**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, 2006





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


For
      the
      transition period from to





Commission
      File Number 001-13835





APPLIED
      NEUROSOLUTIONS, INC .


(Name
      of
      small business issuer in its Charter)





Delaware        39-1661164


(State
      or Other
      Jurisdiction of Incorporation or Organization)   (IRS
      Employer Identification No.)





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


(Address
      of Principal Executive Offices and Zip Code)





(847)
      573-8000


(Issuer’s
      Telephone Number, Including Area Code)





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





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





Common
      Stock, $0.0025 par value


(Title
      of
      Class)





Check
      whether the issuer (1) filed all reports required to be filed by section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days. Yes X No
      __





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





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


Yes__
      No X





State
      issuer's revenues for its most recent fiscal year: $251,634





As
      of
      March 29, 2007, the aggregate market value of voting common stock held by
      non-affiliates of the Registrant (90,789,199 shares) was approximately
      $25,420,975. The aggregate market value was computed by reference to the "Close"
      price of such common equity as of that date.





As
      of
      March 29, 2007, the issuer had 98,409,901 shares of Common Stock
      outstanding. ****





Documents
      Incorporated by Reference:  None





Transitional
      Small Business Disclosure Format (check one):  Yes____
      No X





**INDEX**





**Page****PART
                I**Item
                1.
            Description
                of business
            1Item
                2.
            Description
                of property
            20Item
                3.
            Legal
                proceedings
            20Item
                4.
            Submission
                of matters to a vote of security holders
            20**PART
                II**Item
                5.
            Market
                for common equity and related stockholder matters
            21Item
                6.
            Management’s
                discussion and analysis or plan of operation
            22Item
                7.
            Financial
                statements
            31Item
                8.
            Changes
                in and disagreements with accountants on accounting and financial
                disclosure
            59Item
                8a.
            Controls
                and procedures
            59Item
                8b.
            Other
                information
            59**PART
                III**Item
                9.
            Directors,
                executive officers, promoters, control persons and corporate governance;
                compliance with section 16(a) of the exchange act
            59Item
                10.
            Executive
                compensation
            63Item
                11.
            Security
                ownership of certain beneficial owners and management and related
                stockholder matters
            68Item
                12.
            Certain
                relationships and related transactions, and director
                independence
            70Item
                13.
            Exhibits
            70Item
                14.
            Principal
                accountant fees and services
            74SIGNATURES
            
            75CERTIFICATIONS
            
            76





i


**PART
      I**





*This
      Form 10-KSB contains forward-looking statements. For this purpose, any
      statements contained in this Form 10-KSB that are not statements of historical
      fact may be deemed to be forward-looking statements. You can identify
      forward-looking statements by those that are not historical in nature,
      particularly those that use terminology such as “may,” “will,” “should,”
“could,” “expects,” “anticipates,” “contemplates,” “estimates,” “believes,”
“plans,” “projected,” “predicts,” “potential,” or “continue” or the negative of
      these similar terms. In evaluating these forward-looking statements, you should
      consider various factors, including those listed below under the heading “Item
      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**





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




Alzheimer’s
      disease is the most common cause of dementia among people age 65 and older.
      Dementia is the loss of memory, reason, judgment and language to such an extent
      that it interferes with a person’s daily life and activities. Currently it is
      estimated that over five million people in the U.S. have Alzheimer’s disease and
      the national cost of caring for people with Alzheimer’s is thought to be $100
      billion annually. 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), according to BioPortfolio,
      Ltd.





Our
      core
      technology in the AD field is based on exclusive licenses with AECOM covering
      all diagnostic and therapeutic applications in the field of neurodegenerative
      disease discovered in Dr. Peter Davies’ laboratories at Albert Einstein College
      of Medicine (“AECOM”). Dr. Davies’ research has focused on AD and the roll of
      certain proteins; primarily hyperphosphorylated tau, which are involved in
      the
      formation of neurofibrillary tangles within neurons (nerve cells). Excessive
      phosphorylation of tau (the addition of one or more phosphate groups, which
      are
      comprised of phosphorous and oxygen, to a molecule) prevents it from stabilizing
      microtubules, thereby causing the breakdown of the transit system of the nerve
      cell. This internal neuronal damage leads to the development of the paired
      helical filaments and neurofibrillary tangles which are contributing factors
      to
      the eventual death of the neurons related to Alzheimer’s disease. Tau in this
      abnormally phosphorylated form is the building block for the paired helical
      filaments and the neurofibrillary tangles (“NFTs”); one of the hallmark
      pathologies associated with AD. There is a high correlation among the presence
      of hyperphosphorylated tau, NFTs and AD. Thus, it is believed that the
      hyperphosphorylated tau represents an early abnormality in the Alzheimer’s
      disease process.





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





We
      are
      involved in the discovery and development of novel therapeutic targets for
      the
      development of treatments for Alzheimer’s disease based upon a concept developed
      by 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 focused on discovery of unique therapeutic
      targets that may be involved in a common intracellular phosphorylation pathway
      leading to the development of the abnormal, destructive brain structures,
      amyloid plaques and neurofibrillary tangles, that are characteristic of
      Alzheimer’s disease.  We
      have
      discovered biomarkers that we believe will aid in the development of effective
      AD treatments.


1





In
      November 2006, we announced an agreement with Eli Lilly and Company to develop
      therapeutics to treat AD.  According
      to the terms of the agreement, we received $2 million in cash, including an
      equity investment of $500,000, from Lilly, plus we will receive annual research
      and development support for the duration of the collaboration agreement. In
      addition, Lilly will, based on the achievement of certain milestones, provide
      us
      with up to $10 million to $20 million per therapeutic compound. There are no
      assurances that any milestones will be met. Royalties are to be paid to us
      for
      AD therapies brought to market that result from the collaboration. Lilly
      received the exclusive worldwide rights to the intellectual property related
      to
      our expertise in understanding the molecular
      neuropathology of AD as it pertains to the formation of neurofibrillary
      tangles.





We
      have
      also been working on both a cerebrospinal fluid (“CSF”) based test and serum
      based tests to detect AD at an early stage. In a research setting, our CSF-based
      test has demonstrated an ability to differentiate AD patients from those with
      other diseases that have similar symptoms. There is currently no FDA approved
      diagnostic test to detect Alzheimer's disease.





Our
      product farthest along in development is a CSF-based diagnostic test to detect
      whether a person has AD. This diagnostic, based upon the detection of a certain
      AD associated protein found in the CSF of AD patients, has achieved, in research
      based validation studies, an overall sensitivity and specificity in the range
      of
      85% to 95%. This is based on extensive testing in our lab, utilizing CSF samples
      to differentiate patients diagnosed with AD from patients diagnosed with
      other forms of dementia and relevant neurological diseases, including major
      depression, as well as healthy controls.   In 2005, we submitted
      Pre-IDE documents to the FDA and had a Pre-IDE meeting with the FDA in November
      2005. Subsequent to our meeting with the FDA, we worked with our clinical
      consultants to refine our clinical protocol. At that time, work was suspended
      due to funding constraints. We are planning to continue development of our
      CSF-based diagnostic test while seeking appropriate partnerships and expertise
      to assist us in advancing towards commercialization.





We
      are
      developing serum-based diagnostic tests to detect Alzheimer’s disease that could
      have a much larger potential market than the CSF-based diagnostic test. In
      January 2006, we entered into a research agreement with Nanosphere, Inc., a
      nanotechnology-based molecular diagnostics company, to assist us in the
      development of serum-based diagnostic tests for AD. We are currently working
      on
      developing new tools that may enable us to best utilize Nanosphere’s proprietary
      technology to further evaluate and develop serum-based diagnostic
      tests.





In
      order
      to maximize the value, and minimize the time to market, of our diagnostic
      programs, we may seek some form of partnering, including collaborations,
      strategic alliances and/or licensing opportunities.





*History*


On
      September 10, 2002, Hemoxymed, Inc. and Molecular Geriatrics Corporation (“MGC”)
      established a strategic alliance through the closing of a merger (the “Merger”).
      The Merger Agreement provided that the management team and Board of Directors
      of
      MGC took over control of the merged company. The transaction was tax-free to
      the
      shareholders of both companies. In October 2003, we changed our name to Applied
      NeuroSolutions, Inc. The Merger transaction has been accounted for as a reverse
      merger. For financial reporting purposes, MGC 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.





After
      the
      Merger, 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 MGC, a development
      stage biopharmaceutical company incorporated in November 1991, with operations
      commencing in March 1992, to develop diagnostics to detect AD, and therapeutic
      targets directed at AD solutions.





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


2





We
      are
      subject to risks and uncertainties common to small cap biotech companies,
      including competition from larger, well capitalized entities, patent protection
      issues, availability of funding and government regulations. We have experienced
      significant operating losses since our inception. As of December 31, 2006,
      we
      had an accumulated deficit of approximately $45.5 million. Notwithstanding
      payments that we may receive under our collaboration agreement with Eli Lilly
      and Company, we expect to incur operating losses over the next several years
      as
      our research and development efforts continue. We need to raise additional
      capital before May 2007 to continue our operations.





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





**Alzheimer's
      Disease Background**





Alzheimer’s
      disease is the most common cause of dementia among people age 65 and older.
      Dementia is the loss of memory, reason, judgment and language to such an extent
      that it interferes with a person’s daily life and activities. Currently it is
      estimated that over five million people in the U.S. have Alzheimer’s disease and
      the national cost of caring for people with Alzheimer’s is thought to be $100
      billion annually. The market for AD therapy is expected to grow, based on the
      aging demographic of the seven major pharmaceutical markets (USA, France,
      Germany, Italy, Spain, U.K. and Japan). Currently there are only five drugs
      approved in the U.S. to treat AD. All of these drugs are primarily
      acetylcholinesterase inhibitors and are only beneficial in treating symptoms
      associated with AD in a minority of AD patients.





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





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








**Therapeutic
      Program**





We
      are
      working to discover and develop novel therapeutic targets for the development
      of
      treatments for AD. The basis for this work is Dr. Davies discovery of a novel
      initiation point that we believe is common to the ultimate development of both
      the neurofibrillary tangles and amyloid plaques. A patent application was filed
      in 2005 covering Dr. Davies work relative to this area. As a result of Dr.
      Davies’ research, we are focused on the discovery of unique therapeutic targets
      that may be involved in a common intracellular phosphorylation pathway leading
      to the development of abnormal, destructive brain structures characteristic
      of
      AD. In November 2006, we announced an agreement with Eli Lilly and Company
      to
      develop therapeutics to treat AD. In conjunction with Lilly, we are developing
      novel therapeutics for the treatment of Alzheimer’s disease based upon a concept
      developed by Dr. Davies. The agreement forms a collaboration that will combine
      the expertise, research tools and tau-based approach
      advanced by Dr. Davies and our team at APNS with the scientists, therapeutic
      development expertise and financial resources at Eli Lilly and Company. Lilly
      has an exclusive world-wide license to manufacture, market and sell any AD
      therapeutic that comes to market from our collaboration agreement.


3





The
      market potential for a drug to effectively treat Alzheimer’s disease is
      extremely large. Currently there are only five drugs approved in the U.S. to
      treat AD. All of these drugs are primarily acetylcholinesterase inhibitors
      and
      are only beneficial in treating symptoms associated with AD in a minority of
      AD
      patients. Despite the problems with the currently approved therapeutics, market
      research data indicate that these drugs sell nearly $3 billion annually in
      the
      U.S. The therapeutic market is estimated to be in excess of $6 billion for
      effective therapeutics by 2010 in the U.S.








**Diagnostic
      Program**





Alzheimer’s
      disease, at present, can be conclusively diagnosed only by histological
      examination of the brain by biopsy or autopsy. The diagnosis of patients
      suspected of having AD is therefore typically made through a process of
      elimination, by conducting neurological and psychiatric examinations, extensive
      laboratory tests and brain imaging to rule out other conditions (such as stroke,
      brain tumor, or depression) with similar symptoms. The AD predictive accuracy
      of
      such exams is generally in the range of 75%-85% in some of the larger AD
      centers, but is usually closer to 60%, on average, when diagnosed outside of
      the
      larger AD centers. Costs to patients for such testing can range from $1,000
      -
      $4,000, including imaging procedures. A simple, predictive, accurate and cost
      effective diagnostic test would therefore address a large unmet medical need.
      According to a report by the research organization, Datamonitor, the market
      for
      an AD diagnostic test could be up to $160 million in the U.S. for a CSF-based
      test and significantly higher for a serum-based test, which could potentially
      be
      utilized as a routine screening test.




Our
      approach to meeting this need is based on Dr. Davies’ research of the tau
      pathology, and revolves around building a pipeline of diagnostic tests,
      including: (i) the detection of hyperphosphorylated tau in CSF, (ii) a screening
      test to rule out AD in serum, and (iii) the detection of hyperphosphorylated
      tau
      in serum. Competitive diagnostics in development, as well as some that are
      marketed through reference laboratories, include approaches which attempt to
      identify AD patients by measuring: (i) normal tau, total tau or phosphorylated
      tau in CSF, either individually, or as part of a panel, (ii) beta amyloid,
      (iii)
      neural thread protein in CSF and/or urine, (iv) amyloid derived diffusible
      ligands (ADDL’s) in CSF, (v) imaging plaques in the brain, or (vi) employing
      proteomic or genetic markers for AD.





We
      have
      completed the development of a prototype diagnostic test utilizing CSF. To
      date,
      we have completed numerous validation studies comprising in excess of 3,500
      CSF
      samples utilizing our diagnostic test in our lab. These studies were designed
      using human CSF in blinded samples to determine the test’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
      our test 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 in peer reviewed scientific journals such as *Neuroscience
      Letters* , *Archives
      of Neurology* ,
      and *American
      Journal of Psychiatry* .
      We
      currently have 15 peer-reviewed publications that report the performance of
      our
      CSF-based test in various patient populations, including AD, mild cognitive
      impairment (“MCI”), depression, other neurological disorders and normal
      controls. In addition, a study has been published in *Annals
      of Neurology* addressing the relationship between phosphotau levels in CSF and natural AD
      progression. We have shown with our test that phosphotau concentrations in
      CSF
      correlate well with the degree of cognitive impairment.





A
      study
      published in the January 2004 edition of *Archives
      of General Psychiatry* has
      shown that detecting phosphorylated tau (“ptau”) proteins in CSF comes closest
      to fulfilling the criteria of a biological marker for AD. This publication
      reported that our CSF-based test exceeded standards for an AD diagnostic test
      established by the National Institute of Aging and the Ronald and Nancy Reagan
      Research Institute of the Alzheimer’s Association in a 1998 published “Consensus
      Report”. It was determined by that group that a successful biological marker
      would be one that had a sensitivity level and specificity level of at least
      80%.


4





Studies
      published in the December 2005 edition of *Neuroscience
      Letters* and in
      the March 2006 journal *Neurobiology
      of Aging* support
      the use of our CSF-based diagnostic test in identifying individuals with mild
      cognitive impairment (“MCI”) who, over time, are most likely to develop
      AD.





A
      study
      published in the January 2006 journal *Neurobiology
      of Aging* reported
      on the ability of our CSF-based test to distinguish AD from Creutzfeldt-Jacob
      disease, either alone or in combination with a total tau test.





A
      report
      published in the November 2006 edition of *Brain* describes a study utilizing our CSF-based test that shows a high correlation
      of
      phosphotau 231 levels from 26 living patients with the neurofibrillary pathology
      subsequently observed in those 26 patients upon autopsy.





While
      results in the above noted published studies demonstrate that our CSF-based
      test
      may represent an effective, early, biochemical marker for AD, the results may
      not be predictive of results that may be obtained in clinical studies. Our
      CSF-based test detects a characteristic feature of pathophysiology and may
      allow
      one to track disease progression as well as accurately discriminate between
      AD
      patients, patients with other forms of dementia, and patients with other
      neurological diseases.





In
      2006,
      we completed two research agreements under which we performed certain research
      services under a fee for service contract. These agreements are unrelated to
      the
      development of any of our potential products or technologies. While providing
      useful data to further validate our CSF-based test, 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 a product is
      brought to market) or rights to future agreements with these companies.
      Furthermore, these agreements are not financially material to the success of
      our
      business, but are evidence, however, of our ability to enter into working
      relationships with major pharmaceutical companies. We cannot provide any
      assurances that these agreements will lead to future agreements with these
      companies or any other major pharmaceutical company or biotechnology
      company.





In
      December 2004, we announced a non-exclusive license agreement with bioMérieux,
      S.A., a leading international diagnostics company, with the aim of bringing
      to
      market on a worldwide basis the first definitive biologic test for the diagnosis
      of AD. The agreement granted bioMérieux an option to further evaluate our
      technology. The option period was extended and has subsequently expired.
      bioMérieux has communicated to us that they have embarked on a new strategic
      direction and therefore, we will not be moving forward with bioMérieux relative
      to our CSF-based diagnostic test.





In
      2006,
      we continued to make improvements to the effectiveness and ease-of-use of our
      CSF-based diagnostic test, and explored the utilization of our CSF-based test
      in
      the mild cognitive impaired (“MCI”) population. In order to maximize the value,
      and minimize the time to market, of our diagnostic programs, we may seek some
      form of partnering, including collaborations, strategic alliances and/or
      licensing arrangements.





Before
      approval by the FDA for general sale, under certain conditions, companies can
      supply either “investigational use only” or “research use only” assay kits under
      the Clinical Laboratory Improvement Amendment (“CLIA”) of 1988. We have had
      discussions with reference laboratories for distribution of our diagnostic
      under
      a CLIA exemption. No agreements have been reached with any reference lab. As
      part of our plan to seek commercialization opportunities for our proposed
      diagnostic products, we may continue to pursue some form of agreement with
      a
      reference lab.





We
      are
      developing serum-based diagnostic tests to detect Alzheimer’s disease that could
      have a much larger potential market than the CSF-based diagnostic test. In
      January 2006, we entered into a research agreement with Nanosphere, Inc., a
      nanotechnology-based molecular diagnostics company, to assist us in the
      development of serum-based diagnostic tests for AD. We are currently working
      on
      developing additional tools that may enable us to best utilize Nanosphere’s
      proprietary technology to further evaluate and develop serum-based diagnostic
      tests.





5


**Transgenic
        Mice Model**
 
 To
        date,
        no widely 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 blocks
        of
        the neurofibrillary tangles, which are known to be involved in the pathology
        of
        Alzheimer’s disease. The pathology in these mice is Alzheimer-like, with
        hyperphosphorylated tau accumulating in cell bodies and dendrites as
        neurofibrillary tangles. In addition, these transgenic mice have exhibited
        extensive neuronal death, which accompanies the tau pathology. These transgenic
        mice could be used for testing the efficacy of therapeutic compounds. AECOM
        and
        the New York State Office of Mental Health, the agency that oversees NKI,
        each
        have an interest in these transgenic mice. Through our license agreements
        with
        AECOM, we have license rights to AECOM’s interest in these transgenic mice. In
        2006, we entered into additional license agreements that provide us with
        the
        exclusive rights to sell these mice. The mice are currently available through
        Jackson Laboratories. In December 2006, we entered into our first agreement
        to
        sell a breeding pair of these mice.





**Research
      and Product Development**





During
      the next twenty-four (24) months, we expect to spend a significant amount of
      our
      financial resources on research and development activities. We incurred costs
      of
      approximately $2,119,000 in 2006 and $1,891,000 in 2005 on research and
      development activities. Since we are not yet engaged in the commercial
      distribution of any diagnostic or therapeutic products and we have no revenues
      from the sale of any such products, these research and development costs must
      be
      financed by us. Throughout our collaboration with Eli Lilly and Company, Lilly
      will provide annual research and development support that partially offsets
      these expenses. We estimate that we will incur costs of approximately $150,000
      to $180,000 per month on research and development activities over the next
      twenty-four months. This excludes the non-cash charges resulting from accounting
      for equity instruments included in such monthly expenditures. These
      expenditures, however, may fluctuate from quarter-to-quarter and year-to-year
      depending upon the resources available and our development schedule. Results
      of
      preclinical therapeutic studies, diagnostic validation and proof of concept
      work, clinical trials, regulatory decisions and competitive developments may
      significantly influence the amount of our research and development
      expenditures.





**Sales
      and Marketing**





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





**Manufacturing**





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





**Competition**





Companies
      in the pharmaceutical, diagnostic and biotechnology fields are subject to
      intense competition. We compete with numerous larger companies that have
      substantially greater financial and other resources and more experience. The
      principal factors affecting our competitive markets include scientific and
      technological factors, the availability of patent and other protection for
      technology and products, the ability 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 us may achieve a
      significant competitive advantage. In addition, such companies may succeed
      in
      developing products that are more effective and less costly than products that
      may be developed by us. There can be no assurance that developments
      by other companies will not render our products or technologies obsolete or
      noncompetitive or that we will be able to keep pace with the technological
      developments of our competitors.


6





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





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




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





*Diagnostics*





There
      is
      currently no FDA-approved biochemical diagnostic to detect Alzheimer's disease
      ("AD"), although there are tests available under the CLIA exemption through
      reference labs. Our CSF-based diagnostic to detect AD, if successfully marketed,
      would compete against, or augment, the most widely used current practice of
      detecting AD through a battery of tests, namely neurological and psychiatric
      examinations, extensive laboratory tests and brain imaging to rule out other
      conditions (such as stroke, brain tumor, or depression) with similar symptoms.
      The AD predictive accuracy of such a battery of exams is generally in the range
      of 75%-85% in some of the larger AD centers, but is usually closer to 60% when
      diagnosed outside of the AD centers. Costs to patients for such testing can
      range from $1,000 - $4,000, including imaging procedures. A simple, predictive,
      accurate and cost effective diagnostic test could, therefore, be an attractive
      alternative for medical practitioners and insurers to the current practice
      to
      detect AD. According to a report by the research organization, Datamonitor,
      the
      market for an AD diagnostic test could be up to $160 million in the U.S. for
      a
      CSF test and significantly higher for a serum-based test, which could
      potentially be utilized as a routine screening test.





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





*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, sales in the U.S. in 2006 are estimated to be nearly $3 billion,
      according to *IMS
      Health.*





7


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





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





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





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





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





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








**Alzheimer's
      disease technology license**





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


Year
              Amount2007
              $475,0002008
                  and each subsequent year
              $500,000


We
      are
      obligated to continue to pay AECOM $500,000 for each year after 2007 in which
      the Agreements are still in effect. In addition, we are obligated to pay AECOM
      a
      percentage of all revenues we receive from selling and/or licensing aspects
      of
      the AD technology licensed under the Agreements that exceeds the minimum
      obligations reflected in the annual license maintenance
      payments.


8




**Confidentiality
      and assignment of inventions agreements**





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





**Government
      regulation**





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





*Therapeutics*





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





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





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.





9


The
        process of completing clinical testing and obtaining FDA approval for a new
        drug
        is likely to take a number of years from the commencement of the clinical
        trial
        and require the expenditure of substantial resources.





*Diagnostic*





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





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








**Environmental
      regulation**





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








**Employees**





As
      of
      March 31, 2007 we had eight full-time employees, four of whom have advanced
      scientific degrees. None of our employees are covered by a collective bargaining
      agreement and we believe all relations with our employees are satisfactory.
      In
      addition, to complement our internal expertise, we have license agreements
      with
      AECOM that provide access to Dr. Peter Davies and the academic researchers
      in his lab and we contract with other academic research laboratories and
      scientific consultants that provide pertinent expertise with therapeutic and
      diagnostic development. In the future, we may hire additional research,
      development and other personnel in addition to utilizing
      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.


10





As
      of
      December 31, 2006, we had $1,433,250 of cash on hand. Since we do not expect
      to
      generate significant revenues from operations in 2007, we will be required
      to
      raise additional capital in financing transactions or through some form of
      collaborative partnership in order to satisfy our expected cash expenditures.
      We
      expect to raise such additional capital by selling shares of our capital stock,
      receiving funds upon exercises of existing warrants and/or stock options or
      by
      borrowing money. However, such additional capital may not be available to us
      at
      acceptable terms or at all. Further, if we sell additional shares of our capital
      stock, your ownership position in our Company will be subject to dilution.
      In
      the event that we are unable to obtain additional capital, we may be forced
      to
      reduce our operating expenditures or to cease operations
      altogether.





We
      have
      had net losses for each of the years ended December 31, 2006 and 2005, and
      we
      have an accumulated deficit of $45.5 million as of December 31, 2006. Since
      the
      financial statements for each of these periods were prepared assuming that
      we
      would continue as a going concern, in the view of our independent auditors,
      these conditions raise substantial doubt about our ability to continue as a
      going concern. Furthermore, since we do not expect to generate any significant
      revenues for the foreseeable future, our ability to continue as a going concern
      depends, in large part, on our ability to raise additional capital through
      equity or debt financing transactions, and receipt of payments from
      collaborative partnerships. If we are unable to raise additional capital, we
      may
      be forced to discontinue our business.





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





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





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





We
      have
      experienced significant operating losses since our inception. As of December
      31,
      2006, we had an accumulated deficit of approximately $45.5 million. We expect
      to
      incur operating losses over the next several years as our research and
      development efforts continue. Our ability to achieve profitability depends
      in
      part upon our ability, alone or with or through others, to raise additional
      capital to execute our business plan, to complete development of our proposed
      products, to obtain required regulatory approvals, to manufacture and market
      our
      products, and to successfully commercialize our approved products.





*We
      need to raise additional capital by May 2007, however, we may not be able to
      raise such capital, or we may only be able to raise capital on unfavorable
      terms*





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





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


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


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


·
            the
                time and costs involved in obtaining regulatory
                approvals;


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


·
            competing
                technological and market
                developments;


·
            changes
                in our existing research relationships;
                and


·
            effective
                product commercialization activities and
                arrangements.


11





We
      anticipate that our cash balances as of December 31, 2006, coupled with
      anticipated funds to be received from operations, will be sufficient to cover
      our planned research and development activities and general operating expenses,
      into May 2007. We will need additional funding prior to May 2007 to cover
      operations, and to fund costs of any products in development. If additional
      funding is not obtained, we will not be able to fund costs of any programs,
      and
      we may have to significantly minimize or eliminate our programs, and possibly
      discontinue all our product development and/or our operations. We are currently
      evaluating our options to maximize the value of our diagnostic technology,
      including seeking partnerships and  licensing arrangements.





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





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





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





Diagnostic
      products have a different path to regulatory approval than the path for
      pharmaceutical products. In
      vitro
      diagnostic products have a different path to regulatory approval, i.e., the
      Premarket Approval Application (PMA) process regulated by the Office of In
      Vitro
      Diagnostic Device and Safety (OIVD) of the FDA. The regulatory process leading
      to a submission of an in vitro diagnostic device PMA for FDA approval to market
      involves a multistage process including: (1) a Pre-Investigational Device
      Exemption (Pre-IDE) program in which preliminary information is submitted to
      the
      FDA for review and guidance on, and acceptance of, the test protocol and
      proposed clinical trial to evaluate the safety and effectiveness of an in vitro
      diagnostic product followed by, (2) an Investigational Device Exemption (IDE)
      submission for approval to allow the investigational diagnostic device to be
      used in a clinical study in order to (3) collect safety and effectiveness data
      required to support a PMA to receive FDA approval to market a
      device.





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





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


·
            The
                FDA might not accept the test
                results,


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


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


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





In
      2005
      we filed with the FDA a Pre-Investigational Device Exemption (“Pre-IDE”)
      application with respect to our CSF-based diagnostic test and we had our Pre-IDE
      meeting with the FDA in November 2005. Subsequent to our meeting with the FDA,
      we worked with our clinical consultants to refine our clinical protocol. At
      that
      time, work was suspended due to funding constraints. It is uncertain when we
      will file a Pre-IDE for our serum-based diagnostics in development. We have
      not
      filed any Investigation New Drug (“IND”) with respect to our AD therapeutic, and
      the timing of such filing in the future is uncertain, and subject to the
      progress of our collaboration with Eli Lilly and Company. We
      cannot
      predict with certainty when we might submit any of our proposed products
      currently under development for regulatory  12


review. 
      Once we submit a proposed product for review, the FDA or other regulatory
      agencies may not issue their approvals on a timely basis, if at all. If we
      are
      delayed or fail to obtain such approvals, our business may be adversely
      affected. If
      the
      FDA grants approval for a drug or device, such approval may limit the indicated
      uses for which we may market the drug or device and this could limit the
      potential market for such drug or device. Furthermore, if we obtain approval
      for
      any of our products, the marketing and manufacture of such products remain
      subject to extensive regulatory requirements. Even if the FDA grants approval,
      such approval would be subject to continual review, and later discovery of
      unknown problems could restrict the products future use or cause their
      withdrawal from the market. If
      we
      fail to comply with regulatory requirements, either prior to approval or in
      marketing our products after approval, we could be subject to regulatory or
      judicial enforcement actions. Failure
      to comply with regulatory requirements could, among other things, result
      in:





·
            product
                recalls or seizures;


·
            fines
                and penalties;


·
            injunctions;


·
            criminal
                prosecution;


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


·
            enhanced
                exposure to product liabilities.





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





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




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


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





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





*Our
      technologies are subject to licenses and termination of 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 in order to maintain
      our rights. The agreements also generally require us to pay royalties on the
      sale of products developed from the licensed technologies, fees on revenues
      from
      sublicensees, where applicable, and the costs of filing and prosecuting patent
      applications. We are currently in compliance with our license agreements,
      however, we will need to raise additional capital in order to meet our ongoing
      obligations to AECOM. If we fail to raise sufficient funds, and consequently
      default on our obligations to AECOM, our licenses could terminate, and we could
      lose the rights to our proprietary technologies. Such a loss would have a
      material adverse effect on our operations and prospects.





13


*Our
      collaboration agreement with Eli Lilly and Company may not provide the future
      payments we anticipate over the course of the agreement*





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





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





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





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





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





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





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


14





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





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





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





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





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





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





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





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


15





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





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





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





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





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


·
            preparing
                submissions seeking regulatory approvals


·
            manufacture
                of kits and solutions


·
            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. For example, under
      our
      agreement with Eli Lilly and Company, Lilly has an exclusive world-wide license
      to manufacture, market and sell any AD therapeutics that comes to market from
      our collaboration agreement. We
      cannot
      be sure that the Lilly agreement or any future collaborative agreements will
      be
      successful. If
      these
      third parties, such as Eli Lilly and Company, do not perform in a timely and
      satisfactory manner, we may incur additional costs and lose time in our
      development and clinical programs as well as commercializing our products. To
      the
      extent we choose not to, or are not able to, establish such arrangements, we
      could experience increased risk and capital requirements.





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





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


·
            we
                can not enter into favorable agreements with
                them


·
            third
                parties may not successfully carry out their contractual
                duties


·
            third
                parties may not meet expected deadlines







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





16


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





We
      are
      highly dependent upon the principal members of our management team, especially
      Ellen R. Hoffing, President and Chief Executive Officer, and Peter Davies,
      Ph.D., our founding scientist, as well as our other officers and directors.
      Ms.
      Hoffing’s employment began on August 29, 2006. Our consulting agreements with
      Dr. Davies are effective through November 2008, and we have employment
      agreements with John DeBernardis, Ph.D., Senior Advisor to Ms. Hoffing, Daniel
      Kerkman, Ph.D., Vice President of Research and Development, and David Ellison,
      Chief Financial Officer and Corporate Secretary, all of which run 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, and our ability to identify, hire and
      retain additional staff. We face intense competition for qualified employees
      and
      consultants. Large pharmaceutical 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 may
      not
      be able to match the packages offered by such competitors and large
      pharmaceutical companies, and we may have difficulty attracting suitable
      replacements.





We
      expect
      that our potential expansion into areas and activities requiring additional
      expertise, such as clinical trials, governmental approvals, contract and
      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.





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





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





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





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





17


*Potential
      product liability claims against us could result in reduced demand for our
      products or extensive damages in excess of insurance coverage*





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





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





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





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





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





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








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





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





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





18


·
            patient
                population size


·
            access
                to patients


·
            competitive
                trials


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


·
            patient
                proximity to clinical sites


·
            eligibility
                criteria for the study




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





*Our
      stock price may fluctuate significantly due to reasons unrelated to our
      operations, our products or our financial results. Our stock price may decrease
      if we have to issue a large number of shares of common stock that we may have
      to
      issue in order to raise the additional funds needed by May
      2007.*





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 2005 and 2006 fiscal years and the three-month period ended March
      31,
      2007, the highest interday price of our stock was $0.50 and the lowest interday
      price of our stock during the same period was $0.09. We have sufficient cash
      to
      last into May 2007, and will need to raise additional funds prior to May 2007.
      In order to raise additional funds, we may have to sell a significant number
      of
      shares of our common stock and/or issue warrants exercisable to purchase shares
      of our common stock. While the inflow of additional funds may cause our stock
      price to increase, the prospect of issuing, or actual issuance of, a substantial
      number of additional shares of common stock may cause our stock price to
      decrease.





*We
      will need to increase the number of our authorized shares of common stock in
      order to raise a meaningful amount of capital through the sale of equity
      securities. Such increase will require approval of our stockholders. If our
      stockholders do not approve the increase in authorized common stock, we will
      be
      limited in our ability to raise a significant amount of capital through the
      sale
      of equity securities.*





We
      have
      200,000,000 authorized shares of common stock. We current have 98,409,901 shares
      of common stock issued and outstanding, and we have reserved (i) 48,071,472
      shares of common stock for issuance upon the exercise of outstanding warrants,
      (ii) 20,452,531 shares of common stock for issuance upon the exercise of
      outstanding options, and (iii) 400,000 shares of restricted stock to be issued
      to our CEO pursuant to the terms of her employment. Consequently, unless we
      increase our authorized shares of common stock, we only have 32,666,096 shares
      of common stock available for issuance in any capital raising transaction.
      Because we expect to have to issue warrants in any equity deal to raise capital,
      we will have significantly less than 32.6 million shares to sell, which reduces
      the amount of capital we could raise. In order to raise a significant amount
      of
      capital for future operations, we may need to increase our authorized common
      stock to at least 400 million shares, or more.





*Our
      share price may decline due to a large number of shares of our common stock
      eligible for sale in the public markets and a large number of shares of our
      common stock that could be issued upon the exercise of warrants and options
      that
      are “in the money”*





As
      of
      March 31, 2007, we have outstanding 98,409,901 shares of Common Stock, without
      giving effect to shares of Common Stock issuable upon exercise of (i) warrants
      issued in the February 2004 Offering, exercisable for 41,330,294 shares of
      our
      common stock (at an exercise price of $0.30 per share), (ii) the Placement
      Agent's warrants, exercisable for 3,143,335 shares of our common stock (at
      an
      exercise price of $0.30 per share), (iii) 10,452,531 options granted under
      our
      stock option plan, (iv) 10,000,000 options granted outside of our stock option
      plan, and (iv) 3,597,843 other warrants previously issued. Of such outstanding
      shares of Common Stock, all are freely tradable, except for any shares not
      yet
      registered, shares underlying stock options that are not yet vested, and any
      shares held by our "affiliates" within the meaning of the Securities Act
      (officers, directors and 10% security holders), which shares will be subject
      to
      the resale limitations of Rule 144 promulgated under the Securities Act. We
      will
      need to raise capital and this may cause us to issue additional shares of our
      common stock in 2007.





*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.


19





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





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





*Our
      internal controls may not be adequate*





Although
      we have performed an internal review of our controls and procedures and deemed
      them to be effective, Section 404 of the Sarbanes Oxley Act of 2002 (“Section
      404”) requires significant additional procedures and review processes. Section
      404 requires that we evaluate and report on our system of internal controls
      beginning with our Annual Report on Form 10-KSB for the year ending December
      31,
      2007. In addition, our independent auditors must report on management’s
      evaluation of those controls. The additional costs associated with this process
      may be significant. Our internal controls under Section 404 may not be adequate.
      We are continuing, and are in the early stages of, 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 $125,000.  Our
      current lease agreement expires in May 2007. We are currently negotiating an
      extension of our lease agreement. We believe that we can acquire additional
      space, if needed, on acceptable terms.








**ITEM
      3.**  **LEGAL
      PROCEEDINGS**





We
      are
      not currently involved in any legal proceedings.





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





None








20


**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 closing bid prices for
      our
      common stock, from January 1, 2005 through December 31, 2006, and for each
      of
      the quarterly periods indicated as reported by the OTC Bulletin Board. The
      bid
      prices represent prices between broker-dealers and don’t include retail mark-ups
      and mark-downs or any commissions to the dealer. These bid prices may not
      reflect actual transactions.











**High**
            
            **Low**2005:First
                quarter
            
            $
            0.31
            
            $
            0.20Second
                quarter
            
            
            0.42
            
            
            0.23Third
                quarter
            
            
            0.37
            
            
            0.26Fourth
                quarter
            
            
            0.39
            
            
            0.302006:First
                quarter
            
            $
            0.33
            
            $
            0.17Second
                quarter
            
            
            0.24
            
            
            0.11Third
                quarter
            
            
            0.32
            
            
            0.16Fourth
                quarter
            
            
            0.42
            
            
            0.26





As
      of
      March 31, 2007, we had approximately 1,500 record holders of our common
      stock.





No
      dividends were paid in 2005 and 2006. There are no restrictions on the payment
      of dividends. We do not intend to pay dividends for the foreseeable
      future.





All
      of
      our securities that were issued or sold by us since March 15, 2001, have been
      registered with the SEC, except 1,387,916 shares of common stock issued in
      2006,
      10,000,000 stock options issued outside our Stock Option Plan in 2006, and
      922,500 warrants issued in 2006 to the Bridge Fund note holders. 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.






















21


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





**General**





Our
      business strategy is to build on our strong science, research, and commitment
      to
      develop a range of solutions to meet the growing unmet needs of the Alzheimer
      patient. Through our tau based approach we have developed proprietary
      technology, know-how and tools. Our unique science coupled with our founding
      scientist, Dr. Peter Davies, and a collaboration with a top tier Pharmaceutical
      company, Eli Lilly and Company, is focused on the development and
      commercialization of novel therapeutics to modify the course of AD, as well
      as a
      range of diagnostic tests using both cerebrospinal fluid (“CSF”) and serum. We
      are seeking to offer options for early diagnosis and high impact therapeutic
      solutions that will enhance the physicians’ ability to effectively manage their
      patient’s treatment. Our principal development programs, and plan of operation
      for each, are as follows:





·
            *AD
                Therapeutic Program*-
                We are involved in the discovery and development of novel therapeutic
                targets for the development of treatments for Alzheimer’s disease based
                upon a concept developed by Peter Davies, Ph.D., the Company’s 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 focused on discovery of unique
                therapeutic targets that may be involved in a common intracellular
                phosphorylation pathway leading to the development of the abnormal,
                destructive brain structures, amyloid plaques and neurofibrillary
                tangles,
                that are characteristic of Alzheimer’s disease. We have discovered
                biomarkers that we believe will aid in the development of effective
                AD
                treatments. A patent application was filed in 2005 covering Dr. Davies
                work relative to this area. In November 2006, we announced an agreement
                with Eli Lilly and Company to develop therapeutics to treat AD. The
                agreement forms a collaboration that will combine the expertise,
                research
                tools and tau-based approach advanced by Dr. Davies and our team
                at APNS
                with the scientists, therapeutic development expertise and financial
                resources at Eli Lilly and Company. The agreement calls for Lilly
                to
                receive the exclusive worldwide rights to the intellectual property
                related to our expertise in understanding themolecular
                neuropathology of AD as it pertains to the formation of neurofibrillary
                tangles.




·
            *AD
                Diagnostic Program*-
                Our diagnostic program is based on Dr. Davies’ research of the tau
                pathology, and revolves around building a pipeline of diagnostic
                tests,
                including: (i) the detection of hyperphosphorylated tau in CSF, (ii)
                a
                screening test to rule out AD in serum, and (iii) the detection of
                hyperphosphorylated tau in serum. Our product farthest along in
                development is a CSF-based diagnostic test to detect whether a person
                has
                AD. This diagnostic, based upon the detection of a certain AD associated
                protein found in the CSF of AD patients, has achieved, in research
                based
                validation studies, an overall sensitivity and specificity in the
                range of
                85% to 95%. This is based on extensive testing in our lab, utilizing
                CSF
                samples to differentiate patients diagnosed with AD from patients
                diagnosed with other forms of dementia and relevant neurological
                diseases,
                including major depression, as well as healthy controls. In 2005,
                we
                submitted Pre-IDE documents to the FDA and had a Pre-IDE meeting
                with the
                FDA in November 2005. Subsequent to our meeting with the FDA, we
                worked
                with our clinical consultants to refine our clinical protocol. At
                that
                time, work was suspended due to funding constraints. We are planning
                to
                continue development of our CSF-based diagnostic test while seeking
                appropriate partnerships and expertise to assist us in advancing
                towards
                commercialization. We are developing serum-based diagnostic tests
                to
                detect Alzheimer’s disease that could have a much larger potential market
                than the CSF-based diagnostic test. In January 2006, we entered into
                a
                research agreement with Nanosphere, Inc., a nanotechnology-based
                molecular
                diagnostics company, to assist us in the development of serum-based
                diagnostic tests for AD. We are currently working on developing new
                tools
                that may enable us to best utilize Nanosphere’s proprietary technology to
                further evaluate and develop serum-based diagnostic
                tests.




In
      order
      to maximize the value, and minimize the time to market, of our diagnostic
      programs, we may seek some form of partnering, including collaborations,
      strategic alliances and/or licensing arrangements.







22


·
            *Transgenic
                Mice -*To
                date, no widely 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 containing the human
                tau gene that develops human paired helical filaments, the building
                blocks
                of the neurofibrillary tangles, which are known to be involved in
                the
                pathology of Alzheimer's disease.  The pathology in these mice is
                Alzheimer-like, with hyperphosphorylated
                tau


accumulating
      in cell bodies and dendrites as neurofibrillary tangles. In addition, these
      transgenic mice have exhibited extensive neuronal death, which accompanies
      the
      tau pathology. These transgenic mice could be used for testing the efficacy
      of
      therapeutic compounds. AECOM and the New York State Office of Mental Health,
      the
      agency that oversees NKI, each have an interest in these transgenic mice.
      Through our license agreements with AECOM, we have license rights to AECOM’s
      interest in these transgenic mice. In 2006, we entered into additional license
      agreements that provide us with the exclusive rights to sell these mice. The
      mice are currently available through Jackson Laboratories. In December 2006,
      we
      entered into our first agreement to sell a breeding pair of these
      mice.





We
      incurred research and development costs of $1,889,413 in 2006 and $1,742,782
      in
      2005, excluding non-cash costs related to 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, 2006, coupled with
      anticipated funds to be received from operations, will be sufficient to cover
      our planned research and development activities and general operating expenses
      into May 2007. We will need additional funding prior to May 2007 to cover
      operations. If additional funding is not obtained, we will not be able to fund
      the costs of any programs in development. This would have a material adverse
      effect on our operations and our prospects.





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





As
      of
      December 31, 2006, we had cash of $1,433,250. These funds should be sufficient
      to satisfy our cash requirements into May 2007. The cash on hand will be used for
      ongoing research and development, working capital, general corporate purposes
      and possibly to secure appropriate partnerships and expertise.





We
      do not
      anticipate the purchase, lease or sale of any significant property and equipment
      during 2007. We do not anticipate any significant changes in our employee count
      during 2007.





**Plan
      of Operation**







Our
      strategic plan involves focusing our resources, and establishing priorities,
      to
      maximize the return to the shareholders. In order to accomplish this objective,
      it is expected that we will focus on advancing our therapeutic collaboration
      with Eli Lilly and Company and developing the projects in our diagnostic
      pipeline to detect AD, including our CSF-based test and serum-based tests,
      toward commercialization.




In
      November 2006, we announced an agreement with Eli Lilly and Company to develop
      therapeutics to treat AD.  According
      to the terms of the agreement, we received $2 million in cash, including an
      equity investment of $500,000, from Lilly, plus we will receive annual research
      and development support for the duration of the collaboration agreement. In
      addition, Lilly will, based on achievement of certain milestones, provide us
      with up to $10 million to $20 million per therapeutic compound. There are no
      assurances that any milestones will be met. Royalties are to be paid to us
      for
      AD therapies brought to market that result from the collaboration. Lilly
      received the exclusive worldwide rights to the intellectual property related
      to
      our expertise in understanding the molecular
      neuropathology of AD as it pertains to the formation of neurofibrillary
      tangles.




Our
      product farthest along in development is a CSF-based diagnostic test to detect
      whether a person has AD. We are planning to continue development of our
      CSF-based diagnostic test while seeking appropriate partnerships and expertise
      to assist us in advancing towards commercialization.





We
      are
      developing serum-based diagnostic tests to detect Alzheimer’s disease that could
      have a much larger potential market than the CSF-based diagnostic test. In
      January 2006, we entered into a research agreement with Nanosphere, Inc., a
      nanotechnology-based molecular diagnostics company, to assist us in the
      development of serum-based
      diagnostic tests for AD. We are currently working on developing additional
      tools that may enable us to best utilize Nanosphere’s proprietary technology to
      further evaluate and develop serum-based diagnostic tests.


23


In
      order
      to maximize the value, and minimize the time to market, of our diagnostic
      programs, we may seek some form of partnering, including collaborations,
      strategic alliance and/or licensing opportunities.





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.





We
      will
      need additional funding prior to May 2007 to cover operations, and to fund
      the
      costs of any diagnostic products in development, as well as our therapeutic
      collaboration with Eli Lilly and Company. If additional funding is not obtained,
      we will not be able to fund any programs in development, and we may have to
      discontinue all our product development and/or our 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
      consolidated financial statements include the accounts of APNS and its
      wholly-owned subsidiaries prior to our dissolution of our subsidiaries in 2004.
      All significant intercompany balances and transactions have been eliminated. The
      preparation of these financial statements requires our management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and the disclosure of contingent assets and liabilities at the
      date
      of the financial statements and the reported amounts of revenues and expenses
      during the reporting period.





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





*Revenue
      Recognition*





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





*Research
      and Development*





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





*Net
      Deferred Tax Asset Valuation Allowance*





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


24




*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
      our 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 our options
      awarded to non-employee consultants. To determine fair value, management is
      required to make assumptions such as the expected volatility and expected life
      of the instruments.





**Results
      of Operations**





The
      following discussion of the financial condition and results of operations should
      be read in conjunction with the consolidated financial statements and notes
      thereto included in Item 7.







*Year
      Ended December 31, 2006 Compared to Year Ended December 31,
      2005*





**Revenues**





We
      recognized $251,634 of revenues in 2006 from the completion of two research
      agreements and the recognition of part of our initial funds received from our
      collaboration with Eli Lilly and Company. We recognized $480,000 of revenues
      in
      2005 from the completion of one research agreement and the completion of the
      evaluation period in a collaborative agreement.





**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, 2006 increased 12%
      or
      $228,652 to $2,119,431 from $1,890,779 for the year ended December 31, 2005.
      Below is a summary of our most significant research and development
      expenses:





**Increase****Expense**
            
            **2006**
            
            **2005**
            
            **(Decrease)**Compensation,
                taxes and benefits
            
            $
            885,127
            
            $
            874,702
            
            $
            10,425Research
                funding, license fees and scientific consulting
            
            
            785,500
            
            
            483,074
            
            
            302,426Regulatory
                consulting
            
            
            60,663
            
            
            259,660
            
            
            (198,997
            )Rent,
                telephone and utilities
            
            
            110,645
            
            
            108,190
            
            
            2,455Variable
                accounting for stock options
            
            
            -
            
            
            98,472
            
            
            (98,472
            )Stock
                option compensation expense
            
            
            230,018
            
            
            49,525
            
            
            180,493Other
                research and development expenses, net of reimbursements
            
            
            47,478
            
            
            17,156
            
            
            30,322Total
                Research and Development Expenses
            
            $
            2,119,431
            
            $
            1,890,779
            
            $
            228,652





This
      increase in 2006 is primarily due to non-cash costs associated with expensing
      stock options and an increase in research funding and license fees. Beginning
      January 1, 2006, SFAS 123R requires companies to measure and recognize
      compensation expense for all stock based payments at fair value. Expense
      included in 2006 was $112,558. In addition, we recorded a non-cash expense
      of
      $117,460 for unrecognized compensation costs for the options granted in 2005
      that were subsequently cancelled in June 2006. We also had an increase in
      research funding, licensing and consulting of $302,426 due to the start of
      our
      agreement with Nanosphere, an increase in our


25


payments
      to AECOM, and license
      fees incurred. This increase was partially offset by decreases in expense for
      variable accounting for stock options and costs incurred for regulatory
      consulting. Prior to January 1, 2006, we had certain equity instruments that
      met
      the criteria of variable accounting whereby additional compensation expense
      was
      recognized if the share price of our common stock increased, which may be
      reversed if the price subsequently declined. Included in research and
      development expense in 2005, was non-cash compensation expense of $98,472 for
      variable accounting for stock options reflecting an increase in our stock price.
      In 2005, we had a large increase in regulatory consultant costs due to our
      discussions to advance our CSF-based AD diagnostic through the FDA regulatory
      process. We
      estimate that we may incur costs of approximately $150,000 to $180,000 per
      month
      on research and development activities going forward. This excludes the non-cash
      effect of accounting for equity instruments included in the annual amounts
      mentioned above. These expenditures, however, may fluctuate from
      quarter-to-quarter and year-to-year depending upon the resources available
      and
      our development schedule. Results of preclinical studies, clinical trials,
      regulatory decisions and competitive developments may significantly influence
      the amount of our research and development expenditures. In addition, if we
      incur clinical development costs of any program, research and development
      spending will significantly increase.




**General
      and administrative**





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,
      2006 increased 76% or $961,184 to $2,224,939 from $1,263,755 for the year ended
      December 31, 2005. Below is a summary of our most significant general and
      administrative expenses:








**Increase****Expense**
            
            **2006**
            
            **2005**
            
            **(Decrease)**Compensation,
                taxes and benefits
            
            $
            502,614
            
            $
            351,753
            
            $
            150,861Consulting
            
            
            212,459
            
            
            231,331
            
            
            (18,872
            )Professional
                fees
            
            
            552,366
            
            
            262,816
            
            
            289,550Rent,
                telephone and utilities
            
            
            50,317
            
            
            52,084
            
            
            (1,767
            )Variable
                accounting for stock options
            
            
            -
            
            
            121,480
            
            
            (121,480
            )Stock
                option compensation expense
            
            
            687,929
            
            
            27,532
            
            
            660,397Other
                general and administrative expenses
            
            
            219,254
            
            
            216,759
            
            
            2,495Total
                General and Administrative Expenses
            
            $
            2,224,939
            
            $
            1,263,755
            
            $
            961,184





This
      increase in 2006 is primarily due to non-cash costs associated with expensing
      stock options and increases in compensation costs and professional fees. Beginning
      January 1, 2006, SFAS 123R requires companies to measure and recognize
      compensation expense for all stock based payments at fair value. Expense
      included in 2006 was $687,929. The increase in compensation expense is primarily
      due to the hiring of Ellen R. Hoffing as President and CEO in August 2006.
      The
      increase in professional fees is primarily related to costs incurred to retain
      an executive search firm to assist us in hiring Ms. Hoffing, plus additional
      legal time spent on specific projects in 2006, including our first annual
      stockholders’ meeting, numerous licensing agreements, SEC filings and patent
      support. This
      increase was partially offset by a decrease in expense for variable accounting
      for stock options. Prior to January 1, 2006, we had certain equity instruments
      that met the criteria of variable accounting whereby additional compensation
      expense was recognized if the share price of our common stock increased, which
      may be reversed if the price subsequently declined. Included in general and
      administrative expense in 2005, was non-cash compensation expense of $121,480
      for variable accounting for stock options reflecting an increase in our stock
      price. We
      estimate that we may incur costs of approximately $100,000 to $150,000 per
      month
      on general and administrative activities going forward. This excludes the
      non-cash effect of accounting for equity instruments included in the annual
      amounts mentioned above. These expenditures, however, may fluctuate from
      quarter-to-quarter and year-to-year depending upon the resources available
      and
      our development schedule.





**Other
      income and expense**





Interest
      expense for the year ended December 31, 2006 was $218,740, primarily due to
      $189,707 non-cash amortization of debt discount and $29,000 accrued interest
      related to the bridge loan. Interest expense for the year ended December 31,
      2005 was $588. Interest income for the year ended December 31, 2006 decreased
      59% or $32,332,
      to $22,149 from $54,481 for the year ended December 31, 2005. The decrease
      is
      primarily due to lower average invested balances, which was slightly offset
      by a
      higher rate of return.


26




We
      currently do not hedge foreign exchange transaction exposures. As of December
      31, 2006, we do not have any assets and liabilities denominated in foreign
      currencies.





**Net
      loss**




We
      incurred a
      net loss of $4,289,327 for the year ended December 31, 2006 compared to a net
      loss of $2,620,641 for the year ended December 31, 2005. The primary reasons
      for
      the $1,668,686 increase in the net loss in 2006 were the $620,938 increase
      in
      stock based compensation expense; the $302,426 increase in research funding
      and
      license fees; the $161,286 increase in compensation costs; the $71,681 net
      increase in professional fees, regulatory and business consulting costs; the
      $218,152 increase in interest expense and the $228,366 decrease in revenues.





**Capital
      resources and liquidity**





To
      date,
      we have raised equity and convertible debt financing and received research
      agreement revenues, collaboration revenues and grant revenues to fund our
      operations, and we expect to continue this practice to fund our ongoing
      operations. Since inception, we have raised net proceeds of approximately $38.0
      million from private equity and convertible debt financings. We have also
      received approximately $3.4 million from research agreements, collaboration
      revenues and grant revenues.





Our
      cash
      and cash equivalents were $1,433,250 and $1,663,740 at December 31, 2006 and
      2005, respectively. The decrease in our cash balance is due to the excess cash
      used in operations over funds received from debt and equity financings and
      funds
      received from our collaboration with Eli Lilly and Company.





We
      used
      cash in operating activities of $1,809,803 for the year ended December 31,
      2006
      versus cash used in operating activities of $2,516,610 for the year ended
      December 31, 2005. This decrease primarily reflects the funds received from
      Eli
      Lilly and Company in December 2006 net of the increase in non-cash equity and
      interest expense in 2006. Cash used in investing activities was negligible
      in
      2006 and 2005. Net cash provided by financing activities was $1,581,299 for
      the
      year ended December 31, 2006 versus net cash provided by financing activities
      of
      $672,749 for the year ended December 31, 2005. This increase primarily reflects
      additional funds raised through sale of stock and exercise of options and
      warrants in 2006, plus funds from the proceeds of the bridge loan in 2006.
      The
      bridge loan was repaid, plus accrued interest, in January 2007.





We
      have
      incurred recurring losses since our inception and expect to incur substantial
      additional research and development costs prior to reaching profitability.
      We
      incurred research and development costs of $1,889,413 in 2006 and $1,742,782
      in
      2005, excluding non-cash costs related to 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, 2006, coupled with
      anticipated funds to be received from operations, will be sufficient to cover
      our planned research and development activities and general operating expenses
      into May 2007. We will need additional funding prior to May 2007 to cover
      operations. If additional funding is not obtained, we will not be able to fund
      the costs of any programs in development. This would have a material adverse
      effect on our operations and our prospects.





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




We
      currently do not have sufficient resources to complete the commercialization
      of
      all of our proposed research projects. Therefore, we will need to raise
      substantial additional capital prior to May 2007 to fund our operations. We
      cannot be certain that any financing will be available when needed, or on terms
      acceptable to us. If we fail to raise additional financing as we need it, we
      may
      have to delay or terminate our own product development programs or pass on
      opportunities to in-license or otherwise acquire new products that we believe
      may be beneficial to our business. We may spend capital on:


27





•  research
      and development programs;


•  pre-clinical
      studies and clinical trials; and


•  regulatory
      processes.





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





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


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


•  time
      and
      cost necessary to obtain regulatory approvals;


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


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


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


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


commercial
      relationships; and


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








**Commitments**





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





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


•  pay
        semi-annual maintenance payments in January and July each year;
 •  pay
        quarterly funding payments in February, May, August and November each year
        as
        long as
 the
        license agreements are in place; and
 •  pay
        the
        costs of patent prosecution and maintenance of the patents included in the
        agreement.


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


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


•  enter
      into additional licenses and collaborative agreements; and


•  incur
      additional expenses associated with being a public company.





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





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





Contractual
                Obligations
            
            
            2007
              Year
                1
            
            
            2008
              Year
                2
            
            
            2009
              Year
                3
            
            
            2010
              Year
                4
            
            
            2011
              Year
                5
            
            
            TotalOperating
                Leases
            
            $
            34,000
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            34,000Consulting
                Agreements with initial terms greater than one-year
            
            
            108,000
            
            
            99,000
            
            
            -
            
            
            -
            
            
            -
            
            
            207,000Commitments
                Under
              License
                Agreement with
              AECOM
            
            
            475,000
            
            
            500,000
            
            
            500,000
            
            
            500,000
            
            
            500,000
            
            
            2,475,000Total
                Contractual Cash
              Obligations
            
            $
            617,000
            
            $
            599,000
            
            $
            500,000
            
            $
            500,000
            
            $
            500,000
            
            $
            2,716,000







28


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





**Recently
      issued accounting statements**





In
      June
      2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes” (FIN 48), which supplements SFAS No. 109,
“Accounting for Income Taxes,” by defining the confidence level that a tax
      position must meet in order to be recognized in the financial statements. The
      Interpretation requires that the tax effects of a position be recognized only
      if
      it is “more-likely-than-not” to be sustained based solely on its technical
      merits as of the reporting date. The more-likely-than-not threshold represents
      a
      positive assertion by management that a company is entitled to the economic
      benefits of a tax position. If a tax position is not considered
      more-likely-than-not to be sustained based solely on its technical merits,
      no
      benefits of the position are to be recognized. Moreover, the
      more-likely-than-not threshold must continue to be met in each reporting period
      to support continued recognition of a benefit. At adoption, companies must
      adjust their financial statements to reflect only those tax positions that
      are
      more-likely-than-not to be sustained as of the adoption date. Any necessary
      adjustment would be recorded directly to retained earnings in the period of
      adoption and reported as a change in accounting principle. This Interpretation
      is effective as of the beginning of the first fiscal quarter beginning after
      December 15, 2006. We do not expect the adoption of FIN 48 to have a
      material effect on our financial statements.




In
      September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108,
“Quantifying Financial Misstatements,” which expresses the Staff’s views
      regarding the process of quantifying financial statement misstatements.
      Registrants are required to quantify the impact of correcting all misstatements,
      including both the carryover and reversing effects of prior year misstatements,
      on the current year financial statements. The techniques most commonly used
      in
      practice to accumulate and quantify misstatements are generally referred to
      as
      the “rollover” (current year income statement perspective) and “iron curtain”
(year-end balance sheet perspective) approaches. The financial statements would
      require adjustment when either approach results in quantifying a misstatement
      that is material, after considering all relevant quantitative and qualitative
      factors. This bulletin is effective for financial statements for the first
      fiscal year ending after November 15, 2006. The adoption of SAB No. 108 had
      no effect on our financial statements.





In
      September 2006, the FASB issued SFAS No. 157 “Fair Value Measurement”
(SFAS No. 157) which provides a definition of fair value, establishes a
      framework for measuring fair value and requires expanded disclosures about
      fair
      value measurements. SFAS No. 157 is effective for financial statements
      issued for fiscal years beginning after November 15, 2007 and interim
      periods within those fiscal years. We do not expect the adoption of SFAS No.
      157
      to have a material effect on our financial statements.




In
      September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting
      for Defined Benefit Pension and Other Postretirement Plans,” (SFAS No. 158)
      which amends SFAS No. 87, “Employers’ Accounting for Pensions”
(SFAS No. 87), SFAS No. 88, “Employers’ Accounting for
      Settlements and Curtailments of Defined Benefit Pension Plans and for
      Termination Benefits” (SFAS No. 88), SFAS No. 106,
“Employers’ Accounting for Postretirement Benefits Other Than Pensions”
(SFAS No. 106), and SFAS No. 132(R), “Employers’ Disclosures
      about Pensions and Other Postretirement Benefits (revised 2003)”
(SFAS No. 132(R)). This Statement requires companies to recognize an
      asset or liability for the overfunded or underfunded status of their benefit
      plans in their financial statements. SFAS No. 158 also requires the
      measurement date for plan assets and liabilities to coincide with the sponsor’s
      year end. The standard provides two transition alternatives related to the
      change in measurement date provisions. The recognition of an asset and liability
      related to the funded status provision is effective for fiscal year ending
      after
      December 15, 2006 and the change in measurement date provisions is
      effective for fiscal years ending after December 15, 2008. We do not expect
      the adoption of SFAS No. 158 to have a material effect on our financial
      statements.




In
      October 2006, the FASB issued FSP No. 123(R)-5 “Amendment of FASB
      Staff Position FAS No. 123(R)-1”. This FSP amends FSP FAS
      No. 123(R)-1, “Classification and Measurement of Freestanding Financial
      Instruments Originally Issued in Exchange for Employee Services under
      SFAS No. 123(R),” to clarify that freestanding financial instruments
      that were originally issued as employee compensation subject to
      SFAS No. 123(R) and subsequently modified solely to reflect an equity
      restructuring that occurs when the holders


29


are
      no
      longer employees, should continue to be subject to the recognition and
      measurement provisions of SFAS No. 123(R) if certain conditions are
      met. The provisions in this FSP are effective for the first reporting period
      beginning after October 10, 2006. We adopted the provisions of FSP 123(R)-5
      on January 1, 2007. This guidance will not have a material effect on our
      financial condition and results of operations.




In
      October 2006, the FASB issued FSP No. 123(R)-6 “Technical Corrections
      of FASB Statement No. 123(R),” which revises the definition of “short-term
      inducement” to exclude an offer to settle an award. The provisions of this FSP
      are effective for the first reporting period beginning after October 20,
      2006. We adopted the provisions of FSP 123R-6 on January 1, 2007. This
      guidance will not have a material effect on our financial condition and results
      of operations.





In
      February
      2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial
      Assets and Financial Liabilities - Including an Amendment of SFAS No. 115”
(SFAS No. 159), which permits an entity to measure many financial assets and
      financial liabilities at fair value that are not currently required to be
      measured at fair value. Entities that elect the fair value option will report
      unrealized gains and losses in earnings at each subsequent reporting date.
      The
      fair value option may be elected on an instrument-by-instrument basis, with
      a
      few exceptions. SFAS No. 159 amends previous guidance to extend the use of
      the fair value option to available-for-sale and held-to-maturity securities.
      The
      Statement also establishes presentation and disclosure requirements to help
      financial statement users understand the effect of the election. SFAS
      No. 159 is effective as of the beginning of the first fiscal year beginning
      after November 15, 2007. We do not expect the adoption of SFAS No. 159 to
      have a material effect on our financial statements.


30


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











**APPLIED
      NEUROSOLUTIONS, INC.**


**(a
      development stage company)**




**FINANCIAL
      STATEMENTS**











**Contents**





**Page**Report
                of Independent Registered Public Accounting Firm
            32Consolidated
                Balance Sheets as of December 31, 2006 and 2005
            33Consolidated
                Statements of Operations for the Years Ended December 31, 2006 and
                2005,
                and for the Cumulative Period From March 14, 1992 (inception) to
                December
                31, 2006
            34Consolidated
                Statements of Stockholders’ Equity/(Deficit) for the Years Ended December
                31, 2006, and 2005, and for the Cumulative Period From March 14,
                1992
                (inception) to December 31, 2006
            35Consolidated
                Statements of Cash Flows for the Years Ended December 31, 2006, and
                2005,
                and for the Cumulative Period From March 14, 1992 (inception) to
                December
                31, 2006
            38Notes
                to Consolidated Financial Statements for the Years Ended December
                31,
                2006, and 2005, and for the Cumulative Period From March 14, 1992
                (inception) to December 31, 2006
            40




















31


REPORT
      OF
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM











To
      the
      Shareholders, Audit Committee and Board of Directors


Applied
      NeuroSolutions, Inc.


Vernon
      Hills, Illinois








We
      have
      audited the accompanying consolidated balance sheets of Applied NeuroSolutions,
      Inc. as of December 31, 2006 and 2005, and the related consolidated statements
      of operations, shareholders' equity/(deficit) and cash flows for the years
      then
      ended. These consolidated financial statements are the responsibility of the
      company's management. Our responsibility is to express an opinion on these
      consolidated financial statements based on our audits.





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





As
      discussed in Note 1 to the consolidated financial statements, effective January
      1, 2006, the Company adopted Financial Accounting Standards Board Statement
      No.
      123(R), "Share-Based Payment."





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, 2006 and 2005 and the results of their operations and their
      cash flows for the years then ended, in conformity with U.S. generally accepted
      accounting principles.





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








/s/
      Virchow, Krause & Company, LLP





Chicago,
      Illinois


March
      29,
      2007

















32


**APPLIED
      NEUROSOLUTIONS, INC.**


**(a
      development stage company)**




**CONSOLIDATED
      BALANCE SHEETS**


**December
                31,****2006**
            
            **2005****Assets**
              Current
                assets:Cash
            
            $
            1,433,250
            
            $
            1,663,740Accounts
                receivable
            
            
            250,000
            
            
            46,580Prepaids
                and other current assets
            
            
            94,649
            
            
            150,848Total
                current assets
            
            
            1,777,899
            
            
            1,861,168Property
                and equipment:Equipment
                and leaseholds
            
            
            2,162,727
            
            
            2,160,741Accumulated
                depreciation and amortization
            
            
            (2,124,464
            )
            
            (2,099,531
            )Net
                property and equipment
            
            
            38,263
            
            
            61,210Other
                assets:Prepaids
            
            
            42,889
            
            
            -Deposits
            
            
            15,072
            
            
            15,493Total
                other assets
            
            
            57,961
            
            
            15,493Total
                assets
            
            $
            1,874,123
            
            $
            1,937,871**Liabilities
                and Stockholders’ Equity / (Deficit)**Current
                liabilities:Accounts
                payable
            
            $
            270,698
            
            $
            103,447Bridge
                loan
            
            
            500,000
            
            
            -Bridge
                loan, discount on debt
            
            
            (11,159
            )
            
            -Capital
                lease payable, current portion
            
            
            -
            
            
            1,211Deferred
                revenues, current portion
            
            
            583,333
            
            
            94,200Accrued
                collaborator
            
            
            70,000
            
            
            -Accrued
                consultant fees
            
            
            37,000
            
            
            18,900Accrued
                wages
            
            
            56,756
            
            
            -Accrued
                vacation wages
            
            
            92,671
            
            
            65,311Accrued
                401k match
            
            
            30,506
            
            
            2,950Accrued
                interest
            
            
            29,000
            
            
            -Other
                accrued expenses
            
            
            51,616
            
            
            34,879Total
                current liabilities
            
            
            1,710,421
            
            
            320,898Long
                term liabilities:Deferred
                revenues, net of current portion
            
            
            634,733
            
            
            -Total
                long term liabilities
            
            
            634,733
            
            
            -Stockholders'
                equity / (deficit):Preferred
                stock,par
                value $0.0025: 5,000,000 shares authorized; none issued and
                outstanding
            
            
            -
            
            
            -Common
                stock,par
                value $0.0025: 200,000,000 shares authorized; 98,433,195 and 94,520,878
                issued shares, 98,409,901 and 94,497,584 shares
                outstanding
            
            
            246,025
            
            
            236,244Treasury
                stock
            
            
            (10,614
            )
            
            (10,614
            )Additional
                paid in capital
            
            
            44,796,210
            
            
            42,604,668Deficit
                accumulated during the development stage
            
            
            (45,502,652
            )
            
            (41,213,325
            )Total
                stockholders' equity / (deficit)
            
            
            (471,031
            )
            
            1,616,973Total
                liabilities and stockholders' equity / (deficit)
            
            $
            1,874,123
            
            $
            1,937,871*See
                accompanying notes to consolidated financial
                statements.*


33


**APPLIED
      NEUROSOLUTIONS, INC.**


**(a
      development stage company)**




**CONSOLIDATED
      STATEMENTS OF OPERATIONS**





**Year
                Ended December 31,**
            
            **Period
                from March 14, 1992 (inception) to December 31,****2006**
            
            **2005**
            
            **2006**Research
                agreement revenues
            
            $
            219,700
            
            $
            480,000
            
            $
            1,452,700Collaboration
                revenues
            
            
            31,934
            
            
            -
            
            
            31,934Grant
                revenues
            
            
            -
            
            
            -
            
            
            669,022Total
                revenues
            
            
            251,634
            
            
            480,000
            
            
            2,153,656Operating
                expenses:Research
                and development
            
            
            2,119,431
            
            
            1,890,779
            
            
            29,381,410General
                and administrative
            
            
            2,224,939
            
            
            1,263,755
            
            
            14,453,901Loss
                on impairment of intangible assets
            
            
            -
            
            
            -
            
            
            411,016Loss
                on writedown of leasehold improvements
            
            
            -
            
            
            -
            
            
            1,406,057Total
                operating expenses
            
            
            4,344,370
            
            
            3,154,534
            
            
            45,652,384Operating
                loss
            
            
            (4,092,736
            )
            
            (2,674,534
            )
            
            (43,498,728
            )Other
                (income) expense:Interest
                expense
            
            
            218,740
            
            
            588
            
            
            704,185Interest
                income
            
            
            (22,149
            )
            
            (54,481
            )
            
            (818,355
            )Amortization
                of debt discount
            
            
            -
            
            
            -
            
            
            272,837Beneficial
                conversion of debt to equity
            
            
            -
            
            
            -
            
            
            274,072Inducement
                to convert debt to equity
            
            
            -
            
            
            -
            
            
            1,631,107Cost
                of fund raising activities
            
            
            -
            
            
            -
            
            
            62,582Loss
                on extinguishments of debt
            
            
            -
            
            
            -
            
            
            4,707,939Gain
                on derivative instruments, net
            
            
            -
            
            
            -
            
            
            (4,894,163
            )Net
                other (income) expense
            
            
            -
            
            
            -
            
            
            63,720Total
                other (income) expense
            
            
            196,591
            
            
            (53,893
            )
            
            2,003,924Net
                loss
            
            
            (4,289,327
            )
            
            (2,620,641
            )
            
            (45,502,652
            )Less:
                Fair value of induced preferred stock conversion
            
            
            -
            
            
            -
            
            
            (1,866,620
            )Net
                loss attributable to common shareholders
            
            $
            (4,289,327
            )
            $
            (2,620,641
            )
            $
            (47,369,272
            )Basic
                and diluted loss per common share:Net
                loss attributable to common shareholders per share - basic
            
            $
            (0.04
            )
            $
            (0.03
            )
            $
            (1.70
            )Weighted
                average shares outstanding
            
            
            95,371,726
            
            
            92,881,909
            
            
            27,891,569*See
                accompanying notes to consolidated financial
                statements*


34




**APPLIED
      NEUROSOLUTIONS, INC.**




**(a
      development stage company)**




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




**FOR
      THE PERIOD FROM MARCH 14, 1992 (INCEPTION) TO DECEMBER 31,
      2006**








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


35





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


36





**Shares**
            
            **Common**
              **Stock**
            
            **Treasury**
              **Stock**
            
            **Additional**
              **Paid
                in**
              **Capital**
            
            **Deficit
                Accumulated During the Development****Stage**
            
            **Total**
              **Stockholders’**
              **Equity**
              **(Deficit)**Issuance
                of stock options to purchase shares of common stock
            
            
            -
            
            
            -
            
            
            -
            
            
            77,057
            
            
            -
            
            
            77,057Variable
                accounting for stock options
            
            
            -
            
            
            -
            
            
            -
            
            
            219,952
            
            
            -
            
            
            219,952Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,620,641
            )
            
            (2,620,641
            )**Balance
                at December 31, 2005**
            
            
            94,497,584
            
            
            236,244
            
            
            (10,614
            )
            
            42,604,668
            
            
            (41,213,325
            )
            
            1,616,973Issuance
                of stock upon conversion of warrants
            
            
            2,014,195
            
            
            5,036
            
            
            -
            
            
            438,419
            
            
            -
            
            
            443,455Issuance
                of stock upon conversion of stock options
            
            
            510,206
            
            
            1,275
            
            
            -
            
            
            75,256
            
            
            -
            
            
            76,531Issuance
                of stock
            
            
            1,387,916
            
            
            3,470
            
            
            -
            
            
            559,054
            
            
            -
            
            
            562,524Non
                cash compensation for options FAS123R
            
            
            -
            
            
            -
            
            
            -
            
            
            720,322
            
            
            -
            
            
            720,322Issuance
                of warrants to purchase shares of common stock
            
            
            -
            
            
            -
            
            
            -
            
            
            200,866
            
            
            -
            
            
            200,866Non
                cash unrecognized compensation for options granted and
                cancelled
            
            
            -
            
            
            -
            
            
            -
            
            
            197,625
            
            
            -
            
            
            197,625Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (4,289,327
            )
            
            (4,289,327
            )**Balance
                at December 31, 2006**
            
            
            98,409,901
            
            $
            246,025
            
            $
            (10,614
            )
            $
            44,796,210
            
            $
            (45,502,652
            )
            $
            (471,031
            )








*See
      accompanying notes to consolidated financial statements*


37




**APPLIED
      NEUROSOLUTIONS, INC.**




**(a
      development stage company)**




**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





**Year
                Ended December 31,**
            
            **Period
                from March 14, 1992 (inception) to December 31,****2006**
            
            **2005**
            
            **2006****Cash
                flows from operating activities:**Net
                loss
            
            $
            (4,289,327
            )
            $
            (2,620,641
            )
            $
            (45,502,652
            )Adjustments
                to reconcile net loss to net cash
              used
                in operating activities:Depreciation
                and amortization
            
            
            24,933
            
            
            22,861
            
            
            2,609,557Non-cash
                expense for equity compensation
            
            
            -
            
            
            -
            
            
            2,379,241Non-cash
                expense for equity compensation
              to
                employees and directors
            
            
            917,947
            
            
            297,009
            
            
            2,047,328Non-cash
                interest expense
            
            
            218,707
            
            
            -
            
            
            323,753Amortization
                of deferred financing costscosts
            
            
            -
            
            
            -
            
            
            111,000Non-cash
                expense for beneficial conversion
              of
                debt
            
            
            -
            
            
            -
            
            
            274,072Non
                cash expense for induced conversion
              of
                debt
            
            
            -
            
            
            -
            
            
            1,631,107Non-cash
                expense for loss on
              extinguishments
                of debt
            
            
            -
            
            
            -
            
            
            4,707,939Non-cash
                income for gain on derivative
              instrument,
                net
            
            
            -
            
            
            -
            
            
            (4,894,163
            )Amortization
                of intangible assets
            
            
            -
            
            
            -
            
            
            328,812Loss
                on writedown of leasehold
              improvements
            
            
            -
            
            
            -
            
            
            1,406,057Loss
                on impairment of intangible assets
            
            
            -
            
            
            -
            
            
            411,016Gain
                on sale of equipment
            
            
            -
            
            
            -
            
            
            (250
            )Fund
                raising expense
            
            
            -
            
            
            -
            
            
            62,582Changes
                in assets and liabilities:Accounts
                receivable
            
            
            (203,420
            )
            
            306,970
            
            
            (46,710
            )Prepaids
                and other assets
            
            
            13,731
            
            
            (125,309
            )
            
            (137,892
            )Accounts
                payable
            
            
            167,251
            
            
            (4,560
            )
            
            367,302Deferred
                research agreement revenues
            
            
            1,123,866
            
            
            (355,800
            )
            
            1,218,066Accrued
                wages
            
            
            56,756
            
            
            -
            
            
            56,756Accrued
                collaborator payments
            
            
            70,000
            
            
            -
            
            
            70,000Accrued
                consultant fees
            
            
            18,100
            
            
            (17,400
            )
            
            62,000Accrued
                vacation wages
            
            
            27,360
            
            
            20,140
            
            
            92,671Other
                accrued expenses
            
            
            44,293
            
            
            (39,880
            )
            
            234,272Net
                cash used in operating activities
            
            
            (1,809,803
            )
            
            (2,516,610
            )
            
            (32,188,136
            )**Cash
                flows from investing activities:**Acquisition
                of investment securities
            
            
            -
            
            
            -
            
            
            (9,138,407
            )Redemption
                of investment securities
            
            
            -
            
            
            -
            
            
            9,138,407Acquisition
                of intangible assets
            
            
            -
            
            
            -
            
            
            (339,829
            )Acquisition
                of equipment andleasehold
                improvements
            
            
            (1,986
            )
            
            (57,989
            )
            
            (4,039,740
            )Net
                cash used in investing activities
            
            
            (1,986
            )
            
            (57,989
            )
            
            (4,379,569
            )


38





**Year
                Ended December 31,**
            
            **Period
                from March 14, 1992 (inception) to December 31,****2006**
            
            **2005**
            
            **2006****Cash
                flows from financing activities:**Proceeds
                from issuance of Preferred Stock
            
            
            -
            
            
            -
            
            
            12,193,559Proceeds
                from issuance of units, net of issuance costs
            
            
            562,524
            
            
            -
            
            
            19,533,555Proceeds
                from exercise of warrants
            
            
            443,455
            
            
            677,134
            
            
            1,120,589Proceeds
                from exercise of stock options
            
            
            76,531
            
            
            -
            
            
            76,531Proceeds
                from issuance of debt
            
            
            500,000
            
            
            -
            
            
            500,000Deferred
                financing costs incurred
            
            
            -
            
            
            -
            
            
            (111,000
            )Advances
                from (repayments to) director and shareholders
            
            
            -
            
            
            -
            
            
            120,000Principal
                payments under capital lease
            
            
            (1,211
            )
            
            (4,385
            )
            
            (11,766
            )Proceeds
                from issuance of promissory loans payable
            
            
            -
            
            
            -
            
            
            4,438,491Payments
                to shareholders for registration statement penalties
            
            
            -
            
            
            -
            
            
            (84,000
            )Payments
                to repurchase Common Stock
            
            
            -
            
            
            -
            
            
            (10,614
            )Payments
                received on employee stock purchase notes receivable
            
            
            -
            
            
            -
            
            
            235,610Net
                cash provided by financing activities
            
            
            1,581,299
            
            
            672,749
            
            
            38,000,955Net
                increase (decrease) in cash
            
            
            (230,490
            )
            
            (1,901,850
            )
            
            1,433,250Cashbeginning of period
            
            
            1,663,740
            
            
            3,565,590
            
            
            -Cashend
                of period
            
            $
            1,433,250
            
            $
            1,663,740
            
            $
            1,433,250**Supplemental
                cash flow information:**Cash
                paid for interest
            
            $
            33
            
            $
            588
            
            $
            42,090**Supplemental
                disclosure of non-cash investing and financing
                activities:**Issuance
                of stock for prior services
            
            $
            -
            
            $
            -
            
            $
            4,149,521Intangible
                assets acquired in exchange for stock
            
            $
            -
            
            $
            -
            
            $
            400,000Equipment
                acquired under capital lease
            
            $
            -
            
            $
            -
            
            $
            11,766Issuance
                of stock for promissory loans payable
            
            $
            -
            
            $
            -
            
            $
            2,473,991Issuance
                of stock for accrued interest on promissory loans payable
            
            $
            -
            
            $
            -
            
            $
            136,188*See
                accompanying notes to consolidated financial
                statements.*


39




**APPLIED
      NEUROSOLUTIONS, INC.**




**(a
      development stage company)**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**









**Note
      1 - Organization and Summary of Significant Accounting
      Policies**





(a)  *Organization
      and Basis of Presentation*





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





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





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





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





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





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





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





(b)  *Principles
      of Consolidation*





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





(c)  *Going
      Concern*





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


40


achieving
      profitable operations. In
      the
      opinion of management, the Company anticipates cash balances as of December
      31,
      2006, coupled with anticipated funds to be received from operations, will be
      adequate to fund operations into May 2007. The Company will
      need
      additional funding prior to May 2007 to cover operations, and to fund the
      Company’s products in development. If additional funding is not obtained, the
      Company will not be able to fund any of its programs, and the Company will
      possibly discontinue all its product development and/or operations. Management
      is currently evaluating its options to maximize the value of the Company’s
      diagnostic technology, including evaluating partnering and licensing
      opportunities. The
      Company intends to seek such additional funding through private and/or public
      financing, through exercise of currently outstanding stock options and warrants
      or through collaborative or other arrangements with partners, however, there
      is
      no assurance that additional funding will be available for the Company to
      finance its operations on acceptable terms, or at all. This
      would have a material adverse effect on the Company’s operations and
      prospects.





(d)  *Cash*




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





(e)  *Revenue
      Recognition*





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





(f)  *Equipment
      and Leasehold Improvements*





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





(g)  *Research
      and Development*





All
      research and development costs are expensed as incurred and include salaries
      of,
      and expenses related to, employees and consultants who conduct research and
      development. 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, 2006 and 2005, the Company
      has recorded reimbursements of $32,875 and $76,750 against research and
      development expenses, respectively.





(h)  *Income
      Taxes*





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








41




(i)  *Stock
        Option Plan*


Effective
                January 1, 2006, the Company adopted SFAS No. 123R,*Share-Based
                Payment*(SFAS 123R), which requires companies to measure and recognize
                compensation expense for all stock-based payments at fair value. SFAS
                123R is being applied on the modified prospective basis. Prior to
                the
                adoption of SFAS 123R, the Company accounted for its stock-based
                compensation plans under the recognition and measurement principles
                of
                Accounting Principles Board (APB) Opinion No. 25,*Accounting
                for Stock Issued to Employees,*and related interpretations, and accordingly, recognized no compensation
                expense related to the stock-based plans.Under
                the modified prospective approach, SFAS 123R applies to new awards
                and to
                awards that were outstanding on January 1, 2006, that are subsequently
                modified, repurchased, cancelled or vest. Under the modified prospective
                approach, compensation cost recognized for 2006 includes compensation
                cost
                for all share-based payments granted prior to, but not yet vested
                on,
                January 1, 2006, based on the grant-date fair value estimated in
                accordance with the provisions of SFAS 123R, and compensation cost
                for all
                shared-based payments granted subsequent to January 1, 2006, based
                on the
                grant-date fair value estimated in accordance with the provisions
                of SFAS
                123R. Prior periods were not restated to reflect the impact of adopting
                the new standard.As
                a result of adopting SFAS 123R on January 1, 2006, the net loss and
                net
                loss per share for the year ended December 31, 2006, were $917,947
                and
                $0.01 lower, respectively, than if the Company had continued to account
                for stock-based compensation under APB Opinion No. 25.
              
              The
                following table illustrates the effect on net loss and net loss per
                share
                had the Company accounted for stock-based compensation in accordance
                with
                SFAS 123R for the year ended December 31,
                2005.





UnauditedNet
                loss, as reported
            
            
            ($2,620,641
            )Add
                (deduct) net stock-based employee and director
              compensation
                expense determined under fair-value
              based
                method for all awards, net of tax
            
            
            (89,675
            )Net
                loss, pro forma
            
            
            ($2,710,316
            )Basic,
                as reported
            
            
            ($0.03
            )Basic,
                pro forma
            
            
            ($0.03
            )Diluted,
                as reported
            
            
            ($0.03
            )Diluted,
                pro forma
            
            
            ($0.03
            )







The
      weighted average estimated fair value of the options granted in 2006 and 2005
      was $0.11 and $0.17, respectively, based on the Black-Scholes valuation model
      using the following assumptions:





2006
            
            2005Risk-free
                interest rate, average
            
            
            4.99
            %
            
            3.73
            %Dividend
            
            
            0.00
            %
            
            0.00
            %Expected
                volatility
            
            
            75.00
            %
            
            75.00
            %Expected
                life in years, average
            
            
            3
            
            
            4





42


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 4).




(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 of outstanding during the period as if the
      exchange of common shares in the merger between the Company and MGC was in
      effect at the beginning of all periods presented.





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 anti-dilutive. The Company had 20,452,531 stock options and 48,071,472
      warrants outstanding to issue common stock at December 31, 2006. The Company
      had
      14,384,772 stock options and 49,164,642 warrants outstanding to issue common
      stock at December 31, 2005.





(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 approximates their fair values due to the nature and
      short-term maturity of these instruments.





(m)  *Recent
      Accounting Pronouncements*





In
      June
      2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes” (FIN 48), which supplements SFAS No. 109,
“Accounting for Income Taxes,” by defining the confidence level that a tax
      position must meet in order to be recognized in the financial statements. The
      Interpretation requires that the tax effects of a position be recognized only
      if
      it is “more-likely-than-not” to be sustained based solely on its technical
      merits as of the reporting date. The more-likely-than-not threshold represents
      a
      positive assertion by management that a company is entitled to the economic
      benefits of a tax position. If a tax position is not considered
      more-likely-than-not to be sustained based solely on its technical merits,
      no
      benefits of the position are to be recognized. Moreover, the
      more-likely-than-not threshold must continue to be met in each reporting period
      to support continued recognition of a benefit. At adoption, companies must
      adjust their financial statements to reflect only those tax positions that
      are
      more-likely-than-not to be sustained as of the adoption date. Any necessary
      adjustment would be recorded directly to retained earnings in the period of
      adoption and reported as a change in accounting principle. This Interpretation
      is effective as of the beginning of the first fiscal quarter beginning after
      December 15, 2006. We do not expect the adoption of FIN 48 to have a
      material effect on our financial statements.




In
      September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108,
“Quantifying Financial Misstatements,” which expresses the Staff’s views
      regarding the process of quantifying financial statement misstatements.
      Registrants are required to quantify the impact of correcting all misstatements,
      including both the carryover and reversing effects of prior year misstatements,
      on the current year financial statements. The techniques most commonly used
      in
      practice to accumulate and quantify misstatements are generally referred to
      as
      the “rollover” (current year income statement perspective) and “iron curtain”
(year-end balance sheet perspective) approaches. The financial statements would
      require adjustment when either approach results in quantifying a misstatement
      that is material,
      after considering all relevant quantitative and qualitative factors. This
      bulletin is effective for financial statements for the first fiscal year ending
      after November 15, 2006. The adoption of SAB No. 108 had no effect on our
      financial statements.


43




In
      September 2006, the FASB issued SFAS No. 157 “Fair Value Measurement”
(SFAS No. 157) which provides a definition of fair value, establishes a
      framework for measuring fair value and requires expanded disclosures about
      fair
      value measurements. SFAS No. 157 is effective for financial statements
      issued for fiscal years beginning after November 15, 2007 and interim
      periods within those fiscal years. We do not expect the adoption of SFAS No.
      157
      to have a material effect on our financial statements.




In
      September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting
      for Defined Benefit Pension and Other Postretirement Plans,” (SFAS No. 158)
      which amends SFAS No. 87, “Employers’ Accounting for Pensions”
(SFAS No. 87), SFAS No. 88, “Employers’ Accounting for
      Settlements and Curtailments of Defined Benefit Pension Plans and for
      Termination Benefits” (SFAS No. 88), SFAS No. 106,
“Employers’ Accounting for Postretirement Benefits Other Than Pensions”
(SFAS No. 106), and SFAS No. 132(R), “Employers’ Disclosures
      about Pensions and Other Postretirement Benefits (revised 2003)”
(SFAS No. 132(R)). This Statement requires companies to recognize an
      asset or liability for the overfunded or underfunded status of their benefit
      plans in their financial statements. SFAS No. 158 also requires the
      measurement date for plan assets and liabilities to coincide with the sponsor’s
      year end. The standard provides two transition alternatives related to the
      change in measurement date provisions. The recognition of an asset and liability
      related to the funded status provision is effective for fiscal year ending
      after
      December 15, 2006, and the change in measurement date provisions is
      effective for fiscal years ending after December 15, 2008. We do not expect
      the adoption of SFAS No. 158 to have a material effect on our financial
      statements.




In
      October 2006, the FASB issued FSP No. 123(R)-5 “Amendment of FASB
      Staff Position FAS No. 123(R)-1”. This FSP amends FSP FAS
      No. 123(R)-1, “Classification and Measurement of Freestanding Financial
      Instruments Originally Issued in Exchange for Employee Services under
      SFAS No. 123(R),” to clarify that freestanding financial instruments
      that were originally issued as employee compensation subject to
      SFAS No. 123(R) and subsequently modified solely to reflect an equity
      restructuring that occurs when the holders are no longer employees, should
      continue to be subject to the recognition and measurement provisions of
      SFAS No. 123(R) if certain conditions are met. The provisions in this
      FSP are effective for the first reporting period beginning after
      October 10, 2006. We adopted the provisions of FSP 123(R)-5 on
      January 1, 2007. This guidance will not have a material effect on our
      financial condition and results of operations.




In
      October 2006, the FASB issued FSP No. 123(R)-6 “Technical Corrections
      of FASB Statement No. 123(R),” which revises the definition of “short-term
      inducement” to exclude an offer to settle an award. The provisions of this FSP
      are effective for the first reporting period beginning after October 20,
      2006. We adopted the provisions of FSP 123R-6 on January 1, 2007. This
      guidance will not have a material effect on our financial condition and results
      of operations.





In
      February
      2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial
      Assets and Financial Liabilities - Including an Amendment of SFAS No. 115”
(SFAS No. 159), which permits an entity to measure many financial assets and
      financial liabilities at fair value that are not currently required to be
      measured at fair value. Entities that elect the fair value option will report
      unrealized gains and losses in earnings at each subsequent reporting date.
      The
      fair value option may be elected on an instrument-by-instrument basis, with
      a
      few exceptions. SFAS No. 159 amends previous guidance to extend the use of
      the fair value option to available-for-sale and held-to-maturity securities.
      The
      Statement also establishes presentation and disclosure requirements to help
      financial statement users understand the effect of the election. SFAS
      No. 159 is effective as of the beginning of the first fiscal year beginning
      after November 15, 2007. We do not expect the adoption of SFAS No. 159 to
      have a material effect on our financial statements.









44


**Note
      2 - Collaboration Agreement with Eli Lilly and Company**




In
      November
      2006, the Company announced an agreement with Eli Lilly and Company to develop
      therapeutics to treat AD.According
      to the terms of the agreement, the Company received $2 million in cash,
      including an equity investment of $500,000, from Lilly, plus the Company will
      receive annual research and development support for the duration of the
      collaboration agreement. In addition, Lilly will,based on achievement of
      certain milestones, provide the Company with up to $10 million to $20 million
      per therapeutic compound. There are no assurances that any milestones will
      be
      met. Royalties are to be paid to the Company for AD therapies brought to market
      that result from the collaboration. Lilly received the exclusive worldwide
      rights to the intellectual property related to the Company’s expertise in
      understanding the molecular
      neuropathology of AD as it pertains to the formation of neurofibrillary tangles.
      The Company recorded $1 million received in 2006 as deferred revenues and is
      amortizing the deferral over 36 months. Included in collaboration revenues
      for
      2006 is an amortization of these deferred revenues of $31,934. In addition,
      $64,334 of legal fees directly associated with the agreement are included in
      prepaid assets and are being amortized over 36 months.





**Note
      3 - Property and Equipment**





Property
      and equipment consist of the following:


December
                31,2006
            
            December
                31, 2005Equipment
            
            $
            2,066,348
            
            $
            2,064,362Equipment
                held under capital lease
            
            
            11,766
            
            
            11,766Leasehold
                improvements
            
            
            84,613
            
            
            84,6132,162,727
            
            
            2,160,741Less
                accumulated depreciation and
              amortization
            
            
            (2,124,464
            )
            
            (2,099,531
            )$
            38,263
            
            $
            61,210





Depreciation
      and amortization expense amounted to $24,933 and $22,861 for the years ended
      December 31, 2006 and 2005, respectively.





**Note
      4 - Warrants**





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





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





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





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





The
      Company issued 800,000 warrants, in September 2002, to an entity controlled
      by
      the two largest shareholders of Hemoxymed (prior to the Merger), in lieu of
      compensation. Compensation expense related to the issuance of these warrants
      was
      $159,934 in 2002. These warrants have an exercise price of $0.20 per share,
      and
      expire in September 2007.





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


45


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.




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





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





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





As
      of
      December 31, 2006, the Company has reserved 48,071,472 shares of Common Stock
      for the exercise and conversion of the warrants described above.





**Note
      5 - Stockholders' Equity**





The
      stockholders' equity information presented in these financial statements
      reflects the retroactive recognition of the effects of the Merger (see Note
      1),
      and of the two recapitalizations of the Company's capital structure, the "1996
      Recapitalization", which became effective in March, 1996 and the "2001
      Recapitalization", which became effective in November, 2001. The 1996
      Recapitalization consisted of (i) the conversion of each share of outstanding
      Series A Convertible Preferred Stock and Series B Convertible Preferred Stock
      of
      the Company into one share of Common Stock, (ii) a 1.0-for-10.6 reverse split
      of
      the outstanding shares of Common Stock, and (iii) a reduction in the number
      of
      authorized shares of Common Stock and Preferred Stock from 50,000,000 to
      20,000,000 and 35,000,000 to 15,000,000, respectively. The 2001 Recapitalization
      consisted of (i) the conversion of each share of outstanding Series C
      Convertible Preferred Stock of the Company into two shares of Common Stock,
      (ii)
      the conversion of each share of outstanding Series D Convertible Preferred
      Stock
      of the Company into three and one-third shares of Common Stock, (iii) the
      conversion of convertible debt plus accrued interest into five shares of Common
      Stock for each $1.50 of convertible debt, and (iv) an increase in the number
      of
      authorized shares of Common Stock from 20,000,000 to 50,000,000 (See Note 13).


46





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





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





In
      December 2002, the Board of Directors approved an increase in the number of
      authorized shares from 50,000,000 to 205,000,000, consisting of 200,000,000
      Common Shares and 5,000,000 Preferred Shares. Shareholder approval for this
      increase was obtained in 2003. See note 13 for an explanation of the Company’s
      authorized shares.





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





*Original
      Issuances of Preferred Stock*





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





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





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





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





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





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





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





*Current
      Issuances of Common Stock*





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





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





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


47





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





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





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





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





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





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





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





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





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





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





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


48


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 that was incurred
      but unpaid, as of January 31, 2004.





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





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





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





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





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


49


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





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





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





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





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





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





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





In
      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,
      2006, no Preferred Stock is outstanding. The Company has reserved 48,071,472
      shares of Common Stock for the exercise and conversion warrants, and 20,452,531
      shares of Common Stock for the exercise and conversion of stock
      options.





**Note
      6 - Stock Option Plan**





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





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





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.


50





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





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





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





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





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





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




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




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




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




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




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




51


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




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





As
      of
      December 31, 2006, the Company had 10,452,531 outstanding stock options granted
      under its 2003 stock option plan and had 10,000,000 outstanding stock options
      granted outside the 2003 stock option plan. As of December 31, 2006 there was
      approximately $676,678 of total unrecognized non-cash compensation costs related
      to the outstanding stock options, which is expected to be recognized over a
      weighted-average period of 2.5 years.





As
      of
      December 31, 2006, 20,452,531 options were outstanding (11,746,246 were fully
      vested and exercisable) at prices ranging from $0.15 to $2.00 per
      share.





A
      summary
      of the status of, and changes in, the Company’s stock options as of and for the
      years ended December 31, 2006 and 2005, is presented below for all stock options
      issued to employees, directors and non-employees:





2006
            
            2005Options
            
            Weighted-
              Average-Exercise
              Price
            
            Options
            
            Weighted-
              Average
                ExercisePriceOutstanding
                at beginning of year
            
            
            14,384,772
            
            $
            0.22
            
            
            10,039,636
            
            $
            0.19Granted
            
            
            10,900,000
            
            
            0.22
            
            
            4,345,136
            
            
            0.29Voted
                against at annual stockholders meeting
            
            
            3,602,565
            
            
            0.29
            
            
            -
            
            
            -Exercised
            
            
            510,206
            
            
            0.15
            
            
            -
            
            
            -Forfeited
            
            
            719,470
            
            
            0.55
            
            
            -
            
            
            -Outstanding
                atend
                of year
            
            
            20,452,531
            
            $
            0.20
            
            
            14,384,772
            
            $
            0.22Options
                exercisable atend
                of year
            
            
            11,746,246
            
            
            
            
            
            9,856,670





The
      intrinsic value of options outstanding and options exercisable at December
      31,
      2006 was $2,620,012 and $1,793,267, respectively. The intrinsic value of options
      exercised during 2006 was $90,750. The intrinsic value at December 31, 2006
      of
      options expected to vest was $826,745.


52





Stock
                Options as of December 31, 2006Exercise
              Price
            Number
              Outstanding
                at
              December
                31, 2006
            Weighted-Average
              Remaining
              Contractual
                Life
            Number
              Exercisable
                at
              December
                31, 2006$0.15
            8,650,127
            5.3
                years
            8,650,1270.17
            120,000
            7.8
                years
            85,0000.20
            4,600,000
            9.5
                years
            2,400,0000.23
            6,000,000
            9.7
                years
            -0.275
            300,000
            9.7
                years
            200,0000.285
            742,571
            8.3
                years
            371,2861.50
            14,814
            4.1
                years
            14,8142.00
            25,019
            0.9
                years
            25,01920,452,531
            
            11,746,246








**Note
      7 - Employee Savings Plan**





The
      Company sponsors a defined contribution benefit plan (the “Savings Plan”) which
      qualifies under Section 401(k) of the Internal Revenue Code. The Savings Plan
      covers all eligible employees who are at least eighteen years of age and have
      completed six months of service with the Company. Employee contributions to
      the
      Savings Plan are based on percentages of employee compensation plus a
      discretionary matching contribution by the Company. Vesting in the Company’s
      contributions is based on length of service over a five-year period. The Company
      amended the Savings Plan, effective January 1, 2001, to increase the Company
      match from 50% to 100% of the first 5% of an employee’s deferral, subject to
      certain limitations. Contributions by the Company for the years ended December
      31, 2006 and 2005 were $42,506 and $48,410, respectively.





**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, 2006, the Company has net
      operating loss and research and development credit carry-forwards for Federal
      income tax purposes of approximately $38,800,000 and $970,000, respectively.
      These carry-forwards expire between 2007 and 2026. Changes in the Company's
      ownership may cause annual limitations on the amount of loss and credit
      carry-forwards that can be utilized to offset income in the future. Net
      operating loss and research and development credit carry-forwards, as of
      December 31, 2006, expiring over the next five years are as
      follows:





Year
                Expiring
            
            Net
                Operating Loss
            
            Research
                and Development Credit2007
            
            $
            892,112
            
            $
            23,8632008
            
            
            4,655,901
            
            
            121,6532009
            
            
            6,039,518
            
            
            208,1482010
            
            
            2,100,609
            
            
            31,5222011
            
            
            2,003,368
            
            
            21,454Total
            
            $
            15,691,508
            
            $
            406,640








53


The
        net
        deferred tax assets as of December 31, 2006 and 2005 are summarized as
        follows:


December
                31, 2006
            
            December
                31, 2005Deferred
                tax assets:Depreciation
            
            $
            190,000
            
            $
            210,000Net
                operating loss carry-forwards
            
            
            15,500,000
            
            
            14,200,000Tax
                credit carry-forwards
            
            
            970,000
            
            
            890,00016,660,000
            
            
            15,300,000Valuation
                allowance
            
            
            (16,660,000
            )
            
            (15,300,000
            )Net
                deferred income taxes
            
            $
            -
            
            $
            -





The
      net
      change in the valuation allowance during 2006 and 2005 was an increase of
      $1,360,000 and $945,000, 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, through May 2007. The
      Company is currently negotiating an extension of this lease.





Future
      minimum lease payments as of December 31, 2006, under the terms of the operating
      lease for the facility in Vernon Hills, Illinois are as follows:





Year
                ending December 31,
            
            Amount2007
            
            $
            34,000





Rental
      expense, including allocated operating costs and taxes, was $125,995 and
      $123,308 for the years ended December 31, 2006 and 2005,
      respectively.





Capital
      Lease


The
      Company purchased a telephone system under the terms of a capital lease in
      March
      2003. The lease called for thirty-six monthly payments of $414 through March
      2006, and was fully paid in 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 licensed under the agreements. In March 2002,
      September 2002 and October 2006 the Company renegotiated various terms of the
      AECOM agreements.





Total
      expense for these outside research, collaboration and license agreements,
      included in research and development expenses, was $450,000 and $375,074 for
      the
      years ended December 31, 2006 and 2005, respectively.





The
      Company has a consulting agreement with Dr. Peter Davies, its founding
      scientist, which has been renewed through November 2008, but in some instances,
      may be terminated at an earlier date by the Company and the consultant. Expense
      for the consulting agreement, included in research and development expenses,
      was
      $108,000 and $108,000 for the years ended December 31, 2006 and 2005,
      respectively.





54


Future
        minimum payments, as of December 31, 2006, under the above agreements are
        as
        follows:


Year
                ending December 31,
            
            Collaborations
            
            Consulting2007
            
            $
            475,000
            
            $
            108,0002008
            
            
            500,000
            
            
            99,0002009
            
            
            500,000
            
            
            -2010
            
            
            500,000
            
            
            -2011
            
            
            500,000
            
            
            -Total
            
            $
            2,475,000
            
            $
            207,000





The
      Company is obligated to pay AECOM $500,000 each year 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 aspects of the AD
      technology licensed from AECOM that exceeds the minimum obligations reflected
      in
      the annual license maintenance payments. The Company can terminate the 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.





Executive
      Letter Agreement


Under
      the
      terms of her employment, Ellen R. Hoffing, the President and CEO, receives
      a
      minimum base salary of $300,000 per year, plus a bonus of up to 40% of Ms.
      Hoffing’s base salary upon attainment of performance objectives established by
      the Company’s Board of Directors and acceptable to Ms. Hoffing. The Company
      granted Ms. Hoffing a stock option to purchase 6,000,000 shares of the Company’s
      common stock at an exercise price of $0.23 (which was the closing price of
      the
      common stock on the over-the-counter market on the date of grant). The option
      vests as to 1,000,000 shares of common stock on the sixth month anniversary
      of
      the grant, and then will vest as to an additional 166,667 shares for each month
      thereafter until the option is vested in full (which will be on the third
      anniversary of the date of grant). The Company also granted 400,000 shares
      of
      restricted stock, which vests as to 133,334 shares on the first anniversary
      of
      the date of grant and 133,333 shares on the second and third anniversaries
      of
      the date of grant. In addition, Ms. Hoffing will receive $100,000 worth of
      shares of restricted stock on her one-year anniversary and her two-year
      anniversary with the Company (August 29, 2007 and August 29, 2008). If Ms.
      Hoffing’s employment is terminated by the Company without cause, she is entitled
      to her base salary and benefits for a period of 12 months after such
      termination, and the portion of her options and restricted stock that would
      have
      vested during the 12 months following such termination will immediately vest.
      If
      Ms. Hoffing’s employment is terminated upon or in connection with a change of
      control of the Company, then Ms. Hoffing will be paid the equivalent of one
      year’s base salary and any unvested shares of restricted stock and stock options
      will immediately vest in full upon such change in control. The Company expects
      to enter into a definitive agreement with Ms. Hoffing by the end of the second
      quarter 2007.





Employment
      Agreements


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, with an annual cost of living increase. Mr.
      Ellison has not received an increase in his base salary since April 2005.
      Included in 2006 general and administrative expense is $4,529 accrued as of
      December 31, 2006, representing his earned, but not yet paid, cost of living
      increase since April 2006. Mr. Ellison’s agreement also provides a minimum
      monthly non-accountable allowance of $300 for automobile and cell phone
      expenses. This allowance was increased to $400 per month in April 2005. If
      the
      Company terminates Mr. Ellison’s employment without cause or upon or in
      connection with a change in control or Mr. Ellison terminates his employment
      for
      cause, then Mr. Ellison will receive severance consisting of (i) a lump sum
      payment from the Company equal to the greater of (A) the total base salary
      otherwise payable through the expiration of the term of Mr. Ellison’s employment
      agreement or (B) twelve months’ base salary and bonus (based on the prior year’s
      base salary plus bonus), (ii) health, disability and life insurance provided
      to
      Mr. Ellison for up to twelve months following the effective date of such
      termination and (iii) continued exercisability of all options held by Mr.
      Ellison. If the Company fails to give Mr. Ellison at least 90 days notice that
      his employment agreement is not being renewed for any reason other than cause,
      then Mr. Ellison will receive severance payments equal to his base salary then
      in effect, plus the amount of the bonus earned by Mr. Ellison for the year,
      if
      any. Such severance payment shall be payable over a one (1) year
      period.





55


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





John
      F.
      DeBernardis, Ph.D., Senior Advisor to the Company’s 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, with an annual cost of living
      increase. Dr. DeBernardis has not received an increase in his base salary since
      April 2005. Included in 2006 research and development expense is $7,326 accrued
      as of December 31, 2006, representing his earned, but not yet paid, cost of
      living increase since April 2006. Dr. DeBernardis’s agreement also provides a
      minimum monthly non-accountable allowance of $1,000 for automobile and cell
      phone expenses. This allowance was increased to $1,150 per month in April 2005.
      In addition, the Company also provides Dr. DeBernardis, at the Company’s
      expense, a term life insurance policy in the amount of $600,000. If the Company
      terminates Dr. DeBernardis’ employment without cause or upon or in connection
      with a change in control or Dr. DeBernardis terminates his employment for cause,
      then Dr. DeBernardis will receive severance consisting of (i) a lump sum payment
      from the Company equal to the greater of (A) the total base salary otherwise
      payable through the expiration of the term of Dr. DeBernardis’ employment
      agreement or (B) twelve months’ base salary and bonus (based on the prior year’s
      base salary plus bonus), (ii) health, disability and life insurance provided
      to
      Dr. DeBernardis for up to twelve months following the effective date of such
      termination and (iii) continued exercisability of all options held by Dr.
      DeBernardis. If the Company fails to give Dr. DeBernardis at least 90 days
      notice that his employment agreement is not being renewed for any reason other
      than cause, then Dr. DeBernardis will receive severance payments equal to his
      base salary then in effect, plus the amount of the bonus earned by Dr.
      DeBernardis for the year, if any. Such severance payment shall be payable over
      a
      one (1) year period. Dr. DeBernardis and the Company entered into an amendment
      to Dr. DeBernardis’ employment agreement in July 2006. Pursuant to this
      amendment, the parties agreed that Dr. DeBernardis’ employment agreement stays
      in full force and effect until its expiration (October 31, 2007) after Dr.
      DeBernardis’ resignation as President and CEO became effective. Other than the
      title held by Dr. DeBernardis, no other term of his employment agreement was
      changed by the amendment except that upon a termination of his employment all
      of
      Dr. DeBernardis’ incentive stock options will be converted into non-qualified
      options.





Contingencies


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





The
      ability to develop the Company’s technologies and to commercialize products will
      depend on avoiding patents of others. While the Company is aware of patents
      issued to competitors, as of December 31, 2006, the Company was not aware of
      any
      claim of patent infringement against it.





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


56


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








**Note
      10 - Bridge Funding**





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





The
      Company has adopted EITF 05-4, “The Effect of Liquidated Damages Clause on
      a Freestanding Financial Instrument Subject to Issue No. 00-19”, View C to
      account for its registration rights agreements. The holders of the warrants
      have
      a piggy-back registration right in association with the Note and Warrant
      Purchase Agreement. View C of EITF 05-4 takes the position that the
      registration rights should be accounted for separately from the financial
      instrument as the payoff of the financial instruments is not dependent on the
      payoff of the registration rights agreement, and according to DIG K-1,
      registration rights agreements and the financial instruments do not meet the
      combining criteria as they relate to different risks. The Financial Accounting
      Standards Board (FASB) has postponed further discussion on EITF 05-4. Since
      the FASB has not reached a consensus, the Company’s accounting for the
      registration rights may change when the FASB reaches a consensus.





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





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

      $500,000 Bridge Funding proceeds received, net of the unamortized debt discount
      of $11,159.





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





**Note
      11 - Accounts Receivable**





Included
      in accounts receivable at December 31, 2006 is one signed contract for $250,000.
      The revenues from this agreement have not yet been recognized, and are included
      in deferred revenues at December 31, 2006, as performance of the agreement
      has
      not been completed by either party.





57


**Note
        12 - Research Agreement with Nanosphere, Inc.**


In
      January 2006, the Company entered into a research agreement with Nanosphere,
      Inc., a nanotechnology-based molecular diagnostics company, to assist the
      Company in the development of serum-based diagnostic tests for AD. The Company
      is currently working on developing additional tools that may enable us to
      best utilize Nanosphere’s proprietary technology to further evaluate and develop
      serum-based diagnostic tests.





**Note
      13 - Authorized Shares**





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





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




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





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





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




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





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








58


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




None.





**ITEM
      8A. CONTROLS AND PROCEDURES**




(a) *Disclosure
      Controls and Procedures.* Our
      management, with the participation of our Chief Executive Officer and Chief
      Financial Officer, has evaluated the effectiveness of the Company's disclosure
      controls and procedures (as such term is defined in Rules 13a-15(e) and
      15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange
      Act")) as of the end of the period covered by this report.




(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. The design and operation of our internal
      controls over financial reporting, however, have significant deficiencies and
      material weaknesses that are reasonably likely to adversely affect our ability
      to record, process, summarize and report financial information. We lack
      segregation of duties in the period-end financial reporting process, which
      results in a material weakness. Our Chief Financial Officer (CFO) is the only
      employee with any significant knowledge of generally accepted accounting
      principles. The CFO is also the sole employee in charge of the general ledger
      (including the preparation of routine and non-routine journal entries and
      journal entries involving accounting estimates), the preparation of accounting
      reconciliations, the selection of accounting principles, and the preparation
      of
      interim and annual financial statements (including report combinations,
      consolidation entries and footnote disclosures) in accordance with generally
      accepted accounting principles.





**ITEM
      8B. OTHER INFORMATION**





**None.**











**PART
      III**





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





Our
      executive officers and directors as of December 31, 2006, and their ages as
      of
      March 31, 2007, are as follows:





**Name**
            
            **Age**
            
            **Position**Robert
                S. Vaters (2)(3)
            
            46
            
            Chairman
                of the Board of Directors; Class III DirectorEllen
                R. Hoffing
            
            50
            
            President,
                Chief Executive Officer & Class II DirectorDavid
                Ellison
            
            45
            
            Chief
                Financial Officer & Corporate SecretaryDaniel
                J. Kerkman, Ph.D
            
            55
            
            Vice
                President, Research and DevelopmentJay
                B. Langner (1)(2)
            
            77
            
            Class
                II DirectorMichael
                Sorell, M.D. (1) (3)
            
            59
            
            Class
                III DirectorBruce
                N. Barron
            
            52
            
            Class
                I DirectorAlan
                L. Heller (2)
            
            53
            
            Class
                III Director







(1)
            Member
                of the Audit Committee


(2)
            Member
                of the Compensation and Stock Option
                Committee


(3)
            Member
                of Nominating Committee


59


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




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





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





*Daniel
      J. Kerkman, Ph.D.* ,
      joined
      the Company in August 1993 as Group Leader of Chemistry and now serves in his
      role of Vice President, Research and Development. Prior to joining the Company,
      Dr. Kerkman spent thirteen years at Abbott Laboratories where he began his
      career as a research chemist initially in the cardiovascular area followed
      by
      several positions within both the immunoscience and neuroscience areas. A series
      of promotions ended with his position as the Project Leader in Adrenergic
      research within the Pharmaceutical Products Division supervising a 35 person
      staff. During his tenure, a number of IND candidates were identified. Dr.
      Kerkman received his Ph.D. degree from MIT in 1979 and worked one year as a
      postdoctoral fellow in the Department of Chemistry at MIT. He is co-author
      on
      more than 40 scientific publications and holds 18 U.S. patents.





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





*Michael
      Sorell, MD,* a
      Class
      III director, was appointed as a director in November 2004. Dr. Sorell has
      been
      a Director of Neurologix, Inc., a publicly traded biotechnology company, since
      September 2004 and has been the Managing Member of MS Capital since 1996. Dr.
      Sorell was the President and CEO of Neurologix, Inc. from September 2004 to
      July
      2006. Previous positions have included Associate Director 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.





60


*Bruce
        N. Barron* ,
        a Class
        I director, has been a director of the Company since June 1994. On
        January 30, 2007, Mr. Barron informed the Company that he would not run for
        re-election at the Company’s next annual meeting of Mr.
        Barron was Chairman of the Board from August 1999 until June 2006, 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. Mr.
        Barron has been a director of ClaimForce, Inc. since February 2006. From
        1989 until June 1994, Mr. Barron was a director and Vice Chairman and Chief
        Executive Officer of Xtramedics, Inc. and from 1988 to 1989, a Vice President
        of
        Finance, in all instances on a part-time basis. Xtramedics was merged into
        Athena Medical Corp. in June, 1994. From 1985 to August, 1993, Mr. Barron
        was a
        director and Vice President of Finance and Chief Financial Officer of Gynex
        Pharmaceuticals, Inc. in addition to serving in various other capacities,
        including Vice Chairman from 1988 to 1989, in all instances on a part-time
        basis. Gynex was acquired by BioTechnology General Corp. (now Savient
        Pharmaceuticals) in August 1993. From 1985 to 1992, Mr. Barron also served
        as a
        director and part-time executive officer of Pharmatec, Inc. (now Pharmos
        Corp.)
        in various capacities including President, Chief Executive Officer, Chief
        Financial Officer, and Vice President. Mr. Barron was a member of the Board
        of
        Directors of Trimedyne, Inc., a publicly traded manufacturer of lasers for
        use
        in various medical applications from 1985 until February,
        2001.





*Alan
      L. Heller* ,
      a Class
      III director, since September 6, 2006. Since March 2006, Mr. Heller has been
      an
      Operating Partner at a private equity firm, Water Street Capital Partners.
      Mr.
      Heller currently serves on the Board of Directors of two public companies:
      Savient Pharmaceuticals, Inc. and Northfield Laboratories Inc.. From November
      2004 to November 2005, Mr. Heller was President and Chief Executive Officer
      of
      American Pharmaceutical Partners, Inc., a company that develops, manufactures
      and markets branded and generic injectable pharmaceutical products. From January
      2004 to November 2004 Mr. Heller served as an investment advisor on life
      science transactions to One Equity Partners, a private equity arm of JP Morgan
      Chase. From 2000 to 2004, Mr. Heller also served as Senior Vice President and
      President Global Renal operations at Baxter Healthcare Corporation. Prior to
      joining Baxter, Mr. Heller spent 23 years at G.D. Searle. He served in several
      senior level positions including Co-President and Chief Operating Officer,
      with
      responsibility for all commercial operations worldwide, and Executive Vice
      President and President, Searle Operations.








**Board
      of directors committees and other information**





Since
      April 1999, the Company's Certificate of Incorporation and Bylaws have provided
      that the Company's Board of Directors is divided into three classes with
      staggered terms of three years each. In June 2006, the Company's stockholders
      voted on initial terms for the three classes of directors as set forth in the
      Company’s By-laws, because the terms for all classes of directors had expired.
      As a result of the election of directors in June 2006, the initial term of
      the
      directors of the first class (“Class I”) will expire in 2007, the initial term
      of the directors of the second class (“Class II”) will expire in 2008 and the
      initial term of the directors of the third class (“Class III”) will expire in
      2009. In August and September, we appointed Ellen R. Hoffing as a Class II
      director and Alan L. Heller as a Class III director. The Company’s By-laws
      require that directors who are appointed to fill vacancies must stand for
      election at the next annual meeting of stockholders and thereafter will stand
      for election with the other directors in their class. After the expiration
      of
      the initial term, all of the Company's directors serve three year terms and
      hold
      office until the third annual meeting of stockholders of the Company following
      their election to the Board and until their respective successors have been
      qualified and elected. Officers are elected by, and serve at the discretion
      of,
      the Board of Directors. On
      January 30, 2007, Mr. Barron informed the Company that he would not run for
      re-election at the Company’s next annual meeting of stockholders, due to an
      increase in Mr. Barron’s external business commitments.





**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.


61





**Committees**





In
      June
      2006, the Board of Directors appointed Jay B. Langner and Dr. Michael Sorell
      to
      the Audit Committee. The Audit Committee reviews the scope and results of the
      Company's financial statements conducted by the Company's independent auditors.
      The Committee also reviews the scope of other services provided by the Company's
      independent auditors, proposed changes in the Company's financial and accounting
      standards and principles, and the Company's policies and procedures with respect
      to its internal accounting, and auditing and financial controls. The Committee
      makes recommendations to the Board of Directors on the engagement of the
      independent auditors, as well as other matters which may come before it or
      as
      directed by the Board of Directors. Our Board of Directors has determined that
      Mr. Langner is an “audit committee financial expert” within the applicable
      definition of the Securities and Exchange Commission. Each of Mr. Langner and
      Dr. Sorell qualify as independent directors under
      Rule 10A-3 of the Securities Exchange Act of 1934 and as defined in NASD
      Marketplace Rule 4200(15).





In
      June
      2006, the Board of Directors appointed Robert S. Vaters and Jay B. Langner
      to
      the Compensation Committee. In March 2007, the Board of Directors appointed
      Alan
      L. Heller to the Compensation Committee. The Compensation Committee makes
      decisions concerning matters of executive compensation; administers the
      Company's executive incentive plans; reviews compensation plans, programs and
      policies; and monitors the performance and compensation of executive officers.
      The goal of our Board of Directors executive compensation policy is to ensure
      that an appropriate relationship exists between executive compensation and
      the
      creation of stockholder value, while at the same time attracting, motivating
      and
      retaining senior management.  Each
      of
      Mr. Vaters, Mr. Langner, and Mr. Heller qualify as independent directors under
      Rule 10A-3 of the Securities Exchange Act of 1934 and as defined in NASD
      Marketplace Rule 4200(15).





In
      June
      2006, the Board of Directors appointed Dr. Michael Sorell and Robert S. Vaters
      to the Nominating Committee. The
      Nominating Committee participates in identifying qualified individuals to become
      directors and determining the composition of the Board and its committees.
      Each
      of Dr. Sorell and Mr. Vaters qualify as independent directors under Rule 10A-3
      of the Securities Exchange Act of 1934 and as defined in NASD Marketplace Rule
      4200(15).





**Code
      of Ethics**





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





62


**ITEM
        10.   EXECUTIVE COMPENSATION**


**SUMMARY
      COMPENSATION TABLE**


The
      following table sets forth all compensation awarded to, earned by, or paid
      for
      services in all capacities during 2006 and 2005 by our Chief Executive Officer,
      President and Chief Operating Officer, Vice-President of R & D, and Chief
      Financial Officer.





Name
                and
              Principal
                Position
            
            Year
            
            Salary
            
            Bonus
            
            Stock
              Awards
            
            Option
              Awards
            
            All
                other
              Compensation
            
            TotalEllen
                R. Hoffing, President and CEO(1)
            
            
            2006
              2005
            
            $
            92,115
              N/A
            
            $
            40,000
              N/A
            
            $
            39,805
              N/A
            
            $
            718,685
              N/A
            
            $
            0
              N/A
            
            $
            890,605
              N/AJohn
                F. DeBernardis
              Former
                Pres. and CEO(2)
            
            
            2006
              2005
            
            $
              $
            303,326
              292,500
            
            $
              $
            0
              0
            
            $
              $
            0
              0
            
            $
              $
            0
              0
            
            $
              $
            4,263
              3,885
            
            $
              $
            307,589
              296,385Daniel
                Kerkman
              V.P.
                of R & D(3)
            
            
            2006
              2005
            
            $
              $
            202,901
              195,750
            
            $
              $
            0
              0
            
            $
              $
            0
              0
            
            $
              $
            0
              0
            
            $
              $
            0
              0
            
            $
              $
            202,901
              195,750David
                Ellison
              CFO(4)
            
            
            2006
              2005
            
            $
              $
            187,529
              180,750
            
            $
              $
            0
              0
            
            $
              $
            0
              0
            
            $
              $
            0
              0
            
            $
              $
            0
              0
            
            $
              $
            187,529
              180,750





(1)  Ms.
      Hoffing began employment as President and CEO of the Company in September 2006.
      Her annual base salary per her employment agreement is $300,000. On August
      29,
      2006, The Board of Directors approved a grant of 6,000,000 stock options to
      Ms.
      Hoffing. This option grant was made pursuant to the terms of her employment
      and
      was not made under the Company’s 2003 stock option plan. In addition, the Board
      of Directors approved a grant to Ms. Hoffing of 400,000 restricted shares of
      common stock, which grant was made (i) on the same day as the new CEO’s option
      grants and (ii) pursuant to the terms of the new CEO’s employment.


(2)  Dr.
      DeBernardis was President and CEO of the Company from October 2004 through
      August 2006. Dr. DeBernardis’s employment agreement provides for an annual cost
      of living increase. No increase has been received since April 2005. Included
      in
      the 2006 Salary amount is $7,326 accrued as of December 31, 2006, representing
      his earned, but not yet paid, cost of living increase since April 2006. Dr.
      DeBernardis’s employment agreement provides for the Company to pay for a life
      insurance policy, in addition to the life insurance policy provided through
      the
      Company’s group health plan. The annual premium is included in All Other
      Compensation. Dr. DeBernardis’s employment agreement provides for a monthly
      expense allowance of $1,000. In April 2005, the monthly expense allowance was
      increased to $1,150.


(3)  Dr.
      Kerkman’s employment agreement provides for an annual cost of living increase.
      No increase has been received since April 2005. Included in the 2006 Salary
      amount is $4,901 accrued as of December 31, 2006, representing his earned,
      but
      not yet paid, cost of living increase since April 2006. Dr. Kerkman’s employment
      agreement provides for a monthly expense allowance of $300. In April 2005,
      the
      monthly expense allowance was increased to $400.


(4)  Mr.
      Ellison’s employment agreement provides for an annual cost of living increase.
      No increase has been received since April 2005. Included in the 2006 Salary
      amount is $4,529 accrued as of December 31, 2006, representing his earned,
      but
      not yet paid, cost of living increase since April 2006. Mr. Ellison’s employment
      agreement provides for a monthly expense allowance of $300. In April 2005,
      the
      monthly expense allowance was increased to $400.


63


OUTSTANDING
      EQUITY AWARDS AT FISCAL YEAR-END





Option
                Awards
            
            Stock
                AwardsName
            
            Number
                of Securities Underlying Unexercised Options (#) Exercisable(2)
            
            Number
                of Securities Underlying Unexercised Options (#) Unexercisable(1)
            
            Equity
                Incentive Plan Awards: Number of Securities Underlying Unexercised
                Unearned Options (#)
            
            Option
                Exercise Price ($)
            
            Option
                Expiration Date
            
            Number
                of Shares or Units of Stock That Have Not Vested (#)(1)
            
            Market
                Value of Shares or Units of Stock That Have Not Vested ($)
            
            Equity
                Incentive Plan Awards: Number of Unearned Shares, Units or Other
                Rights
                That Have Not Vested (#)
            
            Equity
                Incentive Plan Awards: Market or Payout Value of Unearned Shares,
                Units or
                Other Rights That Have Not Vested ($)Ellen
                R. Hoffing(1)
            
            
            -
            
            
            6,000,000
            
            
            -
            
            $
            0.230
            
            
            8/29/2016
            
            
            400,000
            
            $
            39,805
            
            
            -
            
            $
            -John
                F. DeBernardis
            
            
            65,840
            
            
            -
            
            
            -
            
            $
            0.150
            
            
            4/1/2008
            
            
            -
            
            
            -
            
            
            -
            
            $
            -233,731
            
            
            -
            
            
            -
            
            $
            0.150
            
            
            11/16/2010427,957
            
            
            -
            
            
            -
            
            $
            0.150
            
            
            11/1/2011120,402
            
            
            -
            
            
            -
            
            $
            0.150
            
            
            6/1/20121,500,000
            
            
            -
            
            
            -
            
            $
            0.150
            
            
            9/2/2013Daniel
                Kerkman
            
            
            39,504
            
            
            -
            
            
            -
            
            $
            0.150
            
            
            4/1/2008
            
            
            -
            
            
            -
            
            
            -
            
            $
            -65,840
            
            
            -
            
            
            -
            
            $
            0.150
            
            
            11/16/2010181,059
            
            
            -
            
            
            -
            
            $
            0.150
            
            
            11/1/201152,738
            
            
            -
            
            
            --
            
            $
            0.l50
            
            
            6/1/2012400,000
            
            
            -
            
            
            -
            
            $
            0.150
            
            
            9/2/2013David
                Ellison
            
            
            9,876
            
            
            -
            
            
            -
            
            $
            0.150
            
            
            4/1/2008
            
            
            -
            
            
            -
            
            
            -
            
            $
            -69,132
            
            
            -
            
            
            -
            
            $
            0.150
            
            
            11/16/2010164,599
            
            
            -
            
            
            -
            
            $
            0.150
            
            
            11/1/200135,656
            
            
            -
            
            
            -
            
            $
            0.150
            
            
            6/1/2012500,000
            
            
            -
            
            
            -
            
            $
            0.150
            
            
            9/2/2013





(1)  Ms.
      Hoffing’s stock options will become exercisable as follows: 1,000,000 options
      will become exercisable on February 29, 2007, 166,667 options will become
      exercisable each month thereafter through July 29, 2009 and 166,657 options
      will
      become exercisable on August 29, 2009. Ms. Hoffing’s restricted common stock
      will become exercisable as follows: **** 133,334
      shares of restricted common stock vests on August 29, 2007, 133,333 shares
      of
      restricted common stock vests on August 29, 2008, and 133,333 shares of
      restricted common stock vests on August 29, 2009.


(2)  All
      the
      above stock options, with the exception of Ms. Hoffing’s stock options, are
      fully vested and exercisable as of December 31, 2006.





**Executive
      letter agreement**





Under
      the
      terms of her employment, Ellen R. Hoffing, the President and CEO, receives
      a
      minimum base salary of $300,000 per year, plus a bonus of up to 40% of Ms.
      Hoffing’s base salary upon attainment of performance objectives established by
      the our Board of Directors and acceptable to Ms. Hoffing. We granted Ms. Hoffing
      a stock option to purchase 6,000,000 shares of our common stock at an exercise
      price of $0.23 (which was the closing price of the common stock on the
      over-the-counter market on the date of grant). The option vests as to 1,000,000
      shares of common stock on the sixth month anniversary of the grant, and then
      will vest as to an additional 166,667 shares for each month







64


thereafter
      until the option is vested in full (which will be on the third anniversary
      of
      the date of grant). We also granted 400,000 shares of restricted stock, which
      vests as to 133,334 shares on the first anniversary of the date of grant and
      133,333 shares on the second and third anniversaries of the date of grant.
      In
      addition, Ms. Hoffing will receive $100,000 worth of shares of restricted stock
      on her one-year anniversary and her two-year anniversary with the Company
      (August 29, 2007 and August 29, 2008). If Ms. Hoffing’s employment is terminated
      by us without cause, she is entitled to her base salary and benefits for a
      period of 12 months after such termination, and the portion of her options
      and
      restricted stock that would have vested during the 12 months following such
      termination will immediately vest. If Ms. Hoffing’s employment is terminated
      upon or in connection with a change of control of the Company, then Ms. Hoffing
      will be paid the equivalent of one year’s base salary and any unvested shares of
      restricted stock and stock options will immediately vest in full upon such
      “change in control”. We expect to enter into a definitive agreement with Ms.
      Hoffing by the end of the second quarter 2007.





**Employment
      agreements**





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, with an annual cost of living increase. Mr.
      Ellison has not received an increase in his base salary since April 2005.
      Included in 2006 general and administrative expense is $4,529 accrued as of
      December 31, 2006, representing his earned, but not yet paid, cost of living
      increase since April 2006. Mr. Ellison’s agreement also provides a minimum
      monthly non-accountable allowance of $300 for automobile and cell phone
      expenses. This allowance was increased to $400 per month in April 2005. If
      we
      terminate Mr. Ellison’s employment without cause or upon or in connection with a
      change in control or Mr. Ellison terminates his employment for “cause”, then Mr.
      Ellison will receive severance consisting of (i) a lump sum payment from us
      equal to the greater of (A) the total base salary otherwise payable through
      the
      expiration of the term of Mr. Ellison’s employment agreement or (B) twelve
      months’ base salary and bonus (based on the prior year’s base salary plus
      bonus), (ii) health, disability and life insurance provided to Mr. Ellison
      for
      up to twelve months following the effective date of such termination and (iii)
      continued exercisability of all options held by Mr. Ellison. If we fail to
      give
      Mr. Ellison at least 90 days notice that his employment agreement is not being
      renewed for any reason other than cause, then Mr. Ellison will receive severance
      payments equal to his base salary then in effect, plus the amount of the bonus
      earned by Mr. Ellison for the year, if any. Such severance payment shall be
      payable over a one (1) year period.





Daniel
      J.
      Kerkman, Ph.D., the Vice President of Research and Development, is employed
      pursuant to an agreement through October 31, 2007 that provides for a minimum
      base salary of $189,000 per year, with an annual cost of living increase. Dr.
      Kerkman has not received an increase in his base salary since April 2005.
      Included in 2006 research and development expense is $4,901 accrued as of
      December 31, 2006, representing his earned, but not yet paid, cost of living
      increase since April 2006. Dr. Kerkman’s agreement also provides a minimum
      monthly non-accountable allowance of $300 for automobile and cell phone
      expenses. This allowance was increased to $400 per month in April 2005. If
      the
      we terminate Dr. Kerkman’s employment without cause or Dr. Kerkman terminates
      his employment for “cause”, then Dr. Kerkman will receive severance consisting
      of (i) a lump sum payment from us equal to the greater of (A) the total base
      salary otherwise payable through the expiration of the term of Dr. Kerkman’s
      employment agreement or (B) twelve months’ base salary and bonus (based on the
      prior year’s base salary plus bonus), (ii) health, disability and life insurance
      provided to Dr. Kerkman for up to twelve months following the effective date
      of
      such termination and (iii) continued exercisability of all options held by
      Dr.
      Kerkman. If the we fail to give Dr. Kerkman at least 90 days notice that his
      employment agreement is not being renewed for any reason other than cause,
      then
      Dr. Kerkman will receive severance payments equal to his base salary then in
      effect, plus the amount of the bonus earned by Dr. Kerkman for the year, if
      any.
      Such severance payment shall be payable over a one (1) year period.





John
      F.
      DeBernardis, Ph.D., Senior Advisor to the Company’s 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, with an annual cost of living
      increase. Dr. DeBernardis has not received an increase in his base salary since
      April 2005. Included in 2006 research and development expense is $7,326 accrued
      as of December 31, 2006, representing his earned, but not yet paid, cost of
      living increase since April 2006. Dr. DeBernardis’s agreement also provides a
      minimum monthly non-accountable allowance of $1,000 for automobile and cell
      phone expenses. This allowance was increased to $1,150 per month in April 2005.
      In addition, we also provide Dr. DeBernardis, at our expense, a term life
      insurance policy in the amount of $600,000. If we terminate Dr. DeBernardis’
employment without cause or upon or in connection with a change in control
      or
      Dr. DeBernardis





65





terminates
      his employment for “cause”, then Dr. DeBernardis will receive severance
      consisting of (i) a lump sum payment from us equal to the greater of (A) the
      total base salary otherwise payable through the expiration of the term of Dr.
      DeBernardis’ employment agreement or (B) twelve months’ base salary and bonus
      (based on the prior year’s base salary plus bonus), (ii) health, disability and
      life insurance provided to Dr. DeBernardis for up to twelve months following
      the
      effective date of such termination and (iii) continued exercisability of all
      options held by Dr. DeBernardis. If we fail to give Dr. DeBernardis at least
      90
      days notice that his employment agreement is not being renewed for any reason
      other than cause, then Dr. DeBernardis will receive severance payments equal
      to
      his base salary then in effect, plus the amount of the bonus earned by Dr.
      DeBernardis for the year, if any. Such severance payment shall be payable over
      a
      one (1) year period. Dr. DeBernardis and the Company entered into an amendment
      to Dr. DeBernardis’ employment agreement in July 2006. Pursuant to this
      amendment, the parties agreed that Dr. DeBernardis’ employment agreement stays
      in full force and effect until its expiration (October 31, 2007) after Dr.
      DeBernardis’ resignation as President and CEO became effective. Other than the
      title held by Dr. DeBernardis, no other term of his employment agreement was
      changed by the amendment except that upon a termination of his employment all
      of
      Dr. DeBernardis’ incentive stock options will be converted into non-qualified
      options.





These
      agreements provide for accelerated vesting of unvested stock options and
      restricted stock upon a change in control.





**Compensation
      of directors**





Directors
      receive annual option grants as compensation for their service as members of
      the
      board of directors. Directors
      are reimbursed for reasonable out-of-pocket expenses incurred in the performance
      of their duties and the attendance of board meetings and any meeting of
      stockholders. Mr. Barron was paid $38,708 and $48,000 as compensation for
      services rendered to the Company as Chairman in 2006 and 2005, respectively.
      Mr.
      Barron was compensated as an employee of the Company and received health
      benefits and participated in the Company’s 401(k) retirement plan in 2006 and
      2005. In
      connection with Mr. Barron’s resignation as Chairman in June 2006, the Company
      and Mr. Barron agreed to reduce the monthly payments that Mr. Barron received
      under his employment agreement to $2,479.74. Such payments were made through
      December 31, 2006, and represent Mr. Barron’s contributions for the coverage of
      Mr. Barron and his family under the Registrant’s group health insurance plan and
      Mr. Barron’s contributions to the Registrant’s 401(k) plan. In the event that
      the Company during its 2007 fiscal year raises at least $2 million in additional
      funding, the Company will make six additional payments of $2,479.74 to Mr.
      Barron. The Company has also agreed to convert Mr. Barron’s incentive options
      into non-qualified options immediately after the Registrant’s next annual
      meeting of stockholders. Mr.
      Vaters, who became Chairman in June 2006, was paid $20,000 for consulting
      services rendered to the Company as Chairman in 2006.





**DIRECTOR
      COMPENSATION**


Name
            
            Fees
                Earned or Paid in Cash ($)
            
            Stock
                Awards ($)
            
            Option
                Awards ($)
            
            Non-Equity
                Incentive Plan Compensation ($)
            
            Change
                in Pension Value and Non-Qualified Deferred Compensation
                Earnings
            
            All
                Other Compensation ($)
            
            Total
                ($)Robert
                S. Vaters
            
            $
            20,000
            
            $
            -
            
            $
            348,000
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            368,000Bruce
                N. Barron
            
            $
            38,708
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            38,708Jay
                B. Langner
            
            $
            -
            
            $
            -
            
            $
            26,100
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            26,100Michael
                Sorell
            
            $
            -
            
            $
            -
            
            $
            26,100
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            26,100Alan
                L. Heller
            
            $
            -
            
            $
            -
            
            $
            35,685
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            35,685








66


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





The
      following table sets forth the beneficial ownership of our securities as of
      March 26, 2007, by (a) each person known by the Company to be the beneficial
      owner of more than 5% of any class of the Company’s securities, (b) the
      Company’s directors, (c) the Company’s executive officers, and (d) all directors
      and executive officers as a group. Except as listed below, the address of all
      owners listed is c/o Applied NeuroSolutions, Inc., 50 Lakeview Parkway, Suite
      111, Vernon Hills, Illinois 60061. As of March 29, 2007, a total of 98,409,901
      shares of the Company’s common stock were outstanding.


Name
                of Beneficial Owner
            
            Amount
                and nature
              of
                beneficial ownership
            
            Percent
              of
                Class (1)Bruce
                N. Barron (3)
            
            
            3,644,066(5
            )
            
            3.6
            %Ellen
                R. Hoffing (2)
            
            
            1,333,334(6
            )
            
            1.3
            %Jay
                B. Langner (3)
            
            
            550,000(7
            )
            
            *Robert
                S. Vaters (3)
            
            
            2,000,000(8
            )
            
            2.0
            %Michael
                Sorell, MD (3)
            
            
            275,000(9
            )
            
            *Alan
                L. Heller (3)
            
            
            200,000(10
            )
            
            *Daniel
                J. Kerkman, Ph.D. (4)
            
            
            914,926(11
            )
            
            *David
                Ellison (4)
            
            
            779,263(12
            )
            
            *Special
                Situations Private Equity Fund, LP
              527
                Madison Avenue, Suite 2600
              New
                York, NY 10022
            
            
            6,250,000(13
            )
            
            6.0
            %Benjamin
                Family Trusts
            
            
            8,317,780(14
            )
            
            8.3
            %All
                Directors and Officers as a group
              (8
                persons)
            
            
            9,696,589(15
            )
            
            9.1
            %





*
      Indicates ownership of less than 1.0%





(1)  Based
      on
      98,409,901 shares of common stock outstanding as of March 29, 2007, plus each
      person’s currently exercisable warrants and/or options.




(2)  Director
      and officer.




(3)  Director.




(4)  Officer.




(5)  Consists
      of 877,403 shares of common stock and 2,766,663 shares of common stock issuable
      upon the exercise of currently exercisable stock options.




(6)  Consists
      of 1,333,334 shares of common stock issuable upon the exercise of currently
      exercisable stock options. Does not include 400,000 shares of restricted stock
      that has not vested.




(7)  Consists
      of 350,000 shares of common stock, and 200,000 shares of common stock issuable
      upon the exercise of currently exercisable stock options.




(8)  Consists
      of 2,000,000 shares of common stock issuable upon the exercise of currently
      exercisable stock options.




(9)  Consists
      of 275,000 shares of common stock issuable upon the exercise of currently
      exercisable stock options.




(10)  Consists
      of 200,000 shares of common stock issuable upon the exercise of currently
      exercisable stock options.




(11)  Consists
      of 175,785 shares of common stock and 739,141 shares of common stock issuable
      upon the exercise of currently exercisable stock options.




(12)  Consists
      of 779,263 shares of common stock issuable upon the exercise of currently
      exercisable stock options.




67


(13)  Consists
      of 250,000 shares of common stock and 6,000,000 shares of common stock issuable
      upon the exercise of currently exercisable warrants. MG Advisors, L.L.C. (“MG”)
      is the general partner of and investment adviser to the Special Situations
      Private Equity Fund, L.P., (“Private Equity Fund”). Austin W. Marxe and David M.
      Greenhouse are the principal owners of MG and are principally responsible for
      the selection, acquisition and disposition of the portfolio securities by MG
      on
      behalf of the Private Equity Fund.




(14)  Consists
      of 5,967,514 shares of common stock and 2,350,266 shares of common stock
      issuable upon the exercise of currently exercisable warrants held by various
      family trusts at U.S. Trust Company of New York, 114 W. 47 th St,
      8 th Floor,
      New York, NY 10036 with respect to family trusts holding 8,217,780 shares of
      common stock (including shares of common stock issuable upon the exercise of
      warrants) and 100,000 shares of common stock held by a trustees
      spouse.




(15)  Consists
      of 1,403,188 shares of common stock, and 8,293,401 shares of common stock
      issuable upon the exercise of currently exercisable stock options.





**Securities
      authorized for issuance under equity compensation plans**





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





In
      2006,
      our Compensation Committee approved 900,000 stock options to directors under
      the
      Plan, and 6,000,000 stock options to our President and CEO and 4,000,000 stock
      options to our Chairman that were granted outside of the Plan and part of their
      respective individual compensation arrangements. Additionally, in 2006
      stockholders failed to approve proposal three in our proxy statement for our
      2006 annual meeting of stockholders, which proposal included ratification of
      the
      grant of previously granted options to executive officers and independent
      directors to purchase approximately 3.6 million shares of common stock (the
      “Excess Options”). As a result of the stockholder vote, we cancelled the Excess
      Options and the approximately 3.6 million shares of our common stock underlying
      such Excess Options became available for future grants under the
      Plan.





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





The
      following table summarizes outstanding options under our Stock Option Plan
      as of
      December 31, 2006. Options granted in the future under the Plan and outside
      of
      the Plan are within the discretion of our Compensation Committee and therefore
      cannot be ascertained at this time.





(a)
            
            (b)
            
            (c)Plan
                Category
            
            Number
                of Securities to
              be
                Issued Upon Exercise
              of
                Outstanding Options
            
            Weighted-Average
              Exercise
                Price of
              Outstanding
                Options
            
            Number
                of Securities
              Remaining
                Available for
              Future
                Issuance Under
              Equity
                Compensation
              Plans
                (excluding securities
              Reflected
                in column (a))Equity
                compensation plans
              Approved
                by security holders
            
            
            10,452,531
            
            $
            0.173
            
            
            1,547,469Equity
                compensation plans
              not
                approved by security
              holders
            
            
            10,000,000(1)
            
            $
            0.218
            
            
            -Total
            
            
            20,452,531
            
            $
            0.195
            
            
            1,547,469


68


(1)
      Consists of an option exercisable to purchase 6,000,000 shares of our common
      stock that was granted to Ellen Hoffing in connection with her employment as
      our
      President and Chief Executive Officer and an option to purchase 4,000,000 shares
      of common stock that was granted to Robert Vaters in connection with his
      appointment as Chairman of our Board of Directors. A description of the material
      terms of the option granted to Ms. Hoffing is set forth in Part III, Item 10
      of
      this Annual Report. The option granted to Mr. Vaters is exercisable for a
      ten-year period to purchase 4,000,000 shares of common stock at an exercise
      price of $0.20 per share (which was the closing price of our common stock on
      the
      OTC Bulletin Board on June 23, 2006). Mr. Vaters options are exercisable as
      follows: 1,000,000 are exercisable immediately, 1,000,000 are exercisable at
      the
      six month anniversary of the grant date, 666,667 are exercisable at the one
      year
      anniversary of the grant date, 666,667 are exercisable at the two year
      anniversary of the grant date and 666,666 are exercisable at the three year
      anniversary of the grant date.





**ITEM
      12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE**





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





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





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





ITEM 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:


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


·
            Consolidated
                Balance Sheets at December 31, 2006 and
                2005


·
            Consolidated
                Statements of Operations for the years ended December 31, 2006 and
                2005
                and for the period from March 14, 1992 (inception) to December 31,
                2006


·
            Consolidated
                Statements of Stockholders’ Equity/(Deficit) for the years ended December
                31, 2006 and 2005 and for the period from March 14, 1992 (inception)
                to
                December 31, 2006


·
            Consolidated
                Statements of Cash Flows for the years ended December 31, 2006 and
                2005
                and for the period from March 14, 1992 (inception) to December 31,
                2006


·
            Notes
                to Consolidated Financial Statements for the years ended December
                31, 2006
                and 2005 and for the period from March 14, 1992 (inception) to December
                31, 2006





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.


69





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 incorporated herein by reference.3.1.1
            Certificate
                of Amendment of Certificate of Incorporation, filed as Exhibit A
                to the
                Company's Proxy Statement on Schedule 14A, filed on June 29, 1999
                and
                incorporated herein by reference.3.1.2
            Certificate
                of Amendment of Certificate of Incorporation, filed as Exhibit 3.1.2
                to
                the Company’s Registration Statement on Form SB-2 SEC File Number
                333-84412, filed on March 15, 2002 (the “March 2002 Registration
                Statement”) and incorporated herein by reference.3.1.3
            Amended
                and Restated Certificate of Incorporation filed as Exhibit B to the
                Company’s Proxy Statement on Schedule 14A filed on May 15, 2006 and
                incorporated herein by reference.3.1.4
            Certificate
                of Designation of Series A Preferred Stock, filed as Exhibit 4.1
                to the
                Company’s Current Report on Form 8-K, dated April 25, 2006, filed on May
                1, 2006 and incorporated herein by reference.3.2
            Company
                Bylaws, filed as Exhibit D to the February 1999 Proxy Statement and
                incorporated herein by reference.4.1
            Specimen
                Common Stock Certificate, filed as Exhibit 4.1 to Amendment No. 3
                to the
                Company's Registration Statement on Form S-1, 1998, Registration
                Number
                333-33219 (the "1998 Registration Statement") filed on January 27,
                1998
                and incorporated herein by reference.4.1.1
            Specimen
                Common Stock Certificate, identifying the Company name change from
                Ophidian Pharmaceuticals, Inc. to Hemoxymed, Inc., filed as Exhibit
                4.1.1
                to the March 2002 Registration Statement and incorporated herein
                by
                reference.4.2
            Specimen
                Warrant Certificate, filed as Exhibit 4.2 to Amendment No. 4 to the
                1998
                Registration Statement filed on January 29, 1998 and incorporated
                herein
                by reference.4.3
            Form
                of Representatives' Warrant Agreement, including Specimen Representatives'
                Warrant filed as Exhibit 4.3 to Amendment No. 4 the 1998 Registration
                Statement filed on January 29, 2004 and incorporated herein by
                reference.4.4
            Form
                of Warrant Agreement filed as Exhibit 4.4 to Amendment No. 4 to the
                1998
                Registration Statement filed on January 29, 2004 and incorporated
                herein
                by reference.4.5
            Specimen
                Unit Certificate filed as Exhibit 4.5 to Amendment No. 5 to the 1998
                Registration Statement filed on February 5, 1998 and incorporated
                herein
                by reference.4.6
            Hemoxymed,
                Inc. 2003 Stock Option Plan filed as Appendix B to the Company’s
                definitive revised information statement on Schedule 14C filed on
                August
                29, 2003 and incorporated herein by reference.#10.1
            Agreement
                and Plan of Merger made as of April 16, 2001, by and among the Company,
                Ophidian Holdings, Inc., a wholly owned subsidiary of the Company,
                and
                Hemoxymed, Inc., filed as Exhibit A to the Company's Information
                Statement
                on Schedule 14f-1, SEC File No. 005-55419, filed on August 8, 2001
                and
                incorporated herein by reference.10.2
            Agreement
                and Plan of Merger made as of September 10, 2002, by and among the
                Company, Molecular Geriatrics Acquisition, Inc., a wholly owned subsidiary
                of the Company, and Molecular Geriatrics Corporation, filed as Exhibit
                2.1
                to the Company's Current Report on Form 8-K filed on September 23,
                2002
                and incorporated herein by
                reference.


70





10.3
            License
                and Collaborative Research Agreement, dated October 1, 1992 between
                Molecular Geriatrics Corporation and Albert Einstein College of Medicine,
                including Amendment Agreement dated July 1, 1993 filed as Exhibit
                10.3 to
                the Company’s Annual Report on Form 10-KSB for the year ended December 31,
                2002 filed on March 31, 2003 (the “2002 10-KSB”) and incorporated herein
                by reference.10.4
            License
                and Collaborative Research Agreement, dated February 1, 1994 between
                Molecular Geriatrics Corporation and Albert Einstein College of Medicine
                filed as Exhibit 10.4 to the Company’s 2002 10-KSB and incorporated herein
                by reference.10.5
            Amendment
                Agreement, dated March 24, 2002 between Molecular Geriatrics Corporation
                and Albert Einstein College of Medicine filed as Exhibit 10.5 to
                the
                Company’s 2002 10-KSB and incorporated herein by
                reference.10.6
            Second
                Amendment Agreement, dated September 21, 2002 between Molecular Geriatrics
                Corporation and Albert Einstein College of Medicine filed as Exhibit
                10.6
                to the Company’s 2002 10-KSB, and incorporated herein by
                reference.10.7
            Consulting
                Agreements with Dr. Peter Davies, dated October 13, 1992, October
                13,
                1992, and January 31, 1994 filed as Exhibit 10.7 to the Company’s 2002
                10-KSB and incorporated herein by reference.10.8
            Lease
                Agreement, dated November 22, 1996, along with First Amendment to
                Lease,
                dated May 2, 1997, and Lease Extension, dated March 18, 2002 between
                Molecular Geriatrics Corporation and Arthur J. Rogers & Co filed as
                Exhibit 10.10 to the Company’s 2002 10-KSB and incorporated herein by
                reference.10.9
            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
                incorporated herein by reference.10.10
            Consulting
                Agreement with Equity Communications, LLC, dated June 20, 2003, along
                with
                amendment dated December 15, 2003, filed as Exhibit 10.12 to the
                2003
                10-KSB and incorporated herein by reference.10.11
            Employment
                Agreement, dated November 1, 2004, between Applied NeuroSolutions,
                Inc.
                and John F. DeBernardis, filed as Exhibit 10.11 to the Company’s Annual
                Report on Form 10-KSB for the year ended December 31, 2004 filed
                on March
                25, 2005 (the “2004 10-KSB”) and incorporated herein by
                reference.#10.12
            Employment
                Agreement, dated November 1, 2004, between Applied NeuroSolutions,
                Inc.
                and Daniel J. Kerkman, filed as Exhibit 10.12 to the 2004 10-KSB
                and
                incorporated herein by reference.#10.13
            Employment
                Agreement, dated November 1, 2004, between Applied NeuroSolutions,
                Inc.
                and David Ellison, filed as Exhibit 10.13 to the 2004 10-KSB and
                incorporated herein by reference.#10.14
            License
                Agreement, dated December 13, 2004, between Applied NeuroSolutions,
                Inc.
                and bioMérieux, SA, filed as Exhibit and incorporated herein by reference.
                (Portions of this exhibit have been omitted pursuant to a request
                for
                confidential treatment.)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 incorporated herein by
                reference.


71





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 incorporated herein by
                reference.10.17
            Form
                of Unit Purchase Agreement, filed as Exhibit 4.2 to the February
                2004 8-K
                and incorporated herein by reference.10.18
            Bridge
                Loan Holder Consent, filed as Exhibit 4.3 to the February 2004 8-K
                and
                incorporated herein by reference.10.19
            Form
                of Registration rights Agreement, filed as Exhibit 4.4 to the Company's
                February 2004 8-K and incorporated herein by reference.10.20
            Form
                of Warrant, filed as Exhibit 4.5 to the Company's February 2004 8-K
                and
                incorporated herein by reference.10.21
            Placement
                Agent Warrant, filed as Exhibit 4.6 to the Company's February 2004
                8-K and
                incorporated herein by reference.10.22
            Collaboration
                Agreement, dated November 27, 2006, between Applied NeuroSolutions,
                Inc.
                and Eli Lilly and Company* (Portions of this exhibit have been omitted
                pursuant to a request for confidential treatment.)10.23
            Amendment
                to Employment Agreement, dated July 14, 2006, between Applied
                NeuroSolutions, Inc. and John F. DeBernardis. *#10.24
            Agreement
                and Plan of Merger, dated as of April 27, 2006, by and between Applied
                NeuroSolutions, Inc. and APNS Merger Corp. filed as Exhibit 10.1
                to the
                Company’s Current Report on Form 8-K, dated April 25, 2006, filed on May
                1, 2006 and incorporated herein by reference.10.25
            Employment
                Agreement, dated January 1, 2005 between Applied NeuroSolutions,
                Inc. and
                Bruce N. Barron.*10.26
            Letter
                Agreement, dated as of January 25, 2007, between Applied NeuroSolutions,
                Inc. and Bruce N. Barron.*10.27
            Third
                Amendment Agreement, dated October 30, 2006 between Applied
                NeuroSolutions, Inc. and Albert Einstein College of Medicine.
                *14
            Code
                of Ethics, filed as Exhibit 14 to the Company’s 2005 10-KSB and
                incorporated herein by reference.16.1
            Letter
                from KPMG to the SEC dated October 25, 2004, filed as Exhibit 16.1
                to the
                Company’s Current Report on Form 8-K, dated October 25, 2004, filed on
                October 25, 2004 and incorporated herein by reference.16.2
            Letter
                from KPMG to the SEC dated November 5, 2004, filed as Exhibit 16.2
                to
                Amendment No. 1 to the Company’s Current Report on Form 8-K/A, dated
                October 25, 2004, filed on November 5, 2004 and incorporated herein
                by
                reference.23.1
            Consent
                of Virchow, Krause & Company,
                LLP.*








*
      Exhibit
      filed herewith.





#
      Management contract or compensatory plan or arrangement.











72





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





The
      following is a summary of the fees billed to us by Virchow, Krause &
Company, LLP (2006 and 2005) and KPMG LLP (2005) for professional services
      rendered for the fiscal years ended December 31, 2006 and 2005:











**Fee
                Category**
            
            **Fiscal
                2006**
              **Fees**
            
            **Fiscal
                2005**
              **Fees**Audit
                Fees
            
            $
            72,500
            
            $
            71,980Audit
                Related Fees
            
            
            2,460
            
            
            8,350Tax
                Fees
            
            
            -
            
            
            -All
                Other Fees
            
            
            -
            
            
            -Total
                Fees
            
            $
            74,960
            
            $
            80,330





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





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





*Tax
      Fees.* Consists
      of fees billed for professional services for tax compliance, tax advice and
      tax
      planning. These services include preparation of federal and state income tax
      returns.





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





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





The
      Audit
      Committee has adopted a policy that requires advance approval of all audits,
      audit-related, tax, and other services performed by our independent registered
      public accounting firm. The policy provides for pre-approval by the Audit
      Committee of specifically defined audit and non-audit services. Unless the
      specific service has been previously pre-approved with respect to that year,
      the
      Audit Committee must approve the permitted service before the independent
      registered public accounting firm is engaged to perform it. The Audit Committee
      has delegated to the Chair of the Audit Committee authority to approve permitted
      service, provided that the Chair reports any decisions to the Audit Committee
      at
      its next scheduled meeting. All of the services performed by our independent
      registered public accounting firm during 2006 and 2005 were pre-approved by
      the
      Audit Committee.




73





SIGNATURE
      PAGE








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








APPLIED
      NEUROSOLUTIONS, INC.





Dated:
      March 29, 2007


By: /s/
      DAVID ELLISON


Chief
      Financial Officer


(Principal
      Financial


and
      Accounting Officer)














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





March
      29,
      2007      By: /s/
      Ellen R. Hoffing


Ellen
      R.
      Hoffing


President,
      Chief Executive Officer


&
      Director


(Principal
      Executive Officer)








March
      29,
      2007      By: /s/
      David Ellison


David
      Ellison


Chief
      Financial Officer


(Principal
      Financial and


Accounting
      Officer)








March
      29,
      2007      By: /s/
      Robert S. Vaters


Robert
      S.
      Vaters


Chairman
      & Director








March
      29,
      2007      By: /s/
      Michael Sorell


Michael
      Sorell


Director








March
      29,
      2007      By: /s/
      Jay B. Langner


Jay
      B.
      Langner


Director





March
      29,
      2007      By: /s/
      Bruce N. Barron


Bruce
      N.
      Barron


Director





March
      29,
      2007      By: /s/
      Alan L. Heller


Alan
      L.
      Heller


Director


74