable accounting for stock options                                          333,645              -        333,645
---------------------------------------------------------------------------------------------------------------------
Expense for stock options and other equity instruments issued                    9,509        202,019      (192,510)
---------------------------------------------------------------------------------------------------------------------
Expense for warrants issued and converted to shares of stock                   193,130        195,670        (2,540)
---------------------------------------------------------------------------------------------------------------------
Amortization of deferred financing fee                                         104,542              -        104,542
---------------------------------------------------------------------------------------------------------------------
Other general and administrative expenses                                       35,876         79,512       (43,636)
                                                                                ------         ------       --------
---------------------------------------------------------------------------------------------------------------------
Total General and Administrative Expenses                                   $1,364,446     $1,173,681       $190,765
                                                                            ==========     ==========       ========
---------------------------------------------------------------------------------------------------------------------
</TABLE>

      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 2003,
was non-cash  compensation expense of $333,645 for variable accounting for stock
options compared to no charge in 2002.  Financing fees were paid in 2003 and are
being amortized over the life of the related  convertible debt. This resulted in
amortization  expense of $104,542 in 2003. These increases were partially offset
by the decreased expense for stock options and other equity  instruments  issued
from $202,019 in 2002 to $9,509 in 2003.  Patent costs were lower in 2003 due to
a decrease in the number of applications in 2003. Our management  estimates that
it has been expending approximately $60,000 to $70,000 per month for general and
administrative  activities, not including the effects of variable accounting for
its equity  instruments  and other  non-cash  equity  expenses.  This  amount is
anticipated to increase in 2004,  due to an increase in potential  licensing and
general corporate activities.

Other income and expense

      Interest  expense for the year ended  December 31, 2003  increased 388% or
$86,692,  from $22,349 for the year ended December 31, 2002, to $109,041 for the
year ended December 31, 2003.  The increase is primarily due to higher  interest


                                       27
<PAGE>

expense   associated  with  convertible   investor  bridge  loans.  The  average
outstanding  bridge  loan  balance  was  approximately  $1,750,000  in 2003  and
$565,000 in 2002.  Interest  income was  negligible  in 2003 and 2002.  Interest
expense is expected to be minimal in 2004, as all  convertible  investor  bridge
loans, including accrued interest, were converted to equity as of the closing of
the private placement in February 2004.

      APNS currently does not hedge foreign exchange transaction exposures.  The
Company's  assets  and  liabilities   denominated  in  foreign   currencies  are
immaterial.

Net loss

      We incurred a net loss of $3,301,420  for the year ended December 31, 2003
compared to a net loss of $2,929,955  for the year ended  December 31, 2002. The
primary  reason for the  increase  in the net loss in 2003 was the  expense  for
variable  accounting for stock options of $604,100 in 2003.  There was no charge
for variable  accounting for stock options in 2002. This was partially offset by
a  decrease  in  other  expenses  related  to stock  options  and  other  equity
instruments of $189,584,  from $270,559 in 2002 to $80,975 in 2003. In addition,
we incurred  additional  costs of $157,872  due to the  inclusion  of our French
subsidiary's  operating expenses for a full year in 2003 following the merger of
the Company and MGC in the third  quarter of 2002,  and we incurred  $104,542 of
deferred   financing  cost   amortization   related  to  costs  associated  with
convertible  investor  bridge  debt in 2003.  This  was  partially  offset  by a
decrease in expenses in 2003 of $254,453 related to our research at AECOM and at
UBC.

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 million from private
equity and convertible debt financings. We have also received approximately $1.7
million from research agreements and grant revenues.

      Our cash and cash  equivalents were $3,565,590 and $72,765 at December 31,
2004 and 2003,  respectively.  The  increase  in our cash  balance is due to the
remaining proceeds from our financing in February 2004.

      We used cash in  operating  activities  of  $3,554,884  for the year ended
December 31, 2004 versus cash used in operating activities of $1,672,297 for the
year ended December 31, 2003. This increase  primarily reflects the reduction of
liabilities  from the proceeds of our financing in February  2004.  Cash used in
investing  activities  was  negligible  in 2004 and 2003.  Net cash  provided by
financing  activities was $7,066,318 for the year ended December 31, 2004 versus
net cash  provided by  financing  activities  of  $1,550,557  for the year ended
December 31, 2003. This increase 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, 2004 are expected to fund our
operations through April 30, 2006.

      We incurred  research  and  development  costs of  $1,545,469  in 2004 and
$1,486,365 in 2003,  excluding  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,
2004,  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 April
30, 2006. We will need  additional  funding during the second quarter of 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.


                                       28
<PAGE>

      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 the second quarter of 2006
to fund  our  operations.  We  cannot  be  certain  that any  financing  will be
available when needed.  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:

      o     research and development programs;
      o     pre-clinical studies and clinical trials; and
      o     regulatory processes.

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

      o     progress, timing and scope of research and development programs;
      o     progress,  timing and scope of our pre-clinical studies and clinical
            trials;
      o     time and cost necessary to obtain regulatory approvals;
      o     time  and  cost  necessary  to seek  third  party  manufacturers  to
            manufacture our products for us;
      o     time and cost  necessary  to seek  marketing  partners to market our
            products for us;
      o     time and cost  necessary  to  respond  to  technological  and market
            developments;
      o     changes made to, or new developments in, our existing collaborative,
            licensing and other commercial relationships; and
      o     new collaborative, licensing and other commercial relationships that
            we may establish.

Commitments

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

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

      o     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 agreement is in place; and
      o     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:

      o     enter  into  additional   leases  for  new  facilities  and  capital
            equipment;
      o     enter into additional licenses and collaborative agreements; and
      o     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.


                                       29
<PAGE>

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

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
                                 2005           2006           2007          2008           2009
  Contractual Obligations       Year 1         Year 2         Year 3        Year 4         Year 5          Total
---------------------------------------------------------------------------------------------------------------------
<S>                             <S>            <S>             <S>         <S>          <S>              <S>
Operating Leases                $100,425       $102,000        $34,000             -              -      $236,425
---------------------------------------------------------------------------------------------------------------------

Consulting Agreements with
initial terms greater than
one-year                         108,000          9,000              -             -              -       117,000
---------------------------------------------------------------------------------------------------------------------

Commitments Under
License Agreement with
AECOM                            375,000        425,000        475,000       500,000              -      1,775,000
---------------------------------------------------------------------------------------------------------------------
Total Contractual Cash
Obligations                     $583,425       $536,000       $509,000      $500,000              -     $2,128,425
---------------------------------------------------------------------------------------------------------------------
</TABLE>

      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.

Recently issued accounting statements

      In April 2003, the FASB issued SFAS No. 149,  "Amendment of FASB Statement
133 on Derivative Instruments and Hedging Activities." This Statement amends and
clarifies  financial  accounting  and  reporting  for  derivative   instruments,
including   certain   derivative   instruments   embedded  in  other   contracts
(collectively  referred to as derivatives) and for hedging activities under SFAS
No. 133,  "Accounting for Derivative  Instruments and Hedging  Activities." This
Statement  clarifies  under what  circumstances  a contract  with an initial net
investment meets the  characteristic of a derivative  discussed in SFAS No. 133,
clarifies  when  a  derivative  contains  a  financing  component,   amends  the
definition of an  "underlying" to conform it to language used in FIN No. 45, and
amends  certain other existing  pronouncements.  This Statement is effective for
contracts entered into or modified after June 30, 2003.

      In December 2003, the Financial  Accounting  Standards Board (FASB) issued
FASB Interpretation No. 46R,  "Consolidation of Variable Interest Entities" (FIN
46R). FIN 46R states that companies that have exposure to the economic risks and
potential rewards from another entity's assets and activities have a controlling
financial  interest in a variable interest entity should consolidate the entity,
despite the  absence of clear  control  through a voting  equity  interest.  The
consolidation  requirements apply to all special-purpose  entities by the end of
the first  reporting  period  ending after  December 15, 2003.  FIN 46R shall be
applied to all  variable  interest  entities  by the end of the first  reporting
period ending after  December 15, 2004 for  enterprises  that are small business
issuers.  The Company does not expect the adoption of FIN 46R to have a material
effect on its consolidated financial statements.

      In December 2004,  FASB issued SFAS No. 123 (revised  2004),  "Share-Based
Payment",  that focuses  primarily on accounting  for  transactions  in which an
entity obtains  employee  services in  share-based  payment  transactions.  This
statement replaces SFAS No. 123, "Accounting for Stock-Based Compensation",  and
supersedes  APB  Opinion No. 25,  "Accounting  for Stock  Issued to  Employees."
Beginning  with our  quarterly  period that begins  January 1, 2006,  we will be
required to expense the fair value of employee stock options and similar awards.
As a public company,  we are allowed to select from two  alternative  transition
methods,  each having different reporting  implications.  The impact of SFAS No.
123R has not been determined at this time.


                                       30
<PAGE>

ITEM 7. FINANCIAL STATEMENTS


                          APPLIED NEUROSOLUTIONS, INC.
                          (a development stage company)
                              FINANCIAL STATEMENTS


                                    Contents

<TABLE>
<CAPTION>
                                                                                       Page
<S>                                                                                    <C>
Report of Independent Registered Public Accounting Firm..................................32

Report of Independent Registered Public Accounting Firm..................................33

Consolidated Balance Sheets as of December 31, 2004 and 2003.............................34

Consolidated Statements of Operations for the Years Ended December 31, 2004, 2003,
and 2002 and for the Cumulative Period From March 14, 1992 (inception) to December
31, 2004.................................................................................35

Consolidated Statements of Stockholders' Equity/(Deficit) for the Years Ended
December 31, 2004, 2003, and 2002 and for the Cumulative Period From March 14, 1992
(inception) to December 31, 2004.........................................................36

Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003,
and 2002 and for the Cumulative Period From March 14, 1992 (inception) to December
31, 2004.................................................................................38

Notes to Consolidated Financial Statements for the Years Ended December 31, 2004,
2003, and 2002 and for the Cumulative Period From March 14, 1992 (inception) to
December 31, 2004........................................................................40
</TABLE>


                                       31
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Shareholders, Audit Committee and Board of Directors
Applied NeuroSolutions, Inc. and subsidiaries
Vernon Hills, Illinois

We  have  audited  the  accompanying   consolidated  balance  sheet  of  Applied
NeuroSolutions,  Inc.  as of December  31,  2004,  and the related  consolidated
statements of operations,  stockholders' equity/(deficit) and cash flows for the
year then ended. These consolidated  financial statements are the responsibility
of the  company's  management.  Our  responsibility  is to express an opinion on
these consolidated financial statements based on our audit.

We conducted  our audit 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 audit  provides 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, 2004 and the results of their operations
and their cash flows for the year then ended in conformity  with U.S.  generally
accepted accounting principles.

                                             /s/ Virchow, Krause & Company, LLP

Chicago, Illinois
March 18, 2005


                                       32
<PAGE>

             Report of Independent Registered Public Accounting Firm

     The Board of Directors
       Applied NeuroSolutions, Inc.:


      We have audited the  accompanying  consolidated  balance sheets of Applied
      NeuroSolutions, Inc. and subsidiaries (a company in the development stage)
      (the  "Company")  as of  December  31,  2003  and  2002,  and the  related
      consolidated  statements of operations,  stockholders' equity / (deficit),
      and cash  flows  for each of the  years in the  three  year  period  ended
      December  31,  2003  and for the  period  from  March  14,  1992  (date of
      inception)  through  December  31,  2003.  These  consolidated   financial
      statements  are  the  responsibility  of  the  Company's  management.  Our
      responsibility  is to express an opinion on these  consolidated  financial
      statements based on our audits.

      We conducted  our audits in  accordance  with the  standards of the Public
      Company  Accounting  Oversight  Board  (United  States).  Those  standards
      require that we plan and perform the audit to obtain reasonable  assurance
      about whether the financial statements are free of material  misstatement.
      An audit  includes  examining,  on a test basis,  evidence  supporting the
      amounts  and  disclosures  in the  financial  statements.  An  audit  also
      includes   assessing  the  accounting   principles  used  and  significant
      estimates made by management,  as well as evaluating the overall financial
      statement  presentation.  We believe that our audits  provide a reasonable
      basis for our opinion.

      In our opinion,  the consolidated  financial  statements referred to above
      present  fairly,  in all  material  respects,  the  financial  position of
      Applied   NeuroSolutions,   Inc.  and   subsidiaries  (a  company  in  the
      development  stage) as of December  31, 2003 and 2002,  and the results of
      their  operations  and their cash flows for each of the years in the three
      year period ended December 31, 2003 and for the period from March 14, 1992
      (date  of  inception)  through  December  31,  2003,  in  conformity  with
      accounting principles generally accepted in the United States of America.


                                             /s/ KPMG LLP

     Chicago, Illinois
     March 12, 2004


                                       33
<PAGE>

                          APPLIED NEUROSOLUTIONS, INC.
                          (a development stage company)
                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                              December 31,
                                                                       ----------------------------
                                                                           2004            2003
                                                                       ------------    ------------
<S>                                                                    <C>             <C>
Assets
Current assets:
   Cash ............................................................   $  3,565,590    $     72,765
   Accounts receivable .............................................        353,550          50,730
   Prepaids and other current assets ...............................         25,539          52,709
                                                                       ------------    ------------
     Total current assets ..........................................      3,944,679         176,204
                                                                       ------------    ------------

Property and equipment:
   Equipment and leaseholds ........................................      2,102,752       2,084,143
   Accumulated depreciation and amortization .......................     (2,076,670)     (2,063,247)
                                                                       ------------    ------------
     Net property and equipment ....................................         26,082          20,896
                                                                       ------------    ------------

Other assets:
   Deposits ........................................................         15,493          15,133
   Deferred financing costs ........................................             --           6,458
                                                                       ------------    ------------
     Total other assets ............................................         15,493          21,591
                                                                       ------------    ------------

        Total assets ...............................................   $  3,986,254    $    218,691
                                                                       ============    ============

Liabilities and Stockholders' Equity / (Deficit)
Current liabilities:
   Accounts payable ................................................   $    108,007    $    301,308
   Loans payable ...................................................             --       2,673,991
   Capital lease payable, current portion ..........................          4,385           3,736
   Deferred research agreement revenues ............................        450,000         275,000
   Accrued wages ...................................................             --         293,310
   Accrued collaborator payments ...................................             --         253,667
   Accrued consultant fees .........................................         36,300         235,100
   Accrued vacation wages ..........................................         45,171          49,926
   Other accrued expenses ..........................................         77,709         280,387
                                                                       ------------    ------------
     Total current liabilities .....................................        721,572       4,366,425
                                                                       ------------    ------------

Long term liabilities:
   Capital lease payable, net of current portion ...................          1,211           5,596
                                                                       ------------    ------------
     Total long term liabilities ...................................          1,211           5,596
                                                                       ------------    ------------

Stockholders' equity / (deficit):
   Preferred stock, par value $0.0025: authorized shares, 5,000,000;
     none issued and outstanding ...................................             --              --
                                                                       ------------    ------------
   Common stock, par value $0.0025: authorized shares, 200,000,000;
     90,765,106 and 47,724,392 issued shares, 90,741,812 and
     47,701,098 outstanding shares .................................        226,855         119,253
   Treasury stock, 23,294 shares held in treasury ..................        (10,614)        (10,614)
   Additional paid in capital ......................................     41,639,914      31,530,189
   Deficit accumulated during the development stage ................    (38,592,684)    (35,792,158)
                                                                       ------------    ------------
   Total stockholders' equity / (deficit) ..........................      3,263,471      (4,153,330)
                                                                       ------------    ------------

        Total liabilities and stockholders' equity / (deficit) .....   $  3,986,254    $    218,691
                                                                       ============    ============
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       34
<PAGE>

                          APPLIED NEUROSOLUTIONS, INC.
                          (a development stage company)
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                           Period from March
                                                                                               14, 1992
                                                                                            (inception) to
                                                       Year Ended December 31,               December 31,
                                             --------------------------------------------
                                                 2004            2003            2002            2004
                                             ------------    ------------    ------------    ------------
<S>                                          <C>             <C>             <C>             <C>
Research agreement revenues ..............   $    253,000    $         --    $         --    $    753,000
Grant revenues ...........................             --              --              --         669,022
                                             ------------    ------------    ------------    ------------
      Total revenues .....................        253,000              --              --       1,422,022
                                             ------------    ------------    ------------    ------------

Operating expenses:
   Research and development ..............      1,546,158       1,828,285       1,682,409      25,371,200
   General and administrative ............      1,651,915       1,364,446       1,173,681      10,965,207
   Loss on impairment of intangible assets             --              --              --         411,016
   Loss on writedown of leasehold
     improvements ........................             --              --              --       1,406,057
                                             ------------    ------------    ------------    ------------
      Total operating expenses ...........      3,198,073       3,192,731       2,856,090      38,153,480
                                             ------------    ------------    ------------    ------------

Operating loss ...........................     (2,945,073)     (3,192,731)     (2,856,090)    (36,731,458)
                                             ------------    ------------    ------------    ------------

Other (income) expense:
   Interest expense ......................         16,081         109,041          22,349         484,857
   Interest income .......................        (36,986)           (352)           (136)       (741,725)
   Amortization of debt discount .........             --              --           7,379         272,837
   Beneficial conversion of debt to equity             --              --          44,273         274,072
   Inducement to convert debt to equity ..             --              --              --       1,631,107
   Cost of fund raising activities .......         62,582              --              --          62,582
   Loss on extinguishments of debt .......      4,707,939              --              --       4,707,939
   Gain on derivative instruments, net ...     (4,894,163)             --              --      (4,894,163)
   Net other (income) expense ............             --              --              --          63,720
                                             ------------    ------------    ------------    ------------
     Total other (income) expense ........       (144,547)        108,689          73,865       1,861,226
                                             ------------    ------------    ------------    ------------

Net loss .................................     (2,800,526)     (3,301,420)     (2,929,955)    (38,592,684)

   Less: Fair value of induced preferred
     stock conversion ....................             --              --              --      (1,866,620)
                                             ------------    ------------    ------------    ------------
 Net loss attributable to common
     shareholders ........................   $ (2,800,526)   $ (3,301,420)   $ (2 929,955)   $(40,459,304)
                                             ============    ============    ============    ============

Basic and diluted loss per common share:
   Net loss attributable to common
     shareholders per share - basic ......        $(0 03)        $ (0 07)        $ (0 10)        $ (2 30)
                                             ============    ============    ============    ============
   Net loss attributable to common
     shareholders per share - diluted ....        $(0 03)        $ (0 07)        $ (0 10)        $ (2 30)
                                             ============    ============    ============    ============
   Weighted average shares - basic .......     87,080,086      47,701,098      28,047,014      17,569,193
                                             ============    ============    ============    ============
   Weighted average shares - diluted .....     87,080,086      47,701,098      28,047,014      17,569,193
                                             ============    ============    ============    ============
</TABLE>

See accompanying notes to consolidated financial statements

<PAGE>

                          APPLIED NEUROSOLUTIONS, INC.
                          (a development stage company)
           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY / (DEFICIT)
       FOR THE PERIOD FROM MARCH 14, 1992 (INCEPTION) TO DECEMBER 31, 2004

<TABLE>
<CAPTION>



                                                                   Common        Treasury
                                                   Shares           Stock          Stock
                                                ------------    ------------    ------------
<S>                                             <C>             <C>             <C>
Issuance of Common Stock ....................        372,682    $        932    $         --
Net loss ....................................             --              --              --
                                                ------------    ------------    ------------
Balance at December 31, 1992 ................        372,682             932              --
Issuance of Common Stock ....................        434,793           1,087              --
Issuance of Preferred Stock, subsequently
   converted to Common Stock ................        165,936             415              --
Issuance of Preferred Stock, subsequently
   converted to Common Stock ................        762,066           1,905              --
Issuance of Common Stock upon conversion of
   note and accrued interest ................        368,322             921              --
Net loss ....................................             --              --              --
                                                ------------    ------------    ------------
Balance at December 31, 1993 ................      2,103,799           5,260              --
Issuance of Preferred Stock, subsequently
   converted to Common Stock ................        533,020           1,333              --
Retirement of Common Stock ..................         (1,887)             (5)             --
Net loss ....................................             --              --              --
                                                ------------    ------------    ------------
Balance at December 31, 1994 ................      2,634,932           6,588              --
Issuance of Preferred Stock, subsequently
   converted to Common Stock ................        493,801           1,235              --
Issuance of Preferred Stock upon conversion
   of bridge loan and accrued interest,
   subsequently converted to Common Stock
                                                     689,179           1,723              --
Net loss ....................................             --              --              --
                                                ------------    ------------    ------------
Balance at December 31, 1995 ................      3,817,912           9,546              --
Issuance of Preferred Stock, subsequently
   converted to Common Stock ................      4,957,145          12,393              --
Issuance of Common Stock ....................         31,802              80              --
Net loss ....................................             --              --              --
                                                ------------    ------------    ------------
Balance at December 31, 1996 ................      8,806,859          22,019              --
Issuance of Common Stock in connection with
   acquisition of intangible assets .........        131,682             329              --
Net loss ....................................             --              --              --
                                                ------------    ------------    ------------
Balance at December 31, 1997 ................      8,938,541          22,348              --
Net loss ....................................             --              --              --
                                                ------------    ------------    ------------
Balance at December 31, 1998 ................      8,938,541          22,348              --
Net loss ....................................             --              --              --
                                                ------------    ------------    ------------
Balance at December 31, 1999 ................      8,938,541          22,348              --
Issuance of Preferred Stock, subsequently
   converted to Common Stock ................      1,466,495           3,666              --
Issuance of warrants to purchase shares of
   Common Stock .............................             --              --              --
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
                                                                  Deficit
                                                                 Accumulated         Total
                                                  Additional      During the     Stockholders'
                                                   Paid in       Development        Equity
                                                   Capital          Stage          (Deficit)
                                                 ------------    ------------    ------------
<S>                                              <C>             <C>             <C>
Issuance of Common Stock ....................    $       (332)   $         --    $        600
Net loss ....................................              --        (922,746)       (922,746)
                                                 ------------    ------------    ------------
Balance at December 31, 1992 ................            (332)       (922,746)       (922,146)
Issuance of Common Stock ....................            (387)             --             700
Issuance of Preferred Stock, subsequently
   converted to Common Stock ................       1,201,750              --       1,202,165
Issuance of Preferred Stock, subsequently
   converted to Common Stock ................       5,640,172              --       5,642,077
Issuance of Common Stock upon conversion of
   note and accrued interest ................       2,964,005              --       2,964,926
Net loss ....................................              --      (4,875,845)     (4,875,845)
                                                 ------------    ------------    ------------
Balance at December 31, 1993 ................       9,805,208      (5,798,591)      4,011,877
Issuance of Preferred Stock, subsequently
   converted to Common Stock ................       4,006,404              --       4,007,737
Retirement of Common Stock ..................         (13,663)             --         (13,668)
Net loss ....................................              --      (6,154,275)     (6,154,275)
                                                 ------------    ------------    ------------
Balance at December 31, 1994 ................      13,797,949     (11,952,866)      1,851,671
Issuance of Preferred Stock, subsequently
   converted to Common Stock ................         748,765              --         750,000
Issuance of Preferred Stock upon conversion
   of bridge loan and accrued interest,
   subsequently converted to Common Stock
                                                    1,005,840              --       1,007,563
Net loss ....................................              --      (2,191,159)     (2,191,159)
                                                 ------------    ------------    ------------
Balance at December 31, 1995 ................      15,552,554     (14,144,025)      1,418,075
Issuance of Preferred Stock, subsequently
   converted to Common Stock ................       6,864,881              --       6,877,274
Issuance of Common Stock ....................          96,524              --          96,604
Net loss ....................................              --      (2,591,939)     (2,591,939)
                                                 ------------    ------------    ------------
Balance at December 31, 1996 ................      22,513,959     (16,735,964)      5,800,014
Issuance of Common Stock in connection with
   acquisition of intangible assets .........         399,671              --         400,000
Net loss ....................................              --      (2,040,092)     (2,040,092)
                                                 ------------    ------------    ------------
Balance at December 31, 1997 ................      22,913,630     (18,776,056)      4,159,922
Net loss ....................................              --      (2,549,920)     (2,549,920)
                                                 ------------    ------------    ------------
Balance at December 31, 1998 ................      22,913,630     (21,325,976)      1,610,002
Net loss ....................................              --      (1,692,356)     (1,692,356)
                                                 ------------    ------------    ------------
Balance at December 31, 1999 ................      22,913,630     (23,018,332)        (82,354)
Issuance of Preferred Stock, subsequently
   converted to Common Stock ................         983,614              --         987,280
Issuance of warrants to purchase shares of
   Common Stock .............................          83,406              --          83,406
</TABLE>


                                       36
<PAGE>

<TABLE>
<CAPTION>



                                                                                Common         Treasury
                                                                 Shares          Stock           Stock
                                                              ------------    ------------    ------------
<S>                                                           <C>             <C>             <C>
Extension of warrants to purchase shares of
   Common Stock ...........................................             --              --              --
Stock options granted to non-employees ....................             --              --              --
Net loss ..................................................             --              --              --
                                                              ------------    ------------    ------------
Balance at December 31, 2000 ..............................     10,405,036          26,014              --
Issuance of Common Stock upon conversion of
 bridge loans/accrd  int ..................................      4,474,649          11,185              --
Issuance of Common Stock ..................................        580,726           1,452              --
Stock options granted to non-employees ....................             --              --              --
Issuance of warrants to purchase shares of
   Common Stock ...........................................             --              --              --
Options reissued to adjust exercise term ..................             --              --              --
Beneficial conversion feature of
   convertible debt .......................................             --              --              --
Induced conversion of convertible debt ....................             --              --              --
Net loss ..................................................             --              --              --
                                                              ------------    ------------    ------------
Balance at December 31, 2001 ..............................     15,460,411          38,651              --
Issuance of Common Stock upon conversion of
   bridge loans, accrued interest, other
   payables and as payment for services
                                                                 7,201,971          18,005              --
Issuance of Common Stock upon conversion of
   warrants ...............................................        156,859             392              --
Stock options granted to non-employees ....................             --              --              --
Repurchase of Common Stock ................................        (23,294)            (58)        (10,614)
Merger between the Company and Molecular
   Geriatrics Corporation .................................     24,905,151          62,263              --
Issuance of warrants to purchase shares of
   Common Stock ...........................................             --              --              --
Net loss ..................................................             --              --              --
                                                              ------------    ------------    ------------
Balance at December 31, 2002 ..............................     47,701,098         119,253         (10,614)
Variable accounting for stock options .....................             --              --              --
Stock options granted to non-employees ....................             --              --              --
Issuance of warrants to purchase shares of
   common stock ...........................................             --              --              --
Net loss ..................................................             --              --              --
                                                              ------------    ------------    ------------
Balance at December 31, 2003 ..............................     47,701,098         119,253         (10,614)
Issuance of units in private placement ....................     32,000,000          80,000              --
Issuance of placement agent warrants ......................             --              --              --
Issuance of units upon conversion of bridge
   loans ..................................................     10,440,714          26,102              --
Issuance of common stock for services .....................        200,000             500              --
Issuance of units for services ............................        400,000           1,000              --
Issuance of warrants to purchase shares of
   common stock ...........................................             --              --              --
Variable accounting for stock options .....................             --              --              --
Net loss ..................................................             --              --              --
                                                              ------------    ------------    ------------
Balance at December 31, 2004 ..............................     90,741,812    $    226,855    $    (10,614)
                                                              ============    ============    ============
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
                                                                               Deficit
                                                                              Accumulated         Total
                                                               Additional      During the     Stockholders'
                                                                Paid in       Development        Equity
                                                                Capital          Stage          (Deficit)
                                                              ------------    ------------    ------------
<S>                                                           <C>             <C>             <C>
Extension of warrants to purchase shares of
   Common Stock ...........................................        154,685              --         154,685
Stock options granted to non-employees ....................        315,976              --         315,976
Net loss ..................................................             --      (2,395,538)     (2,395,538)
                                                              ------------    ------------    ------------
Balance at December 31, 2000 ..............................     24,451,311     (25,413,870)       (936,545)
Issuance of Common Stock upon conversion of
 bridge loans/accrd  int ..................................      2,027,696              --       2,038,881
Issuance of Common Stock ..................................        211,048              --         212,500
Stock options granted to non-employees ....................         77,344              --          77,344
Issuance of warrants to purchase shares of
   Common Stock ...........................................         27,367              --          27,367
Options reissued to adjust exercise term ..................         64,033              --          64,033
Beneficial conversion feature of
   convertible debt .......................................        229,799              --         229,799
Induced conversion of convertible debt ....................      1,631,107              --       1,631,107
Net loss ..................................................             --      (4,146,913)     (4,146,913)
                                                              ------------    ------------    ------------
Balance at December 31, 2001 ..............................     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
                                                                 1,792,878              --       1,810,883
Issuance of Common Stock upon conversion of
   warrants ...............................................         35,536              --          35,928
Stock options granted to non-employees ....................          6,136              --           6,136
Repurchase of Common Stock ................................             58              --         (10,614)
Merger between the Company and Molecular
   Geriatrics Corporation .................................        (62,263)             --              --
Issuance of warrants to purchase shares of
   Common Stock ...........................................        159,934              --         159,934
Net loss ..................................................             --      (2,929,955)     (2,929,955)
                                                              ------------    ------------    ------------
Balance at December 31, 2002 ..............................     30,651,984     (32,490,738)     (1,730,115)
Variable accounting for stock options .....................        604,100              --         604,100
Stock options granted to non-employees ....................         80,975              --          80,975
Issuance of warrants to purchase shares of
   common stock ...........................................        193,130              --         193,130
Net loss ..................................................             --      (3,301,420)     (3,301,420)
                                                              ------------    ------------    ------------
Balance at December 31, 2003 ..............................     31,530,189     (35,792,158)     (4,153,330)
Issuance of units in private placement ....................      1,483,066              --       1,563,066
Issuance of placement agent warrants ......................        875,407              --         875,407
Issuance of units upon conversion of bridge
   loans ..................................................      7,292,016              --       7,318,118
Issuance of common stock for services .....................         64,500              --          65,000
Issuance of units for services ............................        268,426              --         269,426
Issuance of warrants to purchase shares of
   common stock ...........................................        124,775              --         124,775
Variable accounting for stock options .....................          1,535              --           1,535
Net loss ..................................................             --      (2,800,526)     (2,800,526)
                                                              ------------    ------------    ------------
Balance at December 31, 2004 ..............................   $ 41,639,914    $(38,592,684)   $  3,263,471
                                                              ============    ============    ============
</TABLE>

See accompanying notes to consolidated financial statements


                                       37
<PAGE>

                          APPLIED NEUROSOLUTIONS, INC.
                          (a development stage company)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                                                  Period from March
                                                                                                                       14, 1992
                                                                               Year Ended December 31,               (inception) to
                                                                     -------------------------------------------      December 31,
                                                                        2004             2003            2002            2004
                                                                     ------------    ------------    ------------    ------------
<S>                                                                  <C>             <C>             <C>             <C>
Cash flows from operating activities:
  Net loss .......................................................   $ (2,800,526)   $ (3,301,420)   $ (2,929,955)   $(38,592,684)

  Adjustments to reconcile net loss to net cash used in operating
    activities:
       Depreciation and amortization .............................         13,423           8,606          18,648       2,561,763
       Non-cash expense for equity compensation ..................        434,202         311,791         836,806       2,379,241
       Non-cash expense for equity compensation
           to employees and directors ............................          1,535         566,414         264,423         832,372
       Non-cash interest expense .................................         14,844              --           7,379         105,046
       Amortization of deferred financing costs ..................          6,458         104,542              --         111,000
       Non-cash expense for beneficial conversion
           of debt ...............................................             --              --          44,273         274,072
       Non cash expense for induced conversion
           of debt ...............................................             --              --              --       1,631,107
       Non-cash expense for loss on
            extinguishments of debt ..............................      4,707,939              --              --       4,707,939
       Non-cash income for gain on derivative
            instrument, net ......................................     (4,894,163)             --              --      (4,894,163)
       Amortization of intangible assets .........................             --              --              --         328,812
       Loss on writedown of leasehold
           improvements ..........................................             --              --              --       1,406,057
       Loss on impairment of intangible assets ...................             --              --              --         411,016
       Gain on sale of equipment .................................             --              --              --            (250)
       Fund raising expense ......................................         62,582              --              --          62,582
  Changes in assets and liabilities:
       Accounts receivable .......................................       (302,820)        154,515        (202,785)       (150,260)
       Prepaids and other assets .................................         26,810          (8,031)        (45,093)        (26,314)
       Accounts payable ..........................................       (193,301)         47,025         (79,732)        204,611
       Deferred research agreement revenues ......................        175,000          75,000         200,000         450,000
       Accrued wages .............................................       (293,310)             --          15,185              --
       Accrued collaborator payments .............................       (253,667)        129,641         118,988              --
       Accrued consultant fees ...................................       (173,800)        113,300         105,600          61,300
       Accrued vacation wages ....................................         (4,755)         (1,570)         15,175          45,171
       Other accrued expenses ....................................        (81,335)        127,890          45,807         229,859
                                                                     ------------    ------------    ------------    ------------
Net cash used in operating activities ............................     (3,554,884)     (1,672,297)     (1,585,281)    (27,861,723)
                                                                     ------------    ------------    ------------    ------------

Cash flows from investing activities:
       Acquisition of investment securities ......................             --              --              --      (9,138,407)
       Redemption of investment securities .......................             --              --              --       9,138,407
       Acquisition of intangible assets ..........................             --              --              --        (339,829)
       Acquisition of equipment and
           leasehold improvements ................................        (18,609)         (8,372)             --      (3,979,765)
                                                                     ------------    ------------    ------------    ------------
   Net cash used in investing activities..........................        (18,609)         (8,372)             --      (4,319,594)
                                                                     ------------    ------------    ------------    ------------


                                       38
<PAGE>

Cash flows from financing activities:
Proceeds from issuance of Preferred Stock ......................             --              --              --      12,193,559
Proceeds from issuance of units, net of issuance
   costs .......................................................      7,354,054              --         745,000      18,971,031
Deferred financing costs incurred ..............................             --        (111,000)             --        (111,000)
Advances from (repayments to) director and
   shareholders ................................................       (200,000)        200,000              --         120,000
Principal payments under capital lease .........................         (3,736)         (2,434)             --          (6,170)
Proceeds from issuance of promissory loans payable
                                                                             --       1,463,991       1,010,000       4,438,491
Payments to shareholders for registration statement
   penalties ...................................................        (84,000)             --              --         (84,000)
Payments to repurchase Common Stock ............................             --              --         (10,614)        (10,614)
Payments received on employee stock purchase notes
   receivable ..................................................             --              --              --         235,610
                                                                   ------------    ------------    ------------    ------------
Net cash provided by financing activities ......................      7,066,318       1,550,557       1,744,386      35,746,907
                                                                   ------------    ------------    ------------    ------------

Net increase (decrease) in cash ................................      3,492,825        (130,112)        159,105       3,565,590

Cash beginning of period .......................................         72,765         202,877          43,772              --
                                                                   ------------    ------------    ------------    ------------

Cash end of period .............................................   $  3,565,590    $     72,765    $    202,877    $  3,565,590
                                                                   ============    ============    ============    ============

Supplemental cash flow information:
Cash paid for interest .........................................   $      1,237    $      1,295    $      1,706    $     41,469
                                                                   ============    ============    ============    ============

Supplemental disclosure of non-cash investing and financing
  activities:

Issuance of stock for prior services ...........................   $         --    $         --    $    115,000    $  4,149,521
                                                                   ============    ============    ============    ============
Intangible assets acquired in exchange for stock ...............   $         --    $         --    $         --    $    400,000
                                                                   ============    ============    ============    ============
Equipment acquired under capital lease .........................   $         --    $     11,766    $         --    $     11,766
                                                                   ============    ============    ============    ============
Issuance of stock for promissory loans payable .................   $  2,473,991    $         --    $         --    $  2,473,991
                                                                   ============    ============    ============    ============
Issuance of stock for accrued interest on promissory
   loans payable ...............................................   $    136,188    $         --    $         --    $    136,188
                                                                   ============    ============    ============    ============
</TABLE>

See accompanying notes to consolidated financial statements.


                                       39
<PAGE>

                          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.

      In  October  2003,  the  Company's   shareholders  approved  amending  the
Company's  Certificate  of  Incorporation  to  change  the  corporate  name from
Hemoxymed, Inc. to Applied NeuroSolutions, Inc. The name change became effective
on October 30, 2003.

      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.

      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.
The Company raised $8,000,000 ($7,354,054 proceeds, net of commissions and legal
fees) in  February  2004 to advance  its various  programs,  including  clinical
development of its most advanced programs (the "offering").

      (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)   Liquidity

      The  Company  has  experienced  losses  since  inception  in  addition  to
incurring  cash outflows from  operating  activities for the last three years as
well as since  inception.  The Company expects to incur  substantial  additional


                                       40
<PAGE>

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,  this funding appears  adequate to fund operations  through April
30, 2006.  In the future,  the Company may have to seek  alternative  sources of
capital or reevaluate its operating  plans,  which may include  cessation of its
operations,  if it is unable to generate  sufficient cash flows from operations.
There is no assurance that additional  funding will be available for the Company
to finance its operations on acceptable terms, or at all.

      (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, 2004,  2003 and 2002, the Company has recorded  reimbursements  of $128,817,
$112,494 and $52,638 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.


                                       41
<PAGE>

      (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.

<TABLE>
<CAPTION>
                                                                                 Year ended December 31,
                                                                           2004            2003            2002
                                                                       ------------    ------------    ------------
<S>                                                                    <C>             <C>             <C>
Net loss:
     Net loss attributable to common shareholders, as reported         $ (2,800,526)   $ (3,301,420)   $ (2,929,955)
     Add stock-based employee compensation expense
        included in reported net loss, net of tax                             1,535         566,414         264,423
     Deduct total stock-based employee compensation
        expense determined under fair-value-based
        method for all awards, net of tax                                  (238,040)       (696,136)       (479,095)
                                                                       ------------    ------------    ------------
             Pro forma net loss attributable to common shareholders    $ (3,037,031)   $ (3,431,142)   $ (3,144,627)
                                                                       ============    ============    ============

Basic net loss attributable to common shareholders per common share:
     As reported                                                       $      (0.03)   $      (0.07)   $      (0.10)
     Pro forma                                                         $      (0.03)   $      (0.07)   $      (0.12)
</TABLE>

         The weighted  average  estimated  fair value of the options  granted in
2004,  2003 and 2002 was  $0.10,  $0.09 and  $0.09,  respectively,  based on the
Black-Scholes valuation model using the following assumptions:

                                               2004 and 2003         2002
                                               -------------        -----

         Risk-free interest rate                     3.00%          3.75%
         Dividend yield                              0.00%          0.00%
         Expected volatility                        75.00%         75.00%
         Expected life in years, average               4               4

      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).

      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.


                                       42
<PAGE>

      (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 10,039,636 stock options and 52,947,998  warrants
outstanding  to issue  common  stock at  December  31,  2004.  The  Company  had
9,919,636 stock options and 4,858,109 warrants outstanding to issue common stock
at December 31, 2003. In addition,  the Company had  $2,595,331  of  convertible
investor bridge loans,  including  accrued  interest,  at December 31, 2003 that
converted to 10,381,324 shares of common stock and 11,419,460  warrants based on
the February 2004 conversion  price. The Company had 4,582,636 stock options and
2,758,109  warrants  outstanding  to issue common stock at December 31, 2002. In
addition,  the Company had  $1,023,594  of  convertible  investor  bridge loans,
including  accrued  interest,  at December 31, 2002 that  converted to 4,094,376
shares of  common  stock  and  4,503,820  warrants  based on the  February  2004
conversion  price.  The year ended  December 31, 2003 also included a $1,866,620
impact from the induced preferred stock conversion.

      (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)   Reclassifications

      Certain  amounts from prior year  consolidated  financial  statements  and
related   notes  have  been   reclassified   to  conform  to  the  current  year
presentation.

      (n)   Recent Accounting Pronouncements

      In April 2003, the FASB issued SFAS No. 149,  "Amendment of FASB Statement
133 on Derivative Instruments and Hedging Activities." This Statement amends and
clarifies  financial  accounting  and  reporting  for  derivative   instruments,
including   certain   derivative   instruments   embedded  in  other   contracts
(collectively  referred to as derivatives) and for hedging activities under SFAS
No. 133,  "Accounting for Derivative  Instruments and Hedging  Activities." This
Statement  clarifies  under what  circumstances  a contract  with an initial net
investment meets the  characteristic of a derivative  discussed in SFAS No. 133,
clarifies  when  a  derivative  contains  a  financing  component,   amends  the
definition of an  "underlying" to conform it to language used in FIN No. 45, and
amends  certain other existing  pronouncements.  This Statement is effective for
contracts entered into or modified after June 30, 2003.

      In December 2003, the Financial  Accounting  Standards Board (FASB) issued
FASB Interpretation No. 46R,  "Consolidation of Variable Interest Entities" (FIN
46R). FIN 46R states that companies that have exposure to the economic risks and
potential rewards from another entity's assets and activities have a controlling
financial  interest in a variable interest entity should consolidate the entity,
despite the  absence of clear  control  through a voting  equity  interest.  The
consolidation  requirements apply to all special-purpose  entities by the end of
the first  reporting  period  ending after  December 15, 2003.  FIN 46R shall be


                                       43
<PAGE>

applied to all  variable  interest  entities  by the end of the first  reporting
period ending after  December 15, 2004 for  enterprises  that are small business
issuers.  The Company does not expect the adoption of FIN 46R to have a material
effect on its consolidated financial statements.

      In December 2004,  FASB issued SFAS No. 123 (revised  2004),  "Share-Based
Payment",  that focuses  primarily on accounting  for  transactions  in which an
entity obtains  employee  services in  share-based  payment  transactions.  This
statement replaces SFAS No. 123, "Accounting for Stock-Based Compensation",  and
supersedes  APB  Opinion No. 25,  "Accounting  for Stock  Issued to  Employees."
Beginning  with our  quarterly  period that begins  January 1, 2006,  we will be
required to expense the fair value of employee stock options and similar awards.
As a public company,  we are allowed to select from two  alternative  transition
methods,  each having different reporting  implications.  The impact of SFAS No.
123R has not been determined at this time.

Note 2  -  Property and Equipment

         Property and equipment consist of the following:

                                   December 31, 2004  December 31, 2003
                                     --------------    --------------

Equipment                            $    2,006,373    $    1,987,764
Equipment held under capital lease           11,766            11,766
Leasehold improvements                       84,613            84,613
                                     --------------    --------------
                                          2,102,752         2,084,143
Less accumulated depreciation
   and amortization                      (2,076,670)       (2,063,247)
                                     --------------    --------------

                                     $       26,082    $       20,896
                                     ==============    ==============

      Depreciation and amortization  expense  amounted to $13,423,  $8,606,  and
$18,648 for the years ended December 31, 2004, 2003, and 2002 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.


                                       44
<PAGE>

      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.

      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.

      As of December 31, 2004,  the Company has  reserved  52,947,998  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.


                                       45
<PAGE>

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

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

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

      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.


                                       46
<PAGE>

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

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

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

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

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

      In February 2004, The Company  completed an $8,000,000  private  placement
(net proceeds of $7,354,054) in February  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 consists 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 are 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  files 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 provides that if a registration
statement is not filed, or does 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


                                       47
<PAGE>

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.

      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.


                                       48
<PAGE>

      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.

      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,
2004, no Preferred  Stock is  outstanding.  The Company has reserved  52,947,998
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


                                       49
<PAGE>

per year  beginning in September  2004.  Non-employees  were granted  752,000 of
these options.  Compensation expense of $80,975 was recorded to reflect the fair
value of options issued to non-employees.

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

      As of December 31, 2004,  10,039,636  options were outstanding  (7,173,373
were fully  vested and  exercisable)  at prices  ranging from $0.15 to $5.30 per
share.

      A summary of the status of, and changes  in, the  Company's  stock  option
plan as of and for the  years  ended  December  31,  2004,  2003  and  2002,  is
presented  below  for all  stock  options  issued to  employees,  directors  and
non-employees:

<TABLE>
<CAPTION>
                             2004                           2003                         2002
                  ---------------------------   ---------------------------   ----------------------------
                                   Weighted-                     Weighted-                       Weighted-
                               Average-Exercise              Average Exercise               Average Exercise
                    Options          Price         Options         Price        Options           Price
                  ------------   ------------   ------------   ------------   ------------    ------------
<S>               <C>            <C>            <C>            <C>            <C>             <C>
Outstanding at
 beginning of
 year                9,919,636   $       0.19      4,582,636   $       0.24      4,174,628    $       0.90

Granted                120,000            .17      5,337,000            .15        434,172             .15

Reduction  in
 exercise price             --             --             --             --             --            (.59)

Exercised                   --             --             --             --             --              --

Forfeited                   --             --             --             --        (26,164)            .15
                  ------------   ------------   ------------   ------------   ------------    ------------

Outstanding at
 end of year        10,039,636   $       0.19      9,919,636   $       0.19      4,582,636    $       0.24
                  ============   ============   ============   ============   ============    ============

Options
exercisable at
end of year         7,173,373                      5,192,750                     2,995,720
                  ============                  ============                  ============
</TABLE>

<TABLE>
<CAPTION>
                                            December 31, 2004
           ------------------------------------------------------------------------------
                           Number                Weighted-Avg.             Number
           Exercise        Outstanding at        Remaining                 Exercisable at
           Price           Dec. 31, 2004         Contractual Life          Dec. 31, 2004
           -----           -------------         ----------------          -------------
           <S>             <C>                   <C>                       <C>
            $0.15            9,790,370                7.3 years              7,014,107
             0.17              120,000                9.8 years                 30,000
             1.00               39,741                1.1 years                 39,741
             1.50               14,814                6.1 years                 14,814
             2.00               25,019                2.9 years                 25,019
             5.30               49,692                1.1 years                 49,692
                                ------                                          ------
                            10,039,636                                       7,173,373
                            ==========                                       =========
</TABLE>


                                       50
<PAGE>

Note 6  -  Loans Payable

         Loans payable consist of the following:

                                    December 31, 2004    December, 31, 2003
                                    -----------------    ------------------
       Convertible Investor
           Bridge Loans                      $-0-           $2,473,991

       Advances from Shareholders              --              200,000
                                               --           ----------

                                             $-0-           $2,673,991
                                             ====           ==========

      The convertible investor bridge loans, plus any unpaid,  accrued interest,
were converted  into Common Stock in conjunction  with the February 2004 private
placement (see Note 4 - Stockholders'  Equity).  Accrued interest on these loans
at December 31, 2004 and 2003 was $0 and $121,340, respectively.

      The advances  from  shareholders  at December 31, 2003 were repaid in cash
from the proceeds of the February 2004 private placement.

Note 7 - Employee Savings Plan

      The Company  sponsors a defined  contribution  benefit plan (the  "Savings
Plan") which  qualifies  under Section 401(k) of the Internal  Revenue Code. The
Savings Plan covers all  eligible  employees  who are 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,  2004,  2003 and 2002 were  $58,339,  $42,725,  and  $39,552,  respectively.
Contributions of $82,277 were accrued as of December 31, 2003 and paid in 2004.

Note 8 - Income Taxes

      No  Federal  or  state  income  taxes  have  been   provided  for  in  the
accompanying  consolidated  financial statements because of net operating losses
incurred to date and the  establishment  of a valuation  allowance  equal to the
amount of the Company's  deferred tax assets.  At December 31, 2004, the Company
has net operating loss and research and  development  credit  carryforwards  for
Federal  income  tax  purposes  of   approximately   $33,000,000  and  $825,000,
respectively.  These carryforwards  expire between 2007 and 2024. 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,  2004  and  2003  are
summarized as follows:

                                        December 31, 2004    December 31, 2003
                                        -----------------    -----------------

Deferred tax assets:

    Depreciation                         $        230,000    $       250,000
    Net operating loss carryforwards           13,300,000         12,150,000
    Tax credit carryforwards                      825,000            770,000
                                         ----------------    ---------------
                                               14,355,000         13,170,000
Valuation allowance                           (14,355,000)       (13,170,000)
                                         ----------------    ---------------
       Net deferred income taxes         $             --    $            --
                                         ================    ===============


                                       51
<PAGE>

      The net change in the valuation  allowance  during 2004, 2003 and 2002 was
an increase of $1,185,000, $1,041,000, and $1,019,000, respectively.

Note 9 - Commitments and Contingencies

      Operating Lease

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

      Future  minimum lease  payments as of December 31, 2004 under the terms of
the operating lease for the facility in Vernon Hills, Illinois are as follows:

                           Year ending December 31,          Amount
                           ------------------------          ------

                                 2005                       $100,425
                                 2006                        102,000
                                 2007                         34,000

      Rental  expense,  including  allocated  operating  costs  and  taxes,  was
$119,716, $120,627, and $124,955 for the years ended December 31, 2004, 2003 and
2002, 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.

      The Company had a collaborative  research agreement with the University of
British Columbia ("UBC") through June 2003. The Company agreed to fund a project
at UBC for  $233,140,  of which  $51,470  was  funded  by a  Foundation  with no
affiliation  to the  Company.  Additionally,  the Company was  obligated to fund
patent  costs  arising from the project.  Amounts due to UBC,  including  patent
costs,  as of  December  31, 2004 and 2003 were $0 and  $210,086,  respectively,
which were included in accrued collaborator payments.

      Total  expense  for these  outside  research,  collaboration  and  license
agreements,  included  in  research  and  development  expenses,  was  $294,400,
$433,810,  and  $696,063 for the years ended  December 31, 2004,  2003 and 2002,
respectively.

      The Company has  consulting  agreements  with its  founding  scientist  at
AECOM,  which have terms through  January 2006,  but in some  instances,  may be
terminated at an earlier date by the Company.  The Company also has a consulting
agreement with a European  researcher with financial  commitments  through March
2003.  Expense  for  the  consulting   agreements,   included  in  research  and
development expenses,  was $108,000,  $113,400, and $129,600 for the years ended
December 31, 2004, 2003 and 2002, respectively.


                                       52
<PAGE>

      Future  minimum  payments,  as of  December  31,  2004,  under  the  above
agreements are as follows:

          Year ending December 31,      Collaborations             Consulting

                2005                     $375,000                    $108,000
                2006                      425,000                       9,000
                2007                      475,000                           -
                2008                      500,000                           -
                                          -------                   ---------
                Total                  $1,775,000                    $117,000
                                       ==========                    ========

      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.

      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,  2004,  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


                                       53
<PAGE>

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
has recently had a very preliminary discussion with Innogenetics concerning some
form of a potential business relationship.

Note 10 - 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 2004 and 2003 by geographic segment is set forth below.

      Operating loss:              2004           2003
                               -----------    -----------
               United States   ($2,607,409)   ($3,014,123)
               France             (193,117)      (178,608)
                               -----------    -----------
                               ($2,800,526)   ($3,192,731)
                               ===========    ===========
      Identifiable assets:
               United States   $ 3,986,254    $   218,691
               France                   --             --
                               -----------    -----------
                               $ 3,986,254    $   218,691
                               ===========    ===========


                                       54
<PAGE>

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

      On  October  18,  2004,  the Audit  Committee  of the  Company's  Board of
Directors dismissed KPMG LLP ("KPMG") as the Company's independent accountants.

      The audit report of KPMG on the consolidated  financial  statements of the
Company as of December  31,  2003 and 2002 and for the three year  period  ended
December  31, 2003 and for the period  from March 14,  1992 (date of  inception)
through  December 31, 2003 did not contain any adverse  opinion or disclaimer of
opinion,  nor was it  qualified  or modified as to  uncertainty,  audit scope or
accounting  principles.  The audit report of KPMG on the consolidated  financial
statements  of the  Company as of  December  31, 2002 and 2001 and for the three
year period ended December 31, 2002 and for the period from March 14, 1992 (date
of inception)  through  December 31, 2002 did not contain any adverse opinion or
disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit
scope or accounting principles,  except that it was modified as to the Company's
ability to  continue  as a going  concern  and  contained  a separate  paragraph
stating that "as discussed in Note 1 to the consolidated  financial  statements,
the Company has suffered recurring losses from operations and has an accumulated
deficit  that raise  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. The  consolidated  financial  statements do not include any  adjustments
that might result from the outcome of this uncertainty".

      All members of the Company's Audit  Committee  participated in the meeting
held on October 18, 2004 and unanimously approved the dismissal of KPMG.

      During the two most recent fiscal years and the subsequent  interim period
through October 18, 2004,  there were no  disagreements  between the Company and
KPMG as to any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements, if not resolved
to the  satisfaction of KPMG,  would have caused KPMG to make reference in their
reports on the consolidated  financial  statements for such years to the subject
matter of the disagreement.

      A letter  from KPMG is filed as Exhibit  16.1 to Form 8-K filed on October
25, 2004.  During the Company's two most recent fiscal years ended  December 31,
2003, and the subsequent  interim period through October 18, 2004, there were no
"reportable  events" (as that term is defined in Item 304(a)(1)(v) of Regulation
S-K).

      On October 18,  2004,  the Company  engaged  Virchow  Krause & Company LLP
("VK")  as its  new  independent  accountants.  The  Company's  Audit  Committee
unanimously  approved the  engagement of VK at the  Committee's  meeting held on
October  18,  2004.  In the  Company's  two most  recent  fiscal  years  and any
subsequent  interim period through the date of the  engagement,  the Company has
not consulted with VK regarding either:

      (a)   the application of accounting principles to a specified transaction,
            either  completed  or  proposed;  or the type of audit  opinion that
            might be rendered on the Company's financial statements, and neither
            a written  report was  provided  to the  Company nor oral advice was
            provided that VK concluded was an important factor considered by the
            Company in  reaching a decision  as to the  accounting,  auditing or
            financial reporting issue; or

      (b)   any matter that was either the subject of a "disagreement,"  as that
            term is  defined in Item  304(a)(1)(iv)  of  Regulation  S-B and the
            related instructions to Item 304 of Regulation S-B, or a "reportable
            event," as that term is defined in Item  304(a)(1)(v)  of Regulation
            S-B.

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


                                       55
<PAGE>

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

     None.

                                    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, 2004,  and their
ages as of February 28, 2005, are as follows:

   Barron, Bruce N.        50   Chairman of the Board of Directors
   DeBernardis, John F.    57   President, Chief Executive Officer & Director
   Kerkman, Daniel J.      53   Vice President, R & D
   Ellison, David          43   Chief Financial Officer & Secretary
   Stone, Richard          60   Director
   Tsao, Preston           57   Director
   Sorell, Michael         57   Director

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.  Mr.
Barron is  currently a partner and manager of a private  equity/venture  capital
fund. 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.  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  President  and Chief  Operating
Officer of the Company  since August 1999. He joined the Company in August 1993,
as Director of Chemistry  and  Pharmacology,  was promoted to Vice  President of
Discovery, and 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


                                       56
<PAGE>

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.

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.  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.

David Ellison,  CPA, has been Chief  Financial  Officer of the Company since May
1996 and 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 local public accounting firm.

Richard B. Stone, was appointed a director of the Company in December, 1994. Mr.
Stone has been a Professor  of Tax Law at Columbia  University  since 1974 where
his  responsibilities  include  teaching  Federal  Income  Tax,  Corporate  Tax,
Partnership  Tax, Real Estate Tax, and Business  Planning.  During that time Mr.
Stone spent two years as Tax Counsel to Cleary,  Gottlieb,  Steen and  Hamilton.
Previous  positions  have  included  four years as  Assistant  to the  Solicitor
General of the United States, Department of Justice. Mr. Stone holds a J.D. from
Harvard Law School. Mr. Stone is also a Managing Director of Blue Grass Fund.

Preston Tsao, was appointed a director of the Company in May, 1996. Mr. Tsao has
been Managing  Director of SCO Securities LLC since September 2001. From January
1995 until September 2001, Mr. Tsao was Managing Director of Sunrise  Securities
Corporation.  Mr.  Tsao has been the  principal  investment  banker on  numerous
public and private transactions.

Michael  Sorell,  MD, was appointed a 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  Advisors  LLC 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.

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.

Committees

      In October  2002,  the Board of Directors  appointed  Richard B. Stone and
Preston Tsao 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


                                       57
<PAGE>

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 Richard B. Stone is an "audit  committee
financial  expert"  within  the  applicable  definition  of the  Securities  and
Exchange  Commission.  Each of Mr.  Stone and Mr.  Tsao  qualify as  independent
directors for purposes of Section  10A(m)(3) of the  Securities  Exchange Act of
1934.

      In October  2002,  the Board of Directors  appointed  Richard B. Stone and
Preston Tsao 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.

Code of Ethics

      Our Board of  Directors  has not yet  adopted a written  Code of  Business
Conduct and Ethics.  We expect to adopt a written  Code of Business  Conduct and
Ethics in 2005.

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  2004,  2003 and 2002 by our Chief
Executive Officer, President and Chief Operating Officer,  Vice-President of R &
D, and Chief Financial Officer.

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
                              Annual         Compensation                   Long Term    Compensation
----------------------------------------------------------------------------------------------------------------------
<S>                    <C>    <C>            <C>             <C>            <C>          <C>            <C>
                                                             Other          Restricted   Securities     All
Name and                                                     Annual         Stock        Underlying     Other
Principal Position     Year   Salary         Bonus           Compensation   Awards       Options        Compensation
----------------------------------------------------------------------------------------------------------------------

Bruce N. Barron        2004   $   249,767    $          0    $          0            0             0    $         0
CEO (1)                2003   $   228,600    $          0    $          0            0     1,700,000    $         0
                       2002   $   225,000    $          0    $          0            0       151,493    $         0

----------------------------------------------------------------------------------------------------------------------
John F. DeBernardis    2004   $   244,600    $           0   $           0           0              0   $          0
Pres. & CEO (2)        2003   $   217,600    $           0   $           0           0      1,500,000   $          0
                       2002   $   214,000    $           0   $           0           0        120,402   $          0

----------------------------------------------------------------------------------------------------------------------
Daniel Kerkman         2004   $   191,509    $           0   $           0           0              0   $          0
V.P. of R & D          2003   $   151,600    $           0   $           0           0        400,000   $          0
                       2002   $   148,000    $           0   $           0           0         52,737   $          0

----------------------------------------------------------------------------------------------------------------------
David Ellison          2004   $   135,600    $           0   $           0           0              0   $          0
CFO                    2003   $   103,600    $           0   $           0           0        500,000   $          0
                       2002   $   100,000    $           0   $           0           0         35,656   $          0
----------------------------------------------------------------------------------------------------------------------
</TABLE>

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


                                       58
<PAGE>

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 do not currently  receive any  compensation for their service as
members of the board of directors.

Compensation committee report on executive compensation

      Our Board of Directors is comprised of three non-employee  directors,  our
former Chief Executive  Officer,  who serves as Chairman,  and our President and
Chief  Executive  Officer.  Two  of  the  non-employee  directors  comprise  the
Compensation Committee. It is their responsibility to:

      -     Make decisions concerning matters of executive compensation;

      -     Administer the Company's executive incentive plans;

      -     Review compensation plans, programs and policies; and

      -     Monitor 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.  The Board of Directors  informal
executive  compensation  philosophy  (which applies generally to all management)
considers a number of factors, which may include:

      -     Providing  levels of  compensation  competitive  with companies at a
            comparable stage of development and in our geographic area;

      -     Integrating  management's   compensation  with  the  achievement  of
            performance goals;

      -     Maintaining   an  appropriate   balance   between  base  salary  and
            performance-based   compensation,   with  a  higher   proportion  of
            compensation being performance-based.

      The  compensation  structure  of our  executive  officers,  including  our
President  and  Chief  Executive  Officer,  Vice  President  of R & D and  Chief
Financial  Officer,  is  based  on  competitive,   market-based  pay  practices,
performance  evaluations  and generally  includes a combination  of base salary,
discretionary  bonuses and stock  options or warrants.  In setting  compensation
levels, the Board of Directors considers data regarding  compensation  practices
from a group of biotechnology and pharmaceutical  companies that are believed to
be generally comparable to the Company.

      Base salary is not  targeted at any  particular  level within the group of
companies considered.  Instead, total salary is determined based on a subjective
assessment of the executive's performance and the Company's needs.


                                       59
<PAGE>

      Consistent with its belief that equity  ownership by senior  management is
beneficial  in aligning  the  interests of senior  management  with those of the
stockholders,   we   provide   potentially   significant   long-term   incentive
opportunities to our senior  management  through  discretionary  grants of stock
options or warrants,  thereby  emphasizing  the potential  creation of long-term
stockholder  value. The Board of Directors  considers stock options and warrants
effective long-term incentives because an executive can profit only if the value
of the Common Stock  increases.  In making these grants,  the Board of Directors
considers its subjective assessment of our past financial performance and future
prospects,  an  executive  officer's  current  level of  ownership of the Common
Stock,  the period during which an executive  officer has been in a key position
with us, individual performance and competitive practices within the comparative
group of companies.  The Board of Directors views management's  ability to raise
investment capital as a significant asset to the Company. The Board of Directors
intends  on  compensating   executive   management  with  equity  ownership  for
successfully obtaining investment capital for the Company.

By the Compensation Committee:
Richard Stone
Preston Tsao

Stock price performance presentation

      As stated in the notes to the  consolidated  financial  statements  and in
management's  discussion  and  analysis of  financial  condition  and results of
operations  contained in this annual report on Form 10-KSB,  a subsidiary of the
Company  merged with MGC on September 10, 2002. For  accounting  purposes,  this
transaction  is  being  treated  as if  MGC  acquired  the  Company,  thus,  the
historical  operating  results  contained  in this annual  report on Form 10-KSB
prior to September 10, 2002 are those of MGC. The historical  stock  performance
presented  in Item 5, prior to the fourth  quarter  2002,  represents  the stock
performance  of the Company,  prior to the Merger,  and a  predecessor's  of the
Company.

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 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, 2004,  10,039,636  options were outstanding  (7,173,373
were fully  vested and  exercisable)  at prices  ranging from $0.15 to $5.30 per
share.

Option grants

      The Company made 120,000 option grants to employees and directors in 2004.
The Company made  4,250,000  options  grants to employees and directors in 2003.
The Company made 360,288 option grants to employees and directors in 2002.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The following table sets forth the beneficial  ownership of our securities
as of February  28, 2005,  by (a) each person  known by us to be the  beneficial
owner of more than 5% of any class of our securities, (b) our directors, (c) our
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


                                       60
<PAGE>

NeuroSolutions,  Inc., 50 Lakeview  Parkway,  Suite 111, Vernon Hills,  Illinois
60061.  As of February  28,  2005,  a total of  91,013,552  shares of our common
stock, all of which are voting shares,  10,039,636 options to purchase shares of
our Common Stock, and 52,676,258  Common Stock Purchase Warrants were issued and
outstanding.

                                                 Amount and nature
                                                   of beneficial      Percent of
              Name of Beneficial Owner               ownership           Class
              ------------------------               ---------           -----

Bruce N. Barron  (2)                                 3,847,797 (4)        4.1%
John F. DeBernardis, Ph.D. (1)                       2,862,722 (5)        3.1%
Richard Stone (2)                                    8,109,607 (6)        8.7%
Preston Tsao (2)                                       262,783 (7)         *
Michael Sorell, MD (2)                                 100,000 (8)         *
Daniel J. Kerkman, Ph.D. (3)                         1,018,034 (9)        1.1%
David Ellison (3)                                    1,004,552(10)        1.1%
David Stone                                          5,645,364(11)        6.1%

Special Situations Private Equity Fund, LP          12,000,000(12)       12.4%
153 E. 53rd Street, 55th Floor
New York, NY 10022

Benjamin Family Trusts                               7,464,762(13)        7.9%

MicroCapital LLC                                     6,140,000(14)        6.5%
201 Post Street, Suite 1001
San Francisco, CA 94108

All Directors and Officers as a group
      (7 persons)                                   17,205,495(15)       17.1%

*     Less than 1.0%

(1)   Director and officer.

(2)   Director.

(3)   Officer.

(4)   Consists of 877,403 shares of common stock and 2,970,394  shares of common
      stock issuable upon the exercise of stock options.

(5)   Consists of 353,050 shares of common stock and 2,509,672  shares of common
      stock issuable upon the exercise of stock options.

(6)   Consists of 5,997,140  shares of common  stock,  547,710  shares of common
      stock issuable upon the exercise of stock options and 1,564,757  shares of
      common stock issuable upon the exercise of warrants.

(7)   Consists of 67,935  shares of common  stock and  194,848  shares of common
      stock issuable upon the exercise of stock options.

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


                                       61
<PAGE>

(9)   Consists of 175,785  shares of common  stock and 842,249  shares of common
      stock issuable upon the exercise of stock options.

(10)  Consists of 205,537  shares of common  stock and 799,015  shares of common
      stock issuable upon the exercise of stock options.

(11)  Consists  of  3,593,223  shares of common  stock and  2,052,141  shares of
      common stock issuable upon the exercise of warrants.

(12)  Consists  of  6,000,000  shares of common  stock and  6,000,000  shares of
      common stock issuable upon the exercise of warrants.  MG Advisors,  L.L.C.
      ("MG") is the  general  partner of and  investment  adviser to the Special
      Situations  Private Equity Fund, L.P. (the "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  4,526,944  shares of common  stock and  2,937,818  shares of
      common stock issuable upon the exercise of warrants held by various family
      trusts. The trustees of these various family trusts are U.S. Trust Company
      of New York, 114 W. 47th St, 8th 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).

(14)  Consists  of  2,000,000  shares of common  stock and  2,000,000  shares of
      common stock  issuable upon the exercise of warrants held by  MicroCapital
      Fund LP,  1,000,000  shares of common stock and 1,000,000 shares of common
      stock  issuable  upon the exercise of warrants held by  MicroCapital  Fund
      Ltd.  and  140,000   shares  held  by  Price  Trust  UTA  Dated   10/5/84.
      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 .

(15)  Consists of 7,676,850  shares of common stock,  7,963,888 shares of common
      stock issuable upon the exercise of stock options and 1,564,757  shares of
      common stock issuable upon the exercise of warrants.

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,  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.


                                       62
<PAGE>

ITEM 13. EXHIBITS

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

      1.    List of Financial Statements.

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

      o     Report of Virchow  Krause &  Company,  LLP,  Independent  Registered
            Public Accounting Firm.
      o     Report of KPMG LLP, Independent Registered Public Accounting Firm.
      o     Consolidated Balance Sheets at December 31, 2004 and 2003
      o     Consolidated  Statements of Operations  for the years ended December
            31,  2004,  2003 and 2002 and for the  period  from  March 14,  1992
            (inception) to December 31, 2004
      o     Consolidated  Statements of Stockholders'  Equity/(Deficit)  for the
            period from March 14, 1992 (inception) to December 31, 2004
      o     Consolidated  Statements of Cash Flows for the years ended  December
            31,  2004,  2003 and 2002 and for the  period  from  March 14,  1992
            (inception) to December 31, 2004
      o     Notes to  Consolidated  Financial  Statements  for the  years  ended
            December 31,  2004,  2003 and 2002 and for the period from March 14,
            1992 (inception) to December 31, 2004

      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.


                                       63
<PAGE>

    Number  Description
    ------  -----------

      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.

      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. *

      10.12 Employment  Agreement,  dated  November  1,  2004,  between  Applied
            NeuroSolutions, Inc. and Daniel J. Kerkman. *

      10.13 Employment  Agreement,  dated  November  1,  2004,  between  Applied
            NeuroSolutions, Inc. and David Ellison. *

      10.14 License   Agreement,   dated  December  13,  2004,  between  Applied
            NeuroSolutions, Inc. and bioMerieux, SA. *#


                                       64
<PAGE>

    Number  Description
    ------  -----------

      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.

      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.

      21    Subsidiaries of the Company. *

      23.1  Consent of Virchow Krause & Company, LLP.*

      23.2  Consent of KPMG LLP.*

*     Exhibit filed herewith.

#     Portions  of this  exhibit  have been  omitted  pursuant  to a request for
      confidential treatment.

(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  2004 (and  amended in  November
      2004)  concerning  the  dismissal  of prior  auditors  and  hiring  of new
      auditors.

      A Report on Form 8-K was filed in December 2004  concerning the signing of
      a license agreement with bioMerieux, SA.


                                       65
<PAGE>

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

      The  following  is a summary of the fees billed to us by Virchow  Krause &
Company,  LLP  (2004)  and KPMG LLP (2004 and  2003) for  professional  services
rendered for the fiscal years ended December 31, 2004 and 2003:

                              Fiscal 2004    Fiscal 2003
         Fee Category            Fees            Fees
      --------------------       ----            ----

      Audit Fees           $       54,519   $       51,000
      Audit Related Fees               --               --
      Tax Fees                         --               --
      All Other Fees               22,000               --
                           --------------   --------------

      Total Fees           $       76,519   $       51,100
                           ==============   ==============

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's  policy is to pre-approve all audit and permissible
non-audit  services  provided by the  independent  auditors.  These services may
include  audit  services,  audit  related  services,  tax  services,  and  other
services.  Pre-approval  is  generally  provided  for up to one  year,  and  any
pre-approval  is detailed as to the  particular  service or category of services
and is generally  subject to a specific  budget.  The  independent  auditors and
management are required to periodically  report to the Audit Committee regarding
the extent of services  provided by the independent  auditors in accordance with
this  pre-approval  and the fees for the services  performed to date.  The Audit
Committee may also pre-approve particular services on a case-by-case basis.


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