This document describes a system for detecting microaneurysms in retinal images to aid in the diagnosis of diabetic retinopathy. It first discusses diabetic retinopathy and the need for automated detection systems. It then outlines the proposed system, which uses preprocessing like vessel enhancement, thresholding and morphological operations to detect microaneurysms. A neural network is used to classify pixels in retinal images into vessel and non-vessel after extracting 2D features. The algorithm is implemented in MATLAB and can detect microaneurysms with better accuracy and faster than previous methods. Public retinal image databases are also discussed to test and evaluate such algorithms.