**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
  **FORM
        10-QSB**
  (Mark
        One)
 **T** **QUARTERLY REPORT UNDER SECTION 13 OR 15(d)**
 **OF
        THE SECURITIES EXCHANGE ACT OF 1934**
  **For
        the Quarterly Period Ended September 30, 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: 000-50590**
  **REXAHN
        PHARMACEUTICALS, INC.**
 (Exact
        name of registrant as specified on its charter)
  **Delaware**
              
              **11-3516358**(State
                  or other jurisdiction of incorporation or organization)
              
              (IRS
                  Employer Identification No.)
  **9620
        Medical Center Drive**
 **Rockville,
        Maryland 20850**
 (Address
        of principle executive offices)
  **(240)
        268-5300**
 (Registrant's
        telephone number, including area code)
  Indicate
        by check mark whether the registrant: (1) has filed all reports required
        to be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the 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 T  No £
  **APPLICABLE
        ONLY TO CORPORATE ISSUERS:**
  Indicate
        by check mark whether the registrant is a shell company (as defined in
        Rule 12b-2 of the Exchange Act). £ Yes T No
  State
        the
        number of shares outstanding of each of the registrant's classes of common
        equity, as of the latest practicable date: 50,275,632 issued and outstanding
        as
        of November 14, 2006
  Transitional
        Small Business Disclosure Format (check one):  Yes £  No T
  
 
  **REXAHN
        PHARMACEUTICALS, INC.**
  **INDEX**
  **PAGE(S)****PART
                  I**
              **FINANCIAL
                  INFORMATION**Item 1.
              Condensed
                  Financial Statements:Balance
                  Sheets - September 30, 2006 (unaudited) and
                  December 31, 2005
              1Statements
                  of Operations - Three and Nine Months Ended
                  September 30, 2006 and 2005 and March 19, 2001 (Inception)
                  to September 30, 2006 (unaudited)
              2Statements
                  of Cash Flows - Nine Months Ended
                  September 30, 2006 and 2005 and March 19, 2001 (Inception)
                  to September 30, 2006 (unaudited)
              3Notes
                  to Condensed Financial Statements
                  (unaudited)
              4Item 2.
              Management's
                  Discussion and Analysis or Plan of
                  Operation
              14Item 3.
              Controls
                  and Procedures
              34**PART
                  II**
              **OTHER
                  INFORMATION**Item 1.
              Legal
                  Proceedings
              35Item 2.
              Unregistered
                  Sales of Equity Securities and Use of
                  Proceeds
              35Item 3.
              Defaults
                  upon Senior Securities
              35Item 4.
              Submission
                  of Matters to a Vote of Security
                  Holders
              35Item 5.
              Other
                  Information
              35Item 6.
              Exhibits
              36Signatures
              37
  i
 *Index*
  **PART
        I - FINANCIAL INFORMATION**
 
 **Item1.
        FINANCIAL STATEMENTS**
  **REXAHN
        PHARMACEUTICALS, INC.**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 Condensed
        Balance Sheets
  **September
                  30,**
                **2006**
              
              December
                  31,
                2005(Unaudited)**ASSETS****Current
                  Assets:**Cash
                  and cash equivalents
              
              **$**
              **5,038,752**
              
              $
              10,116,625Prepaid
                  expenses and other
              
              
              **99,308**
              
              
              54,774**Total
                  Current Assets**
              
              
              **5,138,060**
              
              
              10,171,399**Equipment,
                  Net**
              
              
              **168,820**
              
              
              203,632**Intangible
                  Assets, Net**
              
              
              **326,532**
              
              
              339,890**Total
                  Assets**
              
              **$**
              **5,633,412**
              
              $
              10,714,921**LIABILITIES
                  AND STOCKHOLDERS' EQUITY****Current
                  Liabilities:**Accounts
                  payable and accrued expenses
              
              **$**
              **289,799**
              
              $
              587,612Licensing
                  fee payable
              
              
              **42,243**
              
              
              172,813**Total
                  Current Liabilities**
              
              
              **332,042**
              
              
              760,425**Long-Term
                  Convertible Debt**
              
              
              **-**
              
              
              3,850,000**Deferred
                  Revenue**
              
              
              **1,218,750**
              
              
              1,275,000**Total
                  Liabilities**
              
              
              **1,550,792**
              
              
              5,885,425**Commitment
                  and Contingencies**(note
                  7)**Stockholders'
                  Equity:**Common
                  stock, par value $0.0001
              
              
              **5,028**
              
              
              4,641Treasury
                  stock, 14,205 shares, at cost
              
              
              **(28,410**
              **)**
              
              -Additional
                  paid-in capital
              
              
              **24,196,117**
              
              
              19,029,178Accumulated
                  deficit during the development stage
              
              
              **(20,090,115**
              **)**
              
              (14,204,323
              )**Total
                  Stockholders' Equity**
              
              
              **4,082,620**
              
              
              4,829,496**Total
                  Liabilities and Stockholders' Equity**
              
              **$**
              **5,633,412**
              
              $
              10,714,921
  **See
        notes accompanying the financial statements**
  1
 *Index*
  **REXAHN
        PHARMACEUTICALS, INC.**
 **(A
        Development Stage Company)**
 Condensed
        Statements of Operations
 (Unaudited)
 
 Cumulative
                from
                  March
                19,
                  2001
                (Inception)
                to
                September
                  30,
              
              Three
                  Months
                Ended
                  September 30,
              
              Nine
                  Months
                Ended
                  September 30,2006
              
              **2006**
              
              2005
              
              **2006**
              
              2005**Revenues:**Interest
                  and other income
              
              $
              661,826
              
              **$**
              **71,098**
              
              $
              57,542
              
              **$**
              **270,377**
              
              $
              94,311Research
              
              
              281,250
              
              
              **18,750**
              
              
              18,750
              
              
              **56,250**
              
              
              56,250943,076
              
              
              **89,848**
              
              
              76,292
              
              
              **326,627**
              
              
              150,561**Expenses:**General
                  and administrative
              
              
              9,221,845
              
              
              **1,004,030**
              
              
              830,422
              
              
              **2,662,756**
              
              
              2,168,185Beneficial
                  conversion feature
              
              
              1,625,000
              
              
              **-**
              
              
              -
              
              
              **-**
              
              
              -Research
                  and development
              
              
              9,142,283
              
              
              **635,047**
              
              
              275,819
              
              
              **3,192,663**
              
              
              917,633Patent
                  fees
              
              
              392,586
              
              
              **100,611**
              
              
              52,039
              
              
              **164,900**
              
              
              107,481Interest
              
              
              296,515
              
              
              **3,998**
              
              
              59,808
              
              
              **95,019**
              
              
              137,027Depreciation
                  and amortization
              
              
              354,962
              
              
              **54,817**
              
              
              30,074
              
              
              **97,081**
              
              
              63,10721,033,191
              
              
              **1,798,503**
              
              
              1,248,162
              
              
              **6,212,419**
              
              
              3,393,433**Net
                  Loss**
              
              $
              (20,090,115
              )
              **$**
              **(1,708,655**
              **)**
              $
              (1,171,870
              )
              **$**
              **(5,885,792**
              **)**
              $
              (3,242,872
              )Loss
                  per share - basic and diluted
              
              
              
              
              **$**
              **(0.03**
              **)**
              $
              (0.03
              )
              **$**
              **(0.12**
              **)**
              $
              (0.08
              )Weighted
                  average number of shares outstanding - basic and diluted
              
              
              
              
              
              **50,265,632**
              
              
              43,943,795
              
              
              **48,990,761**
              
              
              40,648,411
  **See
        notes accompanying the financial statements**
  2
 *Index*
  **REXAHN
        PHARMACEUTICALS, INC.**
 **(A
        Development Stage Company)**
 Condensed
        Statements of Cash Flows
 (Unaudited)
  Cumulative
                  from
                    March 19,
                  2001
                  (Inception)
                    to
                
                Nine
                    Months Ended
                  September
                    30,September
                    30, 2006
                
                **2006**
                
                2005**Cash
                    Flows from Operating Activities:**Net
                    loss
                
                $
                (20,090,115
                )
                **$**
                **(5,885,792**
                **)**
                $
                (3,242,872
                )Adjustments
                    to reconcile net loss to net cash used in operating
                    activities:Beneficial
                    conversion feature
                
                
                1,625,000
                
                
                **—**
                
                
                —Compensatory
                    stock
                
                
                21,877
                
                
                **—**
                
                
                —Depreciation
                    and amortization
                
                
                354,962
                
                
                **97,081**
                
                
                63,107Stock
                    option compensation expense
                
                
                2,518,309
                
                
                **1,312,717**
                
                
                465,427Deferred
                    revenue
                
                
                1,218,750
                
                
                **(56,250**
                **)**
                
                (56,250
                )Changes
                    in assets and liabilities:Prepaid
                    expenses and other
                
                
                (99,308
                )
                
                **(44,534**
                **)**
                
                (15,245
                )Accounts
                    payable and accrued expenses
                
                
                289,799
                
                
                **(297,813**
                **)**
                
                148,354**Net
                    Cash Used in Operating Activities**
                
                
                (14,160,726
                )
                
                **(4,874,591**
                **)**
                
                (2,637,479
                )**Cash
                    Flows from Investing Activities:**Purchase
                    of equipment
                
                
                (494,098
                )
                
                **(48,911**
                **)**
                
                (45,117
                )**Net
                    Cash Used in Investing Activities**
                
                
                (494,098
                )
                
                **(48,911**
                )
                
                (45,117
                )**Cash
                    Flows from Financing Activities:**Issuance
                    of common stock
                
                
                14,885,959
                
                
                **4,609**
                
                
                8,349,982Proceeds
                    from long-term debt
                
                
                5,150,000
                
                
                **—**
                
                
                5,150,000Principal
                    payments on long-term debt
                
                
                (313,973
                )
                
                **(130,570**
                **)**
                
                (138,567
                )Purchase
                    of treasury stock
                
                
                (28,410
                )
                
                **(28,410**
                **)**
                
                —**Net
                    Cash Provided by (Used in) Financing Activities**
                
                
                19,693,576
                
                
                **(154,371**
                **)**
                
                13,361,415**Net
                    Increase (Decrease) in Cash and Cash Equivalents**
                
                
                5,038,752
                
                
                **(5,077,873**
                **)**
                
                10,678,819**Cash
                    and Cash Equivalents - beginning of period**
                
                
                —
                
                
                **10,116,625**
                
                
                1,015,979**Cash
                    and Cash Equivalents - end of period**
                
                $
                5,038,752
                
                **$**
                **5,038,752**
                
                $
                11,694,798**Supplemental
                    Cash Flow Information**Interest
                    paid
                
                $
                292,912
                
                **$**
                **280,535**
                
                $
                2,277
 Non cash
        investing and financing activities
 In
        February 2005, the Company entered into a licensing agreement in exchange
        for
        debt of $375,000.
 In
        May
        2006, the convertible debt of $3.85 million was converted into 3.85 million
        shares of the Company’s common stock.
 **See
          notes accompanying the financial statements**
 3
 *Index*
  **REXAHN
        PHARMACEUTICALS, INC.**
 (A
        Development Stage Company)
 Notes
        to
        Condensed Financial Statements
 Three
        and
        Nine Months Ended September 30, 2006 and 2005
 (Unaudited)
  **1.**
              **Organization**
  The
        accompanying unaudited financial statements of Rexahn Pharmaceuticals, Inc.
        (the
        "Company") have been prepared in accordance with accounting principles generally
        accepted in the United States of America for financial information and the
        requirements of item 310 (b) of Regulation S-B. Accordingly, certain information
        and disclosures normally included in financial statements prepared in accordance
        with accounting principles generally accepted in the United States of America
        have been condensed or omitted pursuant to the rules and regulations of the
        Securities and Exchange Commission. The financial statements reflect all
        adjustments (consisting only of normal recurring adjustments), which, in
        the
        opinion of management, are necessary for a fair presentation of the results
        for
        the periods presented. Except for the adoption of new accounting policies
        as
        disclosed in note 2, there have been no significant changes in our accounting
        policies since December 31, 2005. **** The
        results from operations for the period are not necessarily indicative of
        the
        results expected for the full fiscal year or any future period.
  **Reverse
        Merger Acquisition**
  Pursuant
        to an Agreement and Plan of Merger by and among Rexahn, Corp ("Rexahn"),
        Corporate Road Show.Com Inc. ("CRS"), a New York corporation and predecessor
        corporation of the Company, CRS Merger Sub, Inc., a Delaware corporation
        and
        wholly owned subsidiary of CRS ("Merger Sub"), CRS Delaware, Inc., a Delaware
        corporation and wholly owned subsidiary of CRS ("CRS Delaware"), immediately
        after giving effect to a 1-for-100 reverse stock split and the reincorporation
        of CRS as a Delaware corporation under the name Rexahn Pharmaceuticals, Inc.
        ("Rexahn Pharmaceuticals"), on May 13, 2005, Merger Sub merged with and into
        Rexahn, with Rexahn surviving as a wholly owned subsidiary of Rexahn
        Pharmaceuticals (the "Acquisition Merger"). In the Acquisition Merger, (i)
        each
        share of the issued and outstanding common stock of Rexahn (other than
        dissenting shares) was converted into the right to receive five shares of
        Rexahn
        Pharmaceuticals common stock; and (ii) each issued, outstanding and unexercised
        option to purchase a share of Rexahn common stock was converted into an option
        to purchase five shares of Rexahn Pharmaceuticals common stock.
  Shares
        of
        Rexahn Pharmaceuticals common stock issued in the Acquisition Merger were
        exempt
        from the registration requirements of the Securities Act of 1933, as amended
        (the "Securities Act"), pursuant to Regulation D under the Securities Act
        and/or
        Regulation S under the Securities Act. These shares of Rexahn Pharmaceuticals
        common stock are deemed "restricted securities" and bear an appropriate
        restrictive legend indicating that the resale of such shares may be made
        only
        pursuant to registration under the Securities Act or pursuant to an available
        exemption from such registration.
  4
 *Index*
  **REXAHN
        PHARMACEUTICALS, INC.**
 (A
        Development Stage Company)
 Notes
        to
        Condensed Financial Statements
 Three
        and
        Nine Months Ended September 30, 2006 and 2005
 (Unaudited)
  **1.**
              **Organization**(cont'd)
  **Reverse
        Merger Acquisition** (cont'd)
  As
        part
        of the Acquisition Merger, the Company assumed the convertible notes and
        the
        conversion price was adjusted to reflect the merger exchange ratio.
  For
        accounting purposes, the Acquisition Merger is accounted for as a reverse
        acquisition of CRS (legal acquirer) by Rexahn (accounting acquirer). As a
        result, following the Acquisition Merger, the historical financial statements
        of
        Rexahn became the historical financial statements of the Company.
  **Merger
        of Subsidiary**
  On
        September 29, 2005, the Company's wholly owned subsidiary, Rexahn, was merged
        with and into the Company and Rexahn's separate existence was
        terminated.
  **2.**
              **Summary
                  of Significant Accounting
                  Policies**
  The
        accounting policies of the Company are in accordance with accounting principles
        generally accepted in the United States of America and their basis of
        application is consistent with that of the previous year.
  **Recent
        Accounting Pronouncements**
  On
          September 15, 2006, the Financial Accounting Standards Board ("FASB") issued
          Statement of Financial Accounting Standards ("SFAS") No. 158, "Fair Value
          Measurements". SFAS No. 158 provides enhanced guidance for using fair value
          to
          measure assets and liabilities. The standard applies whenever other standards
          require (or permit) assets or liabilities to be measured at fair value.
          The
          standard does not expand the use of fair value in any new circumstances.
          This
          Statement is effective for financial statements issued for fiscal years
          beginning after November 15, 2007, and interim periods within those fiscal
          years. Earlier application is encouraged, provided that the reporting entity
          has
          not yet issued financial statements for that fiscal year, including financial
          statements for an interim period within that fiscal year. The Company will
          adopt
          this pronouncement effective periods beginning January 1, 2008. We are
          currently
          evaluating the impact of adopting this pronouncement on our financial
          statements.
  In
        July
        2006, FASB issued Financial Accounting Standards Interpretation No. 48 ("FIN
        48"), "Accounting for Uncertainty in Income Taxes". FIN 48 clarifies the
        accounting for uncertainty in income taxes recognized in an enterprise’s
        financial statements in accordance with Statement of Financial Accounting
        Standards No. 109 ("SFAS No. 109"), "Accounting for Income Taxes". FIN 48
        prescribes a recognition threshold and measurement attributable for the
        financial statement recognition and measurement of a tax position taken or
        expected to be taken in a tax return. FIN 48 also provides guidance on
        derecognition, classification, interest and penalties, accounting in interim
        periods, disclosure and transitions. FIN 48 is effective for fiscal years
        beginning on or after December 15, 2006. The Company is currently reviewing
        the
        effect, if any, FIN 48 will have on its financial position.
  In
        September 2006, the Securities and Exchange Commission ("SEC") staff issued
        Staff Accounting Bulletin ("SAB") No. 108, "Considering the Effects of
        Prior Year Misstatements when Quantifying Misstatements in Current Year
        Financial Statements." SAB No. 108 was issued to provide consistency in how
        registrants quantify financial statement misstatements. The Company is required
        to and will initially apply SAB No.108 in connection with the preparation
        of its
        annual financial statements for the year ending December 31, 2006. The
        Company does not expect the application of SAB No. 108 to have a material
        effect
        on its financial position and results of operations.
  5
 *Index*
  **REXAHN
        PHARMACEUTICALS, INC.**
 (A
        Development Stage Company)
 Notes
        to
        Condensed Financial Statements
 Three
        and
        Nine Months Ended September 30, 2006 and 2005
 (Unaudited)
  **3.**
              **Equipment,
                  Net**
  **Cost**
              
              **September
                  30,**
                **2006**
                **Accumulated**
                **Depreciation**
              
              Cost
              
              December
                  31,
                2005
                Accumulated
                DepreciationFurniture
                  and fixtures
              
              **$**
              **31,713**
              
              **$**
              **19,629**
              
              $
              31,713
              
              $
              15,060Office
                  equipment
              
              
              **43,648**
              
              
              **32,716**
              
              
              43,648
              
              
              25,007Lab
                  equipment
              
              
              **412,050**
              
              
              **268,087**
              
              
              363,140
              
              
              197,701Computer
                  equipment
              
              
              **5,066**
              
              
              **4,670**
              
              
              5,066
              
              
              4,161Cylinders
                  and designs
              
              
              **2,000**
              
              
              **555**
              
              
              2,000
              
              
              6**$**
              **494,477**
              
              **$**
              **325,657**
              
              $
              445,567
              
              $
              241,935Net
                  carrying amount
              
              
              
              
              **$**
              **168,820**
              
              
              
              
              $
              203,632
  Equipment
        is stated at cost less accumulated depreciation. Depreciation, based on the
        estimated useful lives of the assets, is provided as follows:
  Furniture
                  and fixtures
              
              7
                  years
              
              Double
                  declining balanceOffice
                  equipment
              
              5
                  years
              
              Double
                  declining balanceLab
                  equipment
              
              7
                  years
              
              Double
                  declining balanceComputer
                  equipment
              
              3
                  years
              
              Straight
                  lineCylinders
                  and designs
              
              7
                  years
              
              Double
                  declining balance
  **4.**
              **Long-Term
                  Convertible Debt**
  On
        February 28, 2005, the Company issued, in a transaction exempt from registration
        under the Securities Act of 1933, as amended, $3,850,000 aggregate principal
        amount of 6% convertible notes due on February 28, 2008. The notes are subject
        to conversion into shares of common stock of the Company, at the holder's
        option, at any time from and after the earlier of (i) the date of the first
        anniversary of the closing of the Acquisition Merger (May 13, 2006) and (ii)
        May
        26, 2006 to the maturity date, February 28, 2008. The notes would
        be
        automatically converted upon (i) the closing of the sale of all or substantially
        all of the assets of the Company or any merger, consolidation or other business
        combination and (ii) the maturity date. The conversion price is equal to
        the
        lesser of $1.00 per share (as adjusted in the Acquisition Merger) and a floating
        price determined by the average of three lowest current market prices of
        Company
        common stock during the 40 calendar day period immediately preceding conversion.
        On May 13, 2006, owners of the convertible notes exercised their rights to
        convert the entire principal amount of the notes into 3,850,000 shares of
        the
        Company’s common stock at a conversion price of $1.00 per share.
  6
 *Index*
  **REXAHN
        PHARMACEUTICALS, INC.**
 (A
        Development Stage Company)
 Notes
        to
        Condensed Financial Statements
 Three
        and
        Nine Months Ended September 30, 2006 and 2005
 (Unaudited)
  **5.**
              **Common
                  Stock**
  Authorized500,000,000
                    shares of common stock, voting, par value $0.0001 per
                    share**September
                    30,**
                  **2006**
                
                December
                    31,
                  2005Issued50,279,837
                    shares (2005 - 46,410,632) of common stockOutstanding50,265,632
                    shares (2005 - 46,410,632) of common stock
                
                **$**
                **5,028**
                
                $
                4,64114,205
                    shares (2005 - 0) of treasury stock
                
                **$**
                **28,410**
                
                
                —
  Pursuant
        to the agreement and plan of merger as disclosed in Note 1, in the Acquisition
        Merger, (i) each share of the issued and outstanding common stock of Rexahn
        (other than dissenting shares) was converted into the right to receive five
        shares of Rexahn Pharmaceuticals common stock; and (ii) each issued, outstanding
        and unexercised option to purchase a share of Rexahn common stock was converted
        into an option to purchase five shares of Rexahn Pharmaceuticals common stock.
        In the Acquisition Merger, 289,780,000 CRS pre-reverse stock split shares
        were
        converted into 2,897,802 post-reverse stock split Rexahn Pharmaceuticals
        shares,
        and an additional 500,000 post-reverse stock split Rexahn Pharmaceuticals
        shares
        were issued to a former executive of CRS.
  On
        February 22, 2006, an option holder exercised its options to purchase shares
        of
        the Company's common stock for cash of $1,200. Pursuant to the agreement,
        the
        Company issued an aggregate 5,000 shares.
  On
        April
        12, 2006, an option holder exercised its options to purchase shares of Rexahn’s
        common stock for cash of $3,409. Pursuant to the agreement, the Company issued
        an aggregate 14,205 shares. On the same date, the Company agreed to purchase
        the
        shares of Rexahn common stock for treasury in exchange for the aggregate
        purchase price of $28,410 in cash.
  On
        May
        13, 2006, owners of the $3,850,000 convertible notes issued on February 28,
        2005, exercised their rights to convert the entire principal amount of the
        note
        into shares of the Company’s common stock. Based on a $1.00 per share conversion
        price, the Company issued 3,850,000 shares of common stock in connection
        with
        the transaction (See Note 4).
  7
 *Index*
  **REXAHN
        PHARMACEUTICALS, INC.**
 (A
        Development Stage Company)
 Notes
        to
        Condensed Financial Statements
 Three
        and
        Nine Months Ended September 30, 2006 and 2005
 (Unaudited)
  **6.**
              **Stock-Based
                  Compensation**
  On
        August
        5, 2003, the Company established a stock option plan. Under the plan, the
        Company grants stock options to key employees, directors and consultants
        of the
        Company. For all grants prior to September 12, 2005 and grants to employees
        of
        the Company after September 12, 2005, the vesting period is 30% on the first
        anniversary of the grant date, an additional 30% on the second anniversary
        and
        the remaining 40% on the third anniversary. For grants to non-employee directors
        and consultants of the Company after September 12, 2005, the vesting period
        is
        100% on the first anniversary of the grant date, subject to the fulfillment
        of
        certain conditions in the individual stock option grant agreements, or 100%
        upon
        the occurrence of certain events specified in the individual stock option
        grant
        agreements, subject to the fulfillment of certain conditions in the individual
        stock option grant agreements. Options authorized for issuance under the
        plan
        total 17,000,000 after giving effect to an amendment to the Company's Stock
        Option Plan approved at the Annual Meeting of the Stockholders of the Company
        on
        June 2, 2006 and as of September 30, 2006, 10,729,205 **** options
        are available for issuance.
  Prior
        to
        adoption of the plan, the Company made restricted stock grants. During 2003
        all
        existing restricted stock grants were converted to stock options. The converted
        options maintained the same full vesting period as the original restricted
        stock
        grants.
  **Accounting
        for Employee Awards**
  Effective
        January 1, 2006, the plan is accounted for in accordance with the recognition
        and measurement provisions of SFAS No. 123R, which replaces SFAS No. 123,
        "Accounting for Stock-Based Compensation", and supersedes Accounting Principles
        Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees",
        and
        related interpretations. SFAS No. 123R requires compensation costs related
        to
        share-based payment transactions, including employee stock options, to be
        recognized in the financial statements. In addition, the Company adheres
        to the
        guidance set forth in SEC SAB No. 107, which provides the SEC staff's views
        regarding the interaction between SFAS No. 123R and certain SEC rules and
        regulations and provides interpretations with respect to the valuation of
        share-based payments for public companies.
  Prior
        to
        January 1, 2006, the Company accounted for similar employee transactions
        in
        accordance with APB No. 25 which employed the intrinsic value method of
        measuring compensation cost. Accordingly, compensation expense was not
        recognized for employee stock options if the exercise price of the option
        equaled or exceeded the fair value of the underlying stock at the grant
        date.
  8
 *Index*
  **REXAHN
        PHARMACEUTICALS, INC.**
 (A
        Development Stage Company)
 Notes
        to
        Condensed Financial Statements
 Three
        and
        Nine Months Ended September 30, 2006 and 2005
 (Unaudited)
  **6.**
              **Stock-Based
                  Compensation**(cont'd)
  **Accounting
        for Employee Awards** (cont'd)
  While
        SFAS No. 123, for employee options, encouraged recognition of the fair value
        of
        all stock-based awards on the date of grant as expense over the vesting period,
        companies were permitted to continue to apply the intrinsic value-based method
        of accounting prescribed by APB No. 25 and disclose certain pro forma amounts
        as
        if the fair value approach of SFAS No. 123 had been applied. In December
        2002,
        SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and
        Disclosure, an amendment of SFAS No. 123", was issued, which, in addition
        to
        providing alternative methods of transition for a voluntary change to the
        fair
        value method of accounting for stock-based employee compensation, required
        more
        prominent pro-forma disclosures in both the annual and interim financial
        statements. The Company complied with these disclosure requirements for all
        applicable periods prior to January 1, 2006.
  In
        adopting SFAS No. 123R, the Company applied the modified prospective approach
        to
        transition. Under the modified prospective approach, the provisions of SFAS
        No.
        123R are to be applied to new employee awards and to employee awards modified,
        repurchased, or cancelled after the required effective date. Additionally,
        compensation cost for the portion of employee awards for which the requisite
        service has not been rendered that are outstanding as of the required effective
        date will be recognized as the requisite service is rendered on or after
        the
        required effective date. The compensation cost for that portion of employee
        awards will be based on the grant-date fair value of those awards as calculated
        for either recognition or pro-forma disclosures under SFAS No. 123.
  As
        a
        result of the adoption of SFAS No. 123R, the Company's results of operations
        for
        the three and nine months ended September 30, 2006 include share-based employee
        compensation expense totaling $175,336 and $505,131, respectively. Such amounts
        have been included in the Statements of Operations in general and administrative
        and research and development expenses. No income tax benefit has been
        recognized in the Statements of Operations for share-based compensation
        arrangements as the Company has provided for a 100% valuation allowance on
        its
        net deferred tax assets. No stock option compensation expense was recorded
        under
        APB No. 25 in the Statements of Operations for the three and nine months
        ended
        September 30, 2005.
  Employee
        stock option compensation expense in 2006 is the estimated fair value of
        options
        granted amortized on a straight-line basis over the requisite service period
        for
        the entire portion of the award. The Company has not adjusted the expense
        by
        estimated forfeitures, as required by SFAS No. 123R for employee options,
        since
        the forfeiture rate based upon historical data was determined to be
        immaterial.
  9
 *Index*
  **REXAHN
        PHARMACEUTICALS, INC.**
 (A
        Development Stage Company)
 Notes
        to
        Condensed Financial Statements
 Three
        and
        Nine Months Ended September 30, 2006 and 2005
 (Unaudited)
  **6.**
              **Stock-Based
                  Compensation**(cont'd)
  **Accounting
        for Non-Employee Awards**
  The
        Company previously accounted for options granted to its non-employee consultants
        and non-employee registered representatives using the fair value cost in
        accordance with SFAS No. 123 and Emerging Issues Task Force Issue No. 96-18
        ("EITF Issue No. 96-18"), "Accounting for Equity Instruments That Are Issued
        to
        Other Than Employees". The adoption of SFAS No. 123R and SAB 107 as of January
        1, 2006, had no material impact on the accounting for non-employee awards.
        The
        Company continues to consider the additional guidance set forth in EITF Issue
        No. 96-18.
 
 Stock
        compensation expense related to non-employee options was $329,062 **** and
        $807,586 for the three and nine months ended September 30, 2006, respectively
        and $87,811 and $158,531 for the three and nine months ended September 30,
        2005,
        respectively. Such amounts have been included in the Statements of Operations
        in
        general and administrative and research and development expenses.
 
 The
        weighted average estimated fair value of stock options granted in the nine
        months ended September 30, 2006 and 2005 was $0.92 and $2.27, respectively.
        The
        fair value of options at the date of grant was estimated using the Black-Scholes
        option pricing model. During 2006, the Company took into consideration guidance
        under SFAS No. 123R and SAB No. 107 when reviewing and updating assumptions.
        The
        expected volatility is based upon historical volatility of the Company's
        stock
        and other contributing factors. The expected term is based upon observation
        of
        actual time elapsed between the date of grant and exercise of options for
        all
        employees.
 
  The
        assumptions made in calculating the fair values of options are as follows:
  Nine
                    Months Ended
                  September
                    30,**2006**
                
                2005Black-Scholes
                    Weighted Average Assumptions:Expected
                    dividend yield
                
                
                **0**
                
                
                0Expected
                    volatility
                
                
                **100**%****
                
                
                100%Riskfree interest rate
                
                
                **4.59%**
                
                
                4.54%Expected
                    term (in years)
                
                
                **5
                    years**
                
                
                5
                    years
  10
 *Index*
  **REXAHN
        PHARMACEUTICALS, INC.**
 (A
        Development Stage Company)
 Notes
        to
        Condensed Financial Statements
 Three
        and
        Nine Months Ended September 30, 2006 and 2005
 (Unaudited)
  **6.**
              **Stock-Based
                  Compensation**(cont'd)
 
 **Pro
        Forma Information under SFAS No. 123 for Periods Prior to Adoption of SFAS
        No.
        123R**
  The
        following table illustrates the pro forma effect on net loss and loss per
        share
        as if the fair value recognition provisions of SFAS No. 123 had been applied
        to
        all outstanding and unvested awards in the three and nine months ended September
        30, 2005.
 
 Three
                  Months Ended
                September
                  30,
                2005
              
              Nine
                  Months Ended
                September
                  30,
                2005Net
                  loss, as reported
              
              
              (1,171,870
              )
              $
              (3,242,872
              )Add:
                  Employee stock option compensation expense included in reported
                  net
                  loss
              
              
              150,306
              
              
              305,946Deduct:
                  Employee stock option compensation expense determined under fair
                  value-based method for all employee awards (no tax effect)
              
              
              (164,576
              )
              
              (403,476
              )Pro
                  forma net loss
              
              **$**
              **(1,186,140**
              **)**
              **$**
              **(3,340,402**
              **)**Net
                  loss per share:Basic
                  and diluted-as reported
              
              $
              (0.03
              )
              $
              (0.08
              )Basic
                  and diluted-pro forma
              
              $
              (0.03
              )
              $
              (0.08
              )
  11
 *Index*
  **REXAHN
        PHARMACEUTICALS, INC.**
 (A
        Development Stage Company)
 Notes
        to
        Condensed Financial Statements
 Three
        and
        Nine Months Ended September 30, 2006 and 2005
 (Unaudited)
  **6** **.**  **Stock-Based
        Compensation** (cont'd)
 
 **Pro
        Forma Information under SFAS No. 123 for Periods Prior to Adoption of SFAS
        No.
        123R** (cont'd)
  The
        following table represents all of the Company's stock options granted,
        exercised, and forfeited during the nine months ended September 30, 2006.
 
 
 **Shares**
                **Subject**
                **to
                  Options**
              ****
              **Weighted
                  Avg.**
                **Option**
                **Prices**
              ****
              **Weighted**
                **Average**
                **Remaining**
                **Contractual**
                **Term**
              ****
              **Aggregated**
                **Intrinsic**
                **Value**Outstanding
                  at January 1, 2006
              
              
              5,770,000
              
              $
              0.84
              
              
              -
              
              
              -Granted
              
              
              1,045,000
              
              
              1.20
              
              
              -
              
              
              -Exercised
              
              
              (19,205
              )
              
              0.24
              
              
              -
              
              
              -Cancelled
              
              
              (525,000
              )
              
              0.80
              
              
              -
              
              
              -**Outstanding
                  at September 30, 2006**
              
              
              **6,270,795**
              ****
              **$**
              **0.90**
              ****
              ****
              **8.2
                  years**
              ****
              **$**
              **8,450,098**
              ******Exercisable
                  at September 30, 2006**
              ****
              ****
              **2,937,129**
              ****
              **$**
              **0.82**
              ****
              ****
              **7.7
                  years**
              ****
              **$**
              **4,205,992**
  No
        options were exercised in the third quarter of 2006 or the same period in
        2005.
 
 As
        of
        September 30, 2006, there was $3,506,296 **** of
        total
        unrecognized compensation cost, net of estimated forfeitures, related to
        all
        unvested stock options, which is expected to be recognized over a weighted
        average period of approximately two years.
  12
 *Index*
  **REXAHN
        PHARMACEUTICALS, INC.**
 (A
        Development Stage Company)
 Notes
        to
        Condensed Financial Statements
 Three
        and
        Nine Months Ended September 30, 2006 and 2005
 (Unaudited)
 
 **7.**
              **Commitments
                  and Contingencies**
 
 a)
              The
                  Company has contracted with various vendors to provide research
                  and
                  development services. The terms of these agreements usually require
                  an
                  initiation fee and monthly or periodic payments over the terms
                  of the
                  agreement, ranging from 6 months to 24 months. The costs to be
                  incurred
                  are estimated and are subject to revision. As of September 30,
                  2006, the
                  total value of these agreements was approximately $1,900,000 and
                  the
                  Company had made payments totaling $1,000,000 under the terms of
                  the
                  agreements
  b)
              The
                  Company signed an agreement with a public relations company to
                  provide services for a period of 12 months for consideration of
                  an
                  initiation fee of $5,000 and periodic payments totaling
                  $30,000.  As of September 30, 2006, the Company had paid
                  $17,332 in connection with this agreement.
  c)
              On
                  April 19, 2006, the Company executed definitive agreements with
                  Future
                  Systems, Inc. ("FSI"), a Korean stock exchange (KOSDAQ) listed
                  information
                  technology company based in Seoul, Korea. Pursuant to the agreements,
                  the
                  Company would transfer to FSI exclusive rights and a non-exclusive
                  license
                  to develop, manufacture, and sell products based on Rexahn’s RX-0201,
                  RX-0047 and RX-10100 drug candidates in certain territories for
                  approximately $35.8 million, and simultaneously, FSI would issue
                  and sell
                  4,326,854 shares of its common stock to the Company, representing
                  approximately 28% of FSI’s outstanding shares, after giving effect to the
                  subscription. The investment, of approximately $35.8 million, would
                  have
                  made the Company the largest single stockholder of FSI. In addition,
                  the
                  Company entered into an agreement with FSI and Core F.G. Co., Ltd.,
                  the
                  general partner of Triplewin Corporate Restructuring Partnership,
                  the
                  then-current majority shareholder of FSI, with respect to the management
                  of FSI in connection with redirecting FSI’s business focus to the
                  biopharmaceutical industry. Completion of the transactions was
                  subject to
                  customary closing conditions, including approval by FSI
                  shareholders.  On June 8, 2006, the Company terminated the agreements
                  entered into with FSI and Core F.G. Co., Ltd., including a share
                  subscription agreement, an intellectual property assignment and
                  license
                  agreement and a management agreement, providing for, among other
                  things,
                  the assignment and license by the Company to FSI of certain intellectual
                  property rights for the Company's drug candidates in specified
                  markets and
                  the acquisition by the Company of an ownership interest in FSI.
                  The
                  termination followed a vote on the proposed transactions that was
                  not
                  approved by the FSI shareholders at a meeting in Seoul, Korea on
                  June 7,
                  2006.
  **8.**
              **Comparative
                  Information**
  Certain
        amounts for fiscal 2005 have been reclassified to conform with the current
        year's financial statement presentation.
  13
 *Index*
  **Item2.
        MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
        OPERATION**
 
 **OVERVIEW**
 
 Our
        company resulted from the merger of Corporate Road Show.Com Inc., a New York
        corporation incorporated in November 1999 ("CPRD"), and Rexahn, Corp, a
        Maryland corporation, immediately after giving effect to our reincorporation
        as
        a Delaware corporation under the name "Rexahn Pharmaceuticals, Inc." In
        connection with that transaction, a wholly owned subsidiary of ours merged
        with
        and into Rexahn, Corp, with Rexahn, Corp remaining as the surviving corporation
        and a wholly owned subsidiary of ours. In exchange for their shares of capital
        stock in Rexahn, Corp, the former stockholders of Rexahn, Corp received shares
        of common stock representing approximately 91.8% of our outstanding equity
        after
        giving effect to the transaction. Further, upon the effective time of the
        merger, our historic business was abandoned and the business plan of Rexahn,
        Corp was adopted. The transaction was therefore accounted for as a reverse
        acquisition with Rexahn, Corp as the accounting acquiring party and CPRD
        as the
        acquired party. In September 2005, Rexahn, Corp was merged with and into
        our company.
 
 Our
        efforts and resources have been focused primarily on acquiring and developing
        our pharmaceutical technologies, raising capital and recruiting personnel.
        We
        are a development stage company and have no product sales to date and we
        will
        not receive any product sales until we receive approval from the Food and
        Drug
        Administration ("FDA") or equivalent foreign regulatory bodies to begin selling
        our pharmaceutical candidates. Our major sources of working capital have
        been
        proceeds from various private financings, primarily private sales of common
        stock and debt securities, and collaboration agreements with our strategic
        investors.
 
 **RECENT
        DEVELOPMENTS**
 
 On
        April 19, 2006, we executed definitive agreements with Future Systems,
        Inc., or FSI, a Korean stock exchange (KOSDAQ) listed information technology
        company based in Seoul, Korea, pursuant to which we would transfer to FSI
        exclusive rights and a non-exclusive license to develop, manufacture, and
        sell
        products based on our RX-0201, RX-0047 and RX-10100 drug candidates in certain
        territories for approximately $35.8 million, and simultaneously, FSI would
        issue and sell 4,326,854 shares of its common stock to us, representing
        approximately 28% of FSI's outstanding shares, after giving effect to the
        subscription. The investment, of approximately $35.8 million, would have
        made us the largest single stockholder of FSI. In addition, we entered into
        an
        agreement with FSI and Core F.G. Co., Ltd., the general partner of Triplewin
        Corporate Restructuring Partnership, the then-current majority shareholder
        of
        FSI, with respect to the management of FSI in connection with redirecting
        FSI's
        business focus to the biopharmaceutical industry. Completion of the transactions
        was subject to customary closing conditions, including approval by FSI
        shareholders.
 
 On
        June 8, 2006, we terminated the agreements entered into with FSI and Core
        F.G. Co., Ltd., including a share subscription agreement, an intellectual
        property assignment and license agreement and a management agreement, providing
        for, among other things, the assignment and license by us to FSI of certain
        intellectual property rights for our drug candidates in specified markets
        and
        the acquisition by the Company of an ownership interest in FSI. The termination
        followed a vote on the proposed transactions that was not approved by the
        FSI
        shareholders at a meeting in Seoul, Korea on June 7, 2006.
  14
 *Index*
  On
        October 17, 2006, we announced the conclusion of the Phase I clinical trial
        of
        RX-0201, our leading dr ug
        candidate. The cost incurred for the clinical trial was approximately
        $1,300,000. RX-0201 is a first-in-class signal inhibitor that directly blocks
        the production of Akt, a protein kinase that plays a key role in cancer
        progression. Akt is over-activated in a significant number of cancers, such
        as
        breast, colorectal, gastric, head and neck, ovarian, pancreatic, prostate,
        and
        thyroid cancers. Akt's transformation ability, as well as its role in cancer
        progression, makes it a highly attractive and unique target in the treatment
        of
        cancer.
  The
        Phase
        I clinical trial of RX-0201, which took place at Georgetown University's
        Lombardi Cancer Center beginning in September 2004 and at the University of
        Alabama at Birmingham beginning in August 2005, was primarily to determine
        the safety and tolerability of the drug in patients with advanced cancer.
        We
        expect to file a complete final report of Phase I results with the Food and
        Drug
        Administration in early 2007.
  The
        Phase
        II clinical trial of RX-0201 is expected to begin in early 2007 in patients
        with
        advanced renal cell carcinoma who have failed previous treatments. The trial
        is
        the first of multiple trials planned for RX-0201. In January 2005, we received
        "orphan drug designation" from the Food and Drug Administration for RX-0201
        for
        five cancer indications, including renal cell carcinoma, ovarian cancer,
        glioblastoma, stomach cancer, and pancreatic cancer. The orphan drug program
        is
        intended to provide patients with faster access to drug therapies for diseases
        and conditions that affect fewer than 200,000 people. Companies that receive
        orphan drug designation are provided an accelerated review process, tax
        advantages, and seven years of market exclusivity in the United States. In
        the
        future, we plan to apply RX-0201 to the treatment of other orphan indications
        and other cancers.
  On
        November 6, 2006, we announced that we had been granted a U.S. patent for
        RX-0201. The patent covers the nucleotide sequences of the anti-sense compounds
        that target and inhibit the expression of Akt in human tissues or cells.
        The
        patent also covers the method of using the compounds to induce cytotoxicity
        in
        cancer cells.
  15
 *Index*
  **SPECIAL
        NOTE REGARDING FORWARD-LOOKING STATEMENTS**
 
 The
        following discussion should be read in conjunction with the unaudited
        consolidated financial statements and notes thereto set forth in Item 1 of
        this Quarterly Report. This Quarterly Report contains statements accompanied
        by
        such phrases as "believe", "estimate", "expect", "anticipate", "may", "intend"
        and other similar expressions, that are "forward-looking statements" as defined
        in the Private Securities Litigation Reform Act of 1995. Actual results may
        differ materially from those projected as a result of certain risks and
        uncertainties, including but not limited to the following:
 
 ·
              our
                  lack of profitability and the need for additional capital to operate
                  our
                  business;
 ·
              our
                  ability to obtain the necessary U.S. and worldwide regulatory approvals
                  for our drug candidates;
 ·
              successful
                  and timely completion of clinical trials for our drug
                  candidates;
 ·
              demand
                  for and market acceptance of our drug
                  candidates;
 ·
              the
                  availability of qualified third-party researchers and manufacturers
                  for
                  our drug development programs;
 ·
              our
                  ability to develop and obtain protection of our intellectual property;
                  and
 ·
              other
                  risks and uncertainties, including those detailed from time to
                  time in our
                  filings with the Securities and Exchange Commission.
  These
        forward-looking statements are made only as of the date hereof, and we undertake
        no obligation to update or revise the forward-looking statements, whether
        as a
        result of new information, future events or otherwise. The safe harbors for
        forward-looking statements provided by the Private Securities Litigation
        Reform
        Act are unavailable to issuers of "penny stock". Our shares may be considered
        a
        penny stock and, as a result, the safe harbors may not be available to
        us.




**CRITICAL
      ACCOUNTING POLICIES**





A
      "critical accounting policy" is one which is both important to the portrayal
      of
      our financial condition and results and requires our management's most
      difficult, subjective or complex judgments, often as a result of the need to
      make estimates about the effect of matters that are inherently uncertain. Our
      accounting policies are in accordance with United States generally accepted
      accounting principles ("GAAP") and their basis of application is consistent
      with
      that of the previous year.





**Use
      of Estimates**





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States requires management to make estimates
      and assumptions that affect the reported amounts of assets and liabilities
      and
      the disclosure of contingent assets and liabilities at the date of the financial
      statements and the reported amounts of revenues and expenses during the
      reporting period. These estimates are based on management's best knowledge
      of
      current events and actions we may undertake in the future. Actual results may
      ultimately differ from those estimates. These estimates are reviewed
      periodically and as adjustments become necessary, they are reported in earnings
      in the period in which they become available.





**Stock-Based
      Compensation**





In
      December 2004, the Financial Accounting Standards Board ("FASB") issued
      Statement of Financial Accounting Standards ("SFAS") No. 123 (Revised 2004),
      "Share-Based Payment" ("SFAS No. 123R"). This pronouncement amends SFAS No.
      123,
      "Accounting for Stock-Based Compensation" and supersedes Accounting Principles
      Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees". SFAS
      No. 123R requires that companies account for awards of equity instruments issued
      to employees under the fair value method of accounting and recognize such
      amounts in the statement of operations. The implementation of this statement
      was
      effective January 1, 2006 and has been adopted using the modified
      prospective method.





16
 *Index*





For
      all
      non-employee stock-based compensation we use the fair value method in accordance
      with SFAS No. 123 and EITF 96-18.





In
      management's opinion, existing stock option valuation models do not provide
      a
      reliable single measure of the fair value of employee stock options that have
      vesting provisions and are not transferable. As option valuation models require
      the input of highly subjective assumptions, changes in such subjective
      assumptions can materially affect the fair value estimate of employee stock
      options.





Prior
      to
      the adoption of SFAS No. 123R, we used the intrinsic value method to account
      for
      stock-based compensation in accordance with APB Opinion No. 25 and, as permitted
      by SFAS No. 123, provided pro forma disclosures of net loss and loss per common
      share as if the fair value methods had been applied in measuring compensation
      expense. Under the intrinsic value method, compensation cost for employee stock
      awards is recognized as the excess, if any, of the deemed fair value for
      financial reporting purposes of our common stock on the date of grant over
      the
      amount an employee must pay to acquire the stock. Compensation cost is amortized
      over the vesting period using an accelerated graded method in accordance with
      FASB Interpretation No. 28, "Accounting for Stock Appreciation Rights and Other
      Variable Stock Option or Award Plans".





**RECENTLY
      ISSUED ACCOUNTING STANDARDS**





In
      February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
      Financial Instruments—an amendment of FASB Statements No. 133 and 140". This
      Statement permits fair value of remeasurement for any hybrid financial
      instrument that contains an embedded derivative that otherwise would require
      bifurcation; clarifies which interest-only strips and principal-only strips
      are
      not subject to the requirements of SFAS No. 133, "Accounting for Derivative
      Instruments and Hedging Activities"; establishes a requirement to evaluate
      interests in securitized financial assets to identify interests that are
      freestanding derivatives or that are hybrid financial instruments that contain
      an embedded derivative requiring bifurcation; clarifies that concentrations
      of
      credit risk in the form of subordination are not embedded derivatives; and
      amended SFAS No. 140, "Accounting for Transfers and Servicing of Financial
      Assets and Extinguishments of Liabilities", to eliminate the prohibition on
      a
      qualifying special-purpose entity from holding a derivative financial instrument
      that pertains to a beneficial interest other than another derivative financial
      instrument. SFAS No. 155 is effective for all financial instruments acquired,
      issued, or subject to a remeasurement (new basis) event occurring after the
      beginning of an entity's first fiscal year that begins after September 15,
      2006. The Company is currently reviewing the effect, if any, the proposed
      guidance will have on its financial position.




In
      March 2006, FASB issued SFAS No. 156, "Accounting for Servicing of
      Financial Assets", which amends SFAS No. 140, "Accounting for Transfers and
      Servicing of Financial Assets and Extinguishments of Liabilities". In a
      significant change to current guidance, SFAS No. 156 permits an entity to choose
      either of the following subsequent measurement methods for each class of
      separately recognized servicing assets and servicing liabilities: (1)
      Amortization Method or (2) Fair Value Measurement Method. SFAS No. 156 is
      effective as of the beginning of an entity's first fiscal year that begins
      after
      September 15, 2006. The Company is currently reviewing the effect, if any,
      the proposed guidance will have on its financial position.





17
 *Index*




In
      July 2006, FASB issued Financial Accounting Standards Interpretation
      No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes". FIN 48
      clarifies the accounting for uncertainty in income taxes recognized in an
      enterprises' financial statement in accordance with SFAS No. 109,
      "Accounting for Income Taxes". FIN 48 prescribes a recognition threshold and
      measurement attributable for the financial statement recognition and measurement
      of a tax position taken or expected to be taken in a tax return. FIN 48 also
      provides guidance on derecognition, classification, interest and penalties,
      accounting in interim periods, disclosures and transitions. FIN 48 is effective
      for fiscal years beginning after December 15, 2006. The Company is
      currently reviewing the effect, if any, the proposed guidance will have on
      its
      financial position.




In
      September 2006, the Securities and Exchange Commission ("SEC") staff issued
      Staff Accounting Bulletin ("SAB") No. 108, "Considering the Effects of
      Prior Year Misstatements when Quantifying Misstatements in Current Year
      Financial Statements." SAB No. 108 was issued to provide consistency in how
      registrants quantify financial statement misstatements. The Company is required
      to and will initially apply SAB No.108 in connection with the preparation of
      its
      annual financial statements for the year ending December 31, 2006. The
      Company does not expect the application of SAB No. 108 to have a material effect
      on its financial position and results of operations.


On
        September 15, 2006, FASB issued Statement of Financial Accounting
        Standards ("SFAS") No. 158, "Fair Value Measurements". SFAS No. 158
        provides enhanced guidance for using fair value to measure assets and
        liabilities. The standard applies whenever other standards require (or permit)
        assets or liabilities to be measured at fair value. The standard does not
        expand
        the use of fair value in any new circumstances. This Statement is effective
        for
        financial statements issued for fiscal years beginning after November 15,
        2007,
        and interim periods within those financial statements for that fiscal year,
        including financial statements for an interim period within that fiscal year.
        The Company will adopt this pronouncement effective periods beginning January
        1,
        2008. We are currently evaluating the impact of adopting this pronouncement
        on
        our financial statements.


**RESULTS
      OF OPERATIONS**





**Comparison
      of Three Months and Nine Months Ended September 30, 2006 and
      2005:**





***Total
      Revenues***





For
      the
      three months and nine months ended September 30, 2006, we recorded revenues
      of $89,848 **** and
      $326,627, respectively, compared to $76,292 and $150,561 in the same period
      last
      year. Revenues include $18,750 and $56,250 from the recognition of deferred
      revenue from a $1,500,000 contribution made in 2003 to us under a collaborative
      research agreement with Rexgene Biotech Co., Ltd., a minority shareholder in
      the
      three and nine months ended September 30, 2006 and the same period last
      year. We recorded $71,098 and $270,397, respectively, of interest and other
      income from the investment of our cash and cash equivalents and other short-term
      investments for the three months and nine months ended September 30, 2006,
      compared to $57,542 and $94,311, respectively, for the same periods in 2005.
      The
      increase of $13,556 and $176,066 **** in
      total
      revenues, or 18% and 117%, respectively, was primarily due to an increase in
      interest income in the three months and nine months ended September 30,
      2006, compared to the same periods in 2005 as a result of higher cash and cash
      equivalent balances and higher interest rates during the 2006
      period.





***General
      and Administrative Expenses***





General
      and administrative expenses consist primarily of salaries and related personnel
      and stock option compensation expenses for executive, finance and other
      administrative personnel, recruitment expenses, professional fees and other
      corporate expenses, including business development and general legal
      activities.





General
      and administrative expenses increased $173,608 and $494,571, or 21% and 23%,
      respectively, from $830,422 and $2,168,185, respectively, for the three months
      and nine months ended September 30, 2005 to $1,004,030 and $2,662,756,
      respectively, for the three months and nine months ended September 30,
      2006. The increases were primarily due to professional fees and expenses
      incurred during the 2006 periods related to preparing for compliance with
      Section 404 of the Sarbanes-Oxley Act of 2002 and during the first nine months
      of 2006, professional fees and expenses related to the FSI transaction. Higher
      general and administrative expenses during the 2006 periods were also
      attributable to the adoption of SFAS No. 123R, effective January 1, 2006,
      and an increase in the number of outstanding shares subject to options during
      the three and nine months ended September 30, 2006 compared to the same
      periods last year. We incurred stock option compensation expense of $147,633
      and
      $288,565, respectively, for the three months and nine months ended September
      30,
      2005 compared to $311,387 and $810,397, respectively, for the three months
      and nine months ended September 30, 2006.





18
 *Index*





***Research
      and Development Expenses***





Research
      and development expenses consist primarily of salaries and related personnel
      and
      stock option compensation expenses, fees paid to consultants and outside service
      providers for laboratory development and other expenses relating to the design,
      development, testing, and enhancement of our drug candidates. We expense our
      research and development costs as they are incurred.





Research
      and development expenses increased $359,228 and $2,275,030, or 130% and 248%,
      respectively, from $275,819 and $917,633, respectively, for the three months
      and
      nine months ended September 30, 2005 to $635,047 and $3,192,663,
      respectively, for the three months and nine months ended September 30,
      2006. The increases during the 2006 periods were due primarily to the fact
      that
      the clinical trials of RX-0201, one of our drug candidates, are continuing
      and we have taken preliminary steps to prepare other drug candidates for
      clinical trials. We expect that research and development expenses will continue
      to increase as our other drug candidates move into the clinical trials phases
      of
      development. Higher research and development expenses during the 2006 periods
      were also attributable to
      the adoption of SFAS No. 123R, effective January 1, 2006, and an increase
      in the number of outstanding shares subject to options during the three and
      nine
      months ended September 30, 2006 compared to the same periods last year. We
      incurred stock option compensation expense of $90,485 and $176,862,
      respectively, for the three months and nine months ended September 30, 2005
      compared to $193,011 and $502,319, respectively, for the three months and nine
      months ended September 30, 2006.





***Patent
      Fees***





Our
      patent fees increased $48,572 and $57,419, or 93% and 53%, respectively, from
      $52,039 and $107,481, respectively, for the three months and nine months ended
      September 30, 2005 to $100,611 and $164,900, respectively, for the three
      months and nine months ended September 30, 2006. The increases during the
      2006 periods were due primarily to an increase in the number of patent filings
      made during the three and nine months ended September 30, 2006 compared to
      the same periods last year.





***Interest
      Expense***





Interest
      expense decreased $55,810 and $42,008, or 93% and 31%, respectively, from
      $59,808 and $137,027, respectively, for the three months and nine months ended
      September 30, 2005 to $3,998 and $95,019, respectively, for the three
      months and nine months ended September 30, 2006. The decreases during the
      three month and nine month periods ended September 30, 2006 were due to
      conversion of debt in May 2006.





***Depreciation
      and Amortization***





Depreciation
      and amortization expenses increased $24,743 and $33,974, or 82% and
      54% **** respectively,
      from $30,074 and $63,107, respectively, for the three months and nine months
      ended September 30, 2005 to $54,817 and $97,081, respectively, for the
      three months and nine months ended September 30, 2006. The increase was due
      primarily to the purchase of new laboratory equipment.





19
 *Index*





***Net
      Loss***





As
      a
      result of the above, the net loss for the three months and nine months ended
      September 30, 2006 was $1,708,655 and $5,885,792, or $0.03 and
      $0.12 **** per
      share, respectively, compared to a net loss of $1,171,870 and $3,242,872, or
      $0.03 and $0.08 per share, respectively, for the three months and nine months
      ended September 30, 2005.





**Research
      and Development Projects**





Research
      and development expenses are expensed as incurred. Research and development
      expenses consist primarily of salaries and related personnel costs, costs to
      acquire pharmaceutical products and product rights for development and amounts
      paid to contract research organizations, hospitals and laboratories for the
      provision of services and materials for drug development and clinical trials.
      Costs incurred in obtaining the license rights to technology in the research
      and
      development stage and that have no alternative future uses are expensed as
      incurred. Our research and development programs are related to our four lead
      drug candidates, RX-0201, RX-0047, RX-5902 and RX-10100.





We
      have
      allocated direct and indirect costs to each program based on certain assumptions
      and our review of the status of each program, payroll-related expenses and
      other
      overhead costs based on estimated usage by each program. Each of our lead drug
      candidates is in various stages of completion as described below. As we expand
      our clinical studies, we will enter into additional development agreements.
      Significant additional expenditures will be required if we complete our clinical
      trials, start new trials, apply for regulatory approvals, continue development
      of our technologies, expand our operations and bring our products to market.
      The
      eventual total cost of each clinical trial is dependent on a number of
      uncertainties such as trial design, the length of the trial, the number of
      clinical sites and the number of patients. The process of obtaining and
      maintaining regulatory approvals for new therapeutic products is lengthy,
      expensive and uncertain. Because the successful development of our most advanced
      drug candidate, RX-0201, is uncertain, and because RX-0047, RX-5902 and RX-10100
      are in early-stage development, we are unable to estimate the costs of
      completing our research and development programs, the timing of bringing such
      programs to market and, therefore, when material cash inflows could commence
      from the sale of these drug candidates. If these projects are not completed
      as
      planned, our results of operations and financial condition could be negatively
      affected and if we are unable to obtain additional financing to fund these
      projects, we may not be able to continue as a going concern.





*RX-0201*





On
      October 17, 2006, we announced the conclusion of the Phase I clinical trial
      of
      RX-0201, our leading drug candidate. The cost incurred for the clinical trial
      was approximately $ 1,300,000.
      RX-0201 is a first-in-class signal inhibitor that directly blocks the production
      of Akt, a protein kinase that plays a key role in cancer progression. Akt is
      over-activated in a significant number of cancers, such as breast, colorectal,
      gastric, head and neck, ovarian, pancreatic, prostate, and thyroid cancers.
      Akt's transformation ability, as well as its role in cancer progression, makes
      it a highly attractive and unique target in the treatment of cancer.




The
      Phase
      I clinical trial of RX-0201, which took place at Georgetown University's
      Lombardi Cancer Center beginning in September 2004 and at the University of
      Alabama at Birmingham beginning in August 2005, was primarily to determine
      the safety and tolerability of the drug in patients with advanced cancer. We
      expect to file a complete final report of Phase I results with the Food and
      Drug
      Administration in early 2007.





20
 *Index*




As
      the
      main purpose of the clinical trial was to establish the safety of RX-0201,
      the
      parameters that determined the completion of this project were a direct function
      of the safety profile of this compound in humans. As this was the first time
      that RX-0201 had been administered to humans, the safety profile in humans
      was
      unknown and therefore, the number of doses required to determine the dosage
      at
      which the FDA safety endpoints would be met was estimated.




The
      Phase
      II clinical trial of RX-0201 is expected to begin in early 2007 in patients
      with
      advanced renal cell carcinoma who have failed previous treatments. The trial
      is
      the first of multiple trials planned for RX-0201. In January 2005, we received
      "orphan drug designation" from the Food and Drug Administration for RX-0201
      for
      five cancer indications, including renal cell carcinoma, ovarian cancer,
      glioblastoma, stomach cancer, and pancreatic cancer. The orphan drug program
      is
      intended to provide patients with faster access to drug therapies for diseases
      and conditions that affect fewer than 200,000 people. Companies that receive
      orphan drug designation are provided an accelerated review process, tax
      advantages, and seven years of market exclusivity in the United States. In
      the
      future, we plan to apply RX-0201 to the treatment of other orphan indications
      and other cancers.





*RX-0047
      and RX-5902*





RX-0047
      and RX-5902 are both in a pre-clinical stage of development and the next
      scheduled program for each compound is a pre-clinical toxicology study required
      prior to submission of an Investigational New Drug ("IND") application to the
      FDA. RX-0047 directly inhibits HIF-1 alpha by reducing expressions of its mRNA
      and protein, resulting in the arrest of tumor growth and tumor metastasis,
      while
      reversing radiation resistance and inducing apoptosis. While it will be
      developed initially as an orphan drug, RX-0047 may also be developed to target
      a
      broad spectrum of human cancers, which will significantly expand its potential
      market. RX-5902, a piperazine analogue, is a G 2 /M-specific
      cell cycle inhibitor. In pre-clinical studies, it strongly induced apoptosis
      (cell death) and inhibited proliferation of various human cancer cells at
      nanomolar concentrations. To date, the costs incurred for development of these
      compounds to date have been approximately $800,000 for RX-0047, and $300,000
      for
      RX-5902. The estimated cost to complete pre-clinical toxicology and Phase I
      clinical trials is estimated to be approximately $1,500,000 per compound for
      a
      total of $3,000,000. These compounds may be entered into these Phase I clinical
      trials in late 2007 or early 2008.





The
      conduct of the clinical trial and toxicology studies described above are being
      accomplished in conjunction with third-party clinical research organizations,
      or
      CROs, at external locations. This business practice is typical for the
      pharmaceutical industry and companies like us. As a result, the risk of
      completion or delay of these studies is not within our direct control and a
      program delay may occur due to circumstances outside our control. A delay in
      any
      of these programs may not necessarily have a direct impact on our daily
      operations. However, to the extent that a delay results in additional cost
      to
      us, a higher than expected expense may result.





*RX-10100*





RX-10100
      is in early pre-IND stages of development and the next scheduled event is the
      synthesis and testing of novel formulations for pre-clinical and clinical
      evaluations. We currently estimate that these studies will require approximately
      $250,000 and $500,000, respectively. We are preparing to initiate a Phase II
      clinical trial of RX-10100 during early 2007.





21
 *Index*





**LIQUIDITY
      AND CAPITAL RESOURCES**





Cash
      used
      in operating activities was $4,874,591  for
      the
      nine months ended September 30, 2006 compared to cash used in operating
      activities of $2,637,479 for the same period ended September 30, 2005. The
      operating cash flows during the nine months ended September 30, 2006
      reflect our loss from operations of $5,885,792 offset by non-cash charges of
      $1,353,548  and
      a net
      decrease in cash components of working capital of $342,347. Non-cash charges
      consist of depreciation and amortization of $97,081, stock option compensation
      expense of $1,312,717  and
      amoritization of deferred revenue of $(56,250). The decrease in working capital
      primarily consists of a $297,813 decrease in accounts payable and accrued
      expenses and an increase of $44,534 to prepaid and other assets.





Cash
      used
      in investing activities during the nine months ended September 30, 2005
      reflects $45,117 of capital expenditures for the purchase of equipment.
      Cash used in investing activities during the nine months ended
      September 30, 2006 reflects $48,911 of capital expenditures for the
      purchase of equipment. Cash provided by financing activities of $13,361,415
      during the nine months ended September 30, 2005 reflects proceeds from the
      issuance of common stock and long-term debt in financing transactions of
      $8,349,982 and $5,150,000, respectively, net of principal payments on long-term
      debt of $138,567. Cash used in financing activities of $154,371  during
      the nine months ended September 30, 2006 consisted of principal payments on
      long-term debt of $130,570 and the purchase of treasury stock in the amount
      of
      $28,410, offset by proceeds of $4,609 from the issuance of common
      stock.





For
      the
      nine months ended September 30, 2006, and the years ended December 31,
      2005 and 2004, we experienced net losses of $5,885,792, $6,349,540 and
      $3,723,442, respectively. Our accumulated deficit as of September 30, 2006,
      and December 31, 2005 and 2004 was $20,090,115, $14,204,323 and $7,854,783,
      respectively.





We
      have
      financed our operations since inception primarily through equity and convertible
      debt financings and interest income from investments of cash and cash
      equivalents. During the nine months ended September 30, 2006, we had a net
      decrease in cash and cash equivalents of $5,077,873. This decrease primarily
      resulted from the net loss of $5,885,792. Total cash and cash equivalents as
      of
      September 30, 2006 were $5,038,752  compared
      to $10,116,625 as of December 31, 2005.





For
      the
      foreseeable future, we will have to fund all of our operations and capital
      expenditures from the net proceeds of equity or debt offerings we may have,
      cash
      on hand, licensing fees and grants. Although we have plans to pursue additional
      financing, there can be no assurance that we will be able to secure financing
      when needed or obtain such financing on terms satisfactory to us, if at all,
      or
      that any additional funding we do obtain will be sufficient to meet our needs
      in
      the long term.





**CONTRACTUAL
      OBLIGATIONS**





In
      April 2004, we entered into a clinical development agreement with
      Georgetown University with an effective period from April 5, 2004 through
      April 5, 2006. The total estimated cost of the program is $223,126, based
      on the fees, enrollment and completion of 20 patients and is payable based
      on
      the progress of the treatment over the effective period of the agreement. For
      the nine months ended September 30, 2006 and the years ended December 31,
      2005 and 2004, we paid $0, $0 and $17,426, respectively, towards the cost of
      this program.





22
 *Index*





On
      August 17, 2004, we entered into an agreement with Formatech, Inc. to
      monitor and perform stability studies on our drug candidate, RX-0201. The total
      cost of these services is $46,700. For the nine months ended September 30,
      2006 and the years ended December 31, 2005 and 2004, we paid $5,200, $10,400
      and
      $22,900, respectively, towards the cost of these studies. The remainder consists
      of a $8,200 payment due during 2007.





In
      April 2004, we signed a 5-year lease for 8,030 square feet of office space
      in Rockville, Maryland commencing July 2004. The lease requires annual base
      rents of $200,750 subject to annual increases of 3% of the preceding years
      adjusted base rent. Under the leasing agreement, we also pay our allocable
      portion of real estate taxes and common area operating charges.




Minimum
      future rental payments under this lease are as follows:




For
                the years ending
              December
                312006
            
            $
            209,8742007
            
            
            216,1702008
            
            
            222,6552009
            
            
            112,972**$**
            **761,671**





On
      August 1, 2005, we signed a one-year contract with the University of
      Massachusetts Medical School ("UMASS") to test proprietary drugs in preclinical
      behavioral assays of anxiety and cognition. We agreed to provide UMASS with
      a
      grant of $76,666, which includes the full direct and indirect costs of the
      preclinical study, payable in four equal quarterly installments of $19,167.
      For
      the year ended December 31, 2005, we made two quarterly payments totaling
      $38,333 and the remaining two quarterly payments totaling $38,333 during the
      nine months ended September 30, 2006.





On
      August 3, 2005, we engaged Montgomery Pacific Group ("MPG") to act as our
      financial advisor for a one-year term in connection with our growth strategies,
      certain licensing activities and acquisition of certain assets. In consideration
      of the services, we agreed to pay MPG an advisory fee, consisting of an initial
      retainer fee and success fees subject to the successful closing of licensing
      transactions, acquisitions and private placements. An initial retainer fee
      of
      $50,000 was paid during the year ended December 31, 2005. Dr. John Holaday,
      a
      former director of ours, is a partner of MPG.





On
      October 6, 2005, we entered into an agreement with Avecia Biotechnology
      Inc. ("Avecia"). Avecia supplied us with RX-0201 and related drug services.
      The
      total cost of the project is $1,738,000. For the nine months ended
      September 30, 2006 and the year ended December 31, 2005, we paid $1,216,600
      and $521,400, respectively, towards the cost of these studies.





On
      January 3, 2006 and March 29, 2006, we contracted with Formatech to
      perform RX-0201 experiments in an effort to develop a more concentrated dosage
      form. The cost of the project was $57,000, the total cost of which was paid
      in
      the nine months ended September 30, 2006. In addition, on January 6,
      2006, we entered into a drug packaging agreement with Formatech for Phase II
      clinical trials of RX-0201. In accordance with the agreement, the estimated
      cost
      of the project is $128,250 plus pass through expenses ( *e.g.* ,
      outsourced testing), of which $138,540 was paid during the nine months ended
      September 30, 2006.





23
 *Index*





On
      January 6, 2006, we contracted with Amarex, LLC to conduct Phase II
      clinical studies. In accordance with the agreement, the estimated contract
      duration is 24 months for a total cost of $596,244 plus pass through
      expenses. The service costs are payable in 24 monthly payments of $18,633
      plus an initiation fee of $149,061 due upon signing. We paid $283,599 towards
      the cost of the study in the nine months ended September 30, 2006 and a
      monthly payment of $18,633 was included in accrued expenses at
      September 30, 2006.





On
      March 1, 2006, we entered into a research program with Ewha Woman's
      University. The effective period of the agreement is from March 1, 2006 to
      February 28, 2007. In accordance with the agreement, the cost of the
      research program is $40,000 and is paid upon full execution of the agreement.
      The Company paid $40,000 in connection with the agreement during the nine months
      ended September 30, 2006.





On
      April 1, 2006, we entered into research agreement with Korean Research
      Institute of Bioscience and Biotechnology to evaluate antitumor activity,
      toxicology, pharmacokinetics and mechanisms of action for RX-5902. In accordance
      with the agreement, the estimated contract duration is twelve months for an
      estimated cost of $120,000, of which $60,000 was paid during the nine months
      ended September 30, 2006.





On
      April 3, 2006, we contracted with UPM Pharmaceuticals, Inc. to develop a
      short-acting extended release formulation for RX-10100. In accordance with
      the
      agreement, the estimated contract duration is seven months for an estimated
      cost
      of $443,975, of which $111,444 was paid during the nine months ended
      September 30, 2006. The service costs are payable based upon a payment
      schedule related to certain milestones.





Although
      we currently believe that our cash and cash equivalents will be sufficient
      to
      meet our minimum planned operating needs for the next 12 months, including
      the amounts payable under the contractual commitments described above, as our
      drug candidates move into the clinical trials phase of development, we expect
      to
      enter into additional agreements of the same type, which may require additional
      contractual commitments. These additional commitments may have a negative impact
      on our future cash flows.





**CURRENT
      AND FUTURE FINANCING NEEDS**





We
      have
      incurred negative cash flow from operations since we started our business.
      We
      have spent, and expect to continue to spend, substantial amounts in connection
      with implementing our business strategy, including our planned product
      development efforts, our clinical trials, and our research and development
      efforts. Based on our current plans and our capital resources (including the
      proceeds of our 2005 financings), we believe that our cash and cash equivalents
      will be sufficient to enable us to meet our minimum planned operating needs
      for
      at least the next 12 months, which would entail focusing our resources on
      Phase II clinical trials of RX-0201 and the pre-clinical studies and Phase
      II clinical trials for RX-10100. Over the next 12 months we expect to spend
      a minimum of approximately $1 million on clinical development for
      Phase II clinical trials of RX-0201 (including our commitments described
      under "Contractual Commitments" of this Item 2), $3 million on general
      corporate expenses, and approximately $216,000 on facilities rent. We may seek
      additional financing to implement and fund other drug candidate development,
      clinical trial and research and development efforts to the maximum extent of
      our
      operating plan, including in-vivo animal and pre-clinical studies and
      Phase I clinical trials for RX-5902, Phase II clinical trials for RX-10100
      and other new product candidates, as well as other research and development
      projects, which together with the minimum operating plan for the next
      12 months, could aggregate $5 million through the third quarter of
      2007.





24
 *Index*





However,
      the actual amount of funds we will need to operate is subject to many factors,
      some of which are beyond our control. These factors include the
      following:




·
            the
                progress of our product development
                activities;




·
            the
                number and scope of our product development
                programs;




·
            the
                progress of our pre-clinical and clinical trial
                activities;




·
            the
                progress of the development efforts of parties with whom we have
                entered
                into collaboration agreements;




·
            our
                ability to maintain current collaboration programs and to establish
                new
                collaboration arrangements;




·
            the
                costs involved in prosecuting and enforcing patent claims and other
                intellectual property rights; and




·
            the
                costs and timing of regulatory
                approvals.




**IMPACT
      OF INFLATION**




To
      date
      inflationary factors have not had a significant effect on our operations.




**OFF-BALANCE
      SHEET ARRANGEMENTS**




We
      do not
      have any off-balance sheet arrangements.




**CERTAIN
      BUSINESS RISKS**




***We
      currently have no product revenues and will need to raise additional capital
      to
      operate our business.***





To
      date,
      we have generated no product revenues. Until we receive approval from the FDA
      and other regulatory authorities for our drug candidates, we cannot sell our
      drugs and will not have product revenues. Therefore, for the foreseeable future,
      we will have to fund all of our operations and capital expenditures from the
      net
      proceeds of equity or debt offerings we may make, cash on hand, licensing fees
      and grants. Over the next year we expect to spend approximately $3 million
      on clinical development for Phase II clinical trials of RX-0201 and RX-10100
      and
      Phase I clinical trials for RX-5902. Based on our current plans and our capital
      resources, we believe that our cash and cash equivalents will be sufficient
      to
      enable us to meet our planned operating needs for at least the next year,
      including the clinical trials of RX-0201, RX-10100 and RX-5902.





However,
      changes may occur that would consume our existing capital at a faster rate
      than
      projected, including but not limited to, the progress of our research and
      development efforts, the cost and timing of regulatory approvals and the costs
      of protecting our intellectual property rights. We may seek additional financing
      to implement and fund other drug candidate development, clinical trial and
      research and development efforts, including Phase I clinical trials for other
      new drug candidates, as well as other research and development projects, which
      together with the current operating plan for the next year, could aggregate
      $15 million through the second quarter of 2008.





25
 *Index*





We
      will
      need additional financing to continue to develop our drug candidates, which
      may
      not be available on favorable terms, if at all. If we are unable to secure
      additional financing in the future on acceptable terms, or at all, we may be
      unable to complete our planned pre-clinical and clinical trials or obtain
      approval of our drug candidates from the FDA and other regulatory authorities.
      In addition, we may be forced to reduce or discontinue product development
      or
      product licensing, reduce or forego sales and marketing efforts and forego
      attractive business opportunities in order to improve our liquidity to enable
      us
      to continue operations. Any additional sources of financing will likely involve
      the sale of our equity securities, which will have a dilutive effect on our
      stockholders.




***We
      are not currently profitable and may never become profitable.***





We
      have
      generated no revenues to date from product sales. Our accumulated deficit as
      of
      September 30, 2006 and December 31, 2005 was $20,090,115  and
      $14,204,323, respectively. For the nine months ended September 30, 2006 and
      the year ended December 31, 2005, we had net losses of $5,885,792  and
      $6,349,540, respectively, primarily as a result of expenses incurred through
      a
      combination of research and development activities related to the various
      technologies under our control and expenses supporting those activities. Even
      if
      we succeed in developing and commercializing one or more of our drug candidates,
      we expect to incur substantial losses for the foreseeable future and may never
      become profitable. We also expect to continue to incur significant operating
      and
      capital expenditures and anticipate that our expenses will increase
      substantially in the foreseeable future, based on the following considerations:





·
            continued
                pre-clinical development and clinical trials for our current and
                new drug
                candidates;




·
            efforts
                to seek regulatory approvals for our drug
                candidates;




·
            implementing
                additional internal systems and
                infrastructure;




·
            licensing
                in additional technologies to develop;
                and




·
            hiring
                additional personnel.




We
      also
      expect to continue to experience negative cash flow for the foreseeable future
      as we fund our operating losses and capital expenditures. As a result, we will
      need to generate significant revenues in order to achieve profitability.




***We
      have a limited operating history.***





We
      are a
      development-stage company with four drug candidates. To date, we have not
      demonstrated an ability to perform the functions necessary for the successful
      commercialization of any of our drug candidates. The successful
      commercialization of our drug candidates will require us to perform a variety
      of
      functions, including, but not limited to:




·
            conducting
                pre-clinical and clinical trials;




·
            participating
                in regulatory approval processes;




·
            formulating
                and manufacturing products; and




·
            conducting
                sales and marketing activities.




To
      date,
      our operations have been limited to organizing and staffing our company,
      acquiring, developing and securing our proprietary technology and undertaking,
      through third parties, pre-clinical trials and clinical trials of our principal
      drug candidates. These operations provide a limited basis for assessment of
      our
      ability to commercialize drug candidates.





26
 *Index*




***We
      may not obtain the necessary U.S. or worldwide regulatory approvals to
      commercialize our drug candidates.***





We
      will
      need FDA approval to commercialize our drug candidates in the U.S. and approvals
      from the FDA-equivalent regulatory authorities in foreign jurisdictions to
      commercialize our drug candidates in those jurisdictions. In order to obtain
      FDA
      approval of our drug candidates, we must submit to the FDA a New Drug
      Application ("NDA") demonstrating that the drug candidate is safe for humans
      and
      effective for its intended use. This demonstration requires significant research
      and animal tests, which are referred to as pre-clinical studies, as well as
      human tests, which are referred to as clinical trials. Satisfaction of the
      FDA's
      regulatory requirements typically takes many years, and depends upon the type,
      complexity and novelty of the drug candidate and requires substantial resources
      for research, development and testing. We cannot predict whether our research
      and clinical approaches will result in drugs that the FDA considers safe for
      humans and effective for indicated uses. Two of our four drug candidates,
      RX-0201 and RX-0047, are ASO compounds. To date, the FDA has not approved any
      NDAs for any ASO compounds. In addition, both RX-0201 and RX-0047 are of a
      drug
      class (Akt inhibitor, in the case of RX-0201, and HIF inhibitor, in the case
      of
      RX-0047) that has not been approved by the FDA to date. After the clinical
      trials are completed, the FDA has substantial discretion in the drug approval
      process and may require us to conduct additional pre-clinical and clinical
      testing or to perform post-marketing studies.





In
      foreign jurisdictions, we must receive approval from the appropriate regulatory
      authorities before we can commercialize our drugs. Foreign regulatory approval
      processes generally include all of the risks associated with the FDA approval
      procedures described above. We cannot assure you that we will receive the
      approvals necessary to commercialize our drug candidates for sale outside the
      United States.




***Our
      drug candidates are in early stages of clinical trials.***





Our
      drug
      candidates are in an early stage of development and require extensive clinical
      testing, which are very expensive, time-consuming and difficult to design.
      In
      2006, we expect to have one oncology drug candidate in Phase I clinical
      trials. In 2007, we expect to have RX-0201, an oncology drug candidate and
      RX-10100, a neuroscience drug candidate, entering Phase II clinical trials.




***Clinical
      trials are very expensive, time-consuming and difficult to design and implement.***





Human
      clinical trials are very expensive and difficult to design and implement, in
      part because they are subject to rigorous regulatory requirements. The clinical
      trial process is also time consuming. We estimate that clinical trials of our
      current drug candidates will take at least three years to complete. Furthermore,
      failure can occur at any stage of the trials, and we could encounter problems
      that cause us to abandon or repeat clinical trials. The commencement and
      completion of clinical trials may be delayed by several factors, including,
      but
      not limited to:




·
            unforeseen
                safety issues;




·
            determination
                of dosing issues;




·
            lack
                of effectiveness during clinical
                trials;





27
 *Index*





·
            reliance
                on third party suppliers for the supply of drug candidate
                samples;




·
            slower
                than expected rates of patient
                recruitment;




·
            inability
                to monitor patients adequately during or after treatment;




·
            inability
                or unwillingness of medical investigators and institutional review
                boards
                to follow our clinical protocols;
                and




·
            lack
                of sufficient funding to finance the clinical
                trials.




In
      addition, we or the FDA may suspend clinical trials at any time if it appears
      that we are exposing participants to unacceptable health risks or if the FDA
      finds deficiencies in our IND submissions or the conduct of these
      trials.




***If
      the results of our clinical trials fail to support our drug candidate claims,
      the completion of development of such drug candidate may be significantly
      delayed or we may be forced to abandon development altogether, which will
      significantly impair our ability to generate product revenues.***





Even
      if
      our clinical trials are completed as planned, we cannot be certain that our
      results will support our drug candidate claims. Success in pre-clinical testing
      and early clinical trials does not ensure that later clinical trials will be
      successful, and we cannot be sure that the results of later clinical trials
      will
      replicate the results of prior clinical trials and pre-clinical testing. The
      clinical trial process may fail to demonstrate that our drug candidates are
      safe
      for humans and effective for indicated uses. This failure would cause us to
      abandon a drug candidate and may delay development of other drug candidates.
      Any
      delay in, or termination of, our clinical trials will delay the filing of our
      NDAs with the FDA and, ultimately, delay our ability to commercialize our drug
      candidates and generate product revenues. In addition, our trial designs may
      involve a small patient population. Because of the small sample size, the
      results of early clinical trials may not be indicative of future
      results.




***If
      physicians and patients do not accept and use our drugs, our ability to generate
      revenue from sales of our products will be materially impaired.***





Even
      if
      the FDA approves our drug candidates, physicians and patients may not accept
      and
      use them. Future acceptance and use of our products will depend upon a number
      of
      factors including:





·
            awareness
                of the drug's availability and
                benefits;




·
            perceptions
                by members of the health care community, including physicians, about
                the
                safety and effectiveness of our
                drugs;




·
            pharmacological
                benefit and cost-effectiveness of our product relative to competing
                products;




·
            availability
                of reimbursement for our products from government or other healthcare
                payers;




·
            effectiveness
                of marketing and distribution efforts by us and our licensees and
                distributors, if any; and




·
            the
                price at which we sell our
                products.




Because
      we expect sales of our current drug candidates, if approved, to generate
      substantially all of our product revenues for the foreseeable future, the
      failure of any of these drugs to find market acceptance would harm our business
      and could require us to seek additional financing.





28
 *Index*




***Much
      of our drug development program depends upon third-party researchers, and the
      results of our clinical trials and such research activities are, to a limited
      extent, beyond our control.***





We
      depend
      upon independent investigators and collaborators, such as universities and
      medical institutions, to conduct our pre-clinical and clinical trials. For
      example, the Phase I clinical trials of RX-0201 were conducted at the
      Lombardi Comprehensive Cancer Center of Georgetown Medical Center with the
      assistance of Amarex, LLC, a pharmaceutical clinical research service provider
      who will be responsible for creating the reports that will be submitted to
      the
      FDA. We also relied on TherImmune Research Corporation (currently Gene Logic
      Laboratories, Inc.), a discovery and pre-clinical service provider, to summarize
      RX-0201's pre-clinical data. While we make every effort internally to oversee
      their work, these collaborators are not our employees and we cannot control
      the
      amount or timing of resources that they devote to our programs. These
      investigators may not assign priority to our programs or pursue them as
      diligently as we would if we were undertaking such programs ourselves. If
      outside collaborators fail to devote sufficient time and resources to our
      drug-development programs, or if their performance is substandard, the approval
      of our FDA applications, if any, and our introduction of new drugs, if any,
      may
      be delayed. These collaborators may also have relationships with other
      commercial entities, some of whom may compete with us. If our collaborators
      assist our competitors at our expense, our competitive position would be harmed.




***We
      rely exclusively on third parties to formulate and manufacture our drug
      candidates, which expose us to a number of risks that may delay development,
      regulatory approval and commercialization of our products or result in higher
      product costs.***





We
      have
      no experience in drug formulation or manufacturing. Internally, we lack the
      resources and expertise to formulate or manufacture our own drug candidates.
      Therefore, we rely on third party expertise to support us in this area. For
      example, we have entered into contracts with third-party manufacturers such
      as
      Raylo Chemicals Inc., Formatech, Inc., Avecia Biotechnology Inc. and UPM
      Pharmaceuticals, Inc. to manufacture, supply, store and distribute supplies
      of
      our drug candidates for our clinical trials. If any of our drug candidates
      receive FDA approval, we will rely on these or other third-party contractors
      to
      manufacture our drugs. Our reliance on third-party manufacturers exposes us
      to
      the following potential risks:





·
            We
                may be unable to identify manufacturers on acceptable terms or at
                all
                because the number of potential manufacturers is limited and the
                FDA must
                approve any replacement contractor. This approval would require new
                testing and compliance inspections. In addition, a new manufacturer
                would
                have to be educated in, or develop substantially equivalent processes
                for,
                the production of our products after receipt of FDA approval, if
                any.




·
            Our
                third-party manufacturers might be unable to formulate and manufacture
                our
                drugs in the volume and of the quality required to meet our clinical
                needs
                and commercial needs.




·
            Our
                contract manufacturers may not perform as agreed or may not remain
                in the
                contract manufacturing business for the time required to supply our
                clinical trials or to successfully produce, store and distribute
                our
                products.




·
            Drug
                manufacturers are subject to ongoing periodic unannounced inspection
                by
                the FDA, the Drug Enforcement Agency ("DEA"), and corresponding state
                agencies to ensure strict compliance with good manufacturing practice
                and
                other government regulations and corresponding foreign standards.
                We do
                not have control over third-party manufacturers' compliance with
                these
                regulations and standards, but we may be ultimately responsible for
                any of
                their failures.





29
 *Index*





·
            If
                any third-party manufacturer makes improvements in the manufacturing
                process for our products, we may not own, or may have to share, the
                intellectual property rights to the
                innovation.





Each
      of
      these risks could delay our clinical trials, drug approval and commercialization
      and potentially result in higher costs and/or reduced revenues.




***We
      have no experience selling, marketing or distributing products and*** ***currently
      no internal capability to do so.***





We
      currently have no sales, marketing or distribution capabilities. While we intend
      to have a role in the commercialization of our products, we do not anticipate
      having the resources in the foreseeable future to globally develop sales and
      marketing capabilities for all of our proposed products. Our future success
      depends, in part, on our ability to enter into and maintain collaborative
      relationships with other companies having sales, marketing and distribution
      capabilities, the collaborator's strategic interest in the products under
      development and such collaborator's ability to successfully market and sell
      any
      such products. To the extent that we decide not to, or are unable to, enter
      into
      collaborative arrangements with respect to the sales and marketing of our
      proposed products, significant capital expenditures, management resources and
      time will be required to establish and develop an in-house marketing and sales
      force with technical expertise. We cannot assure you that we will be able to
      establish or maintain relationships with third party collaborators or develop
      in-house sales and distribution capabilities. To the extent that we depend
      on
      third parties for marketing and distribution, any revenues we receive will
      depend upon the efforts of such third parties, as well as the terms of its
      agreements with such third parties, which cannot be predicted at this early
      stage of our development. We cannot assure you that such efforts will be
      successful. In addition, we cannot assure you that we will be able to market
      and
      sell our products in the United States or overseas.




***Developments
      by competitors may render our products or technologies obsolete or
      non-competitive.***





We
      will
      compete against fully integrated pharmaceutical companies and smaller companies
      that are collaborating with larger pharmaceutical companies, academic
      institutions, government agencies and other public and private research
      organizations, such as Antigenics Inc., Genta Incorporated, Imclone Systems
      Incorporated, Human Genome Sciences, Inc., Kosan Biosciences Incorporated and
      Medimmune, Inc. In addition, many of these competitors, either alone or together
      with their collaborative partners, operate larger research and development
      programs or have substantially greater financial resources than we do, as well
      as more experience in:





·
            developing
                drugs;




·
            undertaking
                pre-clinical testing and human clinical trials;




·
            obtaining
                FDA and other regulatory approvals of
                drugs;




·
            formulating
                and manufacturing drugs; and




·
            launching,
                marketing and selling drugs.





Large
      pharmaceutical companies such as Bristol-Myers, Squibb, Eli-Lilly, Novartis
      and
      Glaxo-SmithKline currently sell both generic and proprietary compounds for
      the
      treatment of cancer. In addition, companies pursuing different but related
      fields represent substantial competition. Many of these organizations have
      substantially greater capital resources, larger research and development staffs
      and facilities, longer drug development history in obtaining regulatory
      approvals and greater manufacturing and marketing capabilities than we do.
      These
      organizations also compete with us to attract qualified personnel, parties
      for
      acquisitions, joint ventures or other collaborations.





30
 *Index*




***If
      we fail to adequately protect or enforce our intellectual property rights or
      secure rights to patents of others, the value of our intellectual property
      rights would diminish and our business and competitive position would
      suffer.***





Our
      success, competitive position and future revenues will depend in part on our
      ability and the abilities of our licensors to obtain and maintain patent
      protection for our products, methods, processes and other technologies, to
      preserve our trade secrets, to prevent third parties from infringing on our
      proprietary rights and to operate without infringing the proprietary rights
      of
      third parties. We have filed U.S. and PCT patent applications for anti-Akt
      compounds, including RX-0201, and anti-HIF compounds, including RX-0047. In
      November 2006, we were granted a U.S. patent for our anti-Akt compounds,
      including RX-0201. The patent covers the nucleotide sequences of the anti-sense
      compounds that target and inhibit the expression of Akt in human tissues or
      cells. The patent also covers the method of using the compounds to induce
      cytotoxicity in cancer cells. We have also filed three U.S. provisional patent
      applications for new anti-cancer quinazoline compounds, new anti-cancer
      nucleoside products and a drug target, cenexin, a polo-box binding protein.
      In
      December 2004, we also filed two Korean patent applications for new anti-cancer
      piperazine compounds. Through our licensing agreement with Revaax
      Pharmaceuticals LLC, we hold exclusive rights to five patents and 14 patent
      applications, with respect to certain chemical structures related to
      antibiotics, but without antibiotic efficacy. However, we cannot predict:





·
            the
                degree and range of protection any patents will afford us against
                competitors, including whether third parties will find ways to invalidate
                or otherwise circumvent our licensed
                patents;




·
            if
                and when patents will issue;




·
            whether
                or not others will obtain patents claiming aspects similar to those
                covered by our licensed patents and patent applications; or




·
            whether
                we will need to initiate litigation or administrative proceedings
                which
                may be costly whether we win or
                lose.





Our
      success also depends upon the skills, knowledge and experience of our scientific
      and technical personnel, our consultants and advisors as well as our licensors
      and contractors. To help protect our proprietary know-how and our inventions
      for
      which patents may be unobtainable or difficult to obtain, we rely on trade
      secret protection and confidentiality agreements. To this end, we require all
      employees to enter into agreements that prohibit the disclosure of confidential
      information and, where applicable, require disclosure and assignment to us
      of
      the ideas, developments, discoveries and inventions important to our business.
      These agreements may not provide adequate protection for our trade secrets,
      know-how or other proprietary information in the event of any unauthorized
      use
      or disclosure or the lawful development by others of such information. If any
      of
      our trade secrets, know-how or other proprietary information is disclosed,
      the
      value of our trade secrets, know-how and other proprietary rights would be
      significantly impaired and our business and competitive position would
      suffer.




***If
      we infringe the rights of third parties we could be prevented from selling
      products and be forced to pay damages and defend against
      litigation.***





If
      our
      products, methods, processes and other technologies infringe the proprietary
      rights of other parties, we could incur substantial costs and may have
      to:




·
            obtain
                licenses, which may not be available on commercially reasonable terms,
                if
                at all;




·
            redesign
                our products or processes to avoid infringement;




31
 *Index*





·
            stop
                using the subject matter claimed in the patents held by others, which
                could cause us to lose the use of one or more of our drug candidates;




·
            pay
                damages; or




·
            defend
                litigation or administrative proceedings which may be costly whether
                we
                win or lose, and which could result in a substantial diversion of
                our
                management resources.




Although
      to date, we have not received any claims of infringement by any third parties,
      as our drug candidates move into clinical trials and commercialization, our
      public profile and that of our drug candidates may be raised and generate such
      claims.




***Our
      license agreement with Revaax may be terminated in the event we commit a
      material breach, the result of which would significantly harm our business
      prospects.***





Our
      license agreement with Revaax is subject to termination by Revaax if we
      materially breach those agreements, including breaches with respect to certain
      installment payments and royalty payments, if such breaches are not cured within
      a 60-day period. The agreement also provides that it may be terminated if we
      become involved in a bankruptcy, insolvency or similar proceeding. If this
      license agreement is terminated, we will lose all of our rights to develop
      and
      commercialize the licensed compounds, which would significantly harm our
      business and future prospects.




***If
      we are unable to successfully manage our growth, our business may be harmed.***





In
      addition to our own internally developed drug candidates, we proactively seek
      opportunities to license in and advance compounds in oncology and other
      therapeutic areas that are strategic and have value creating potential to take
      advantage of our development know-how. We are actively pursuing additional
      drug
      candidates to acquire for development. Such additional drug candidates could
      significantly increase our capital requirements and place further strain on
      the
      time of our existing personnel, which may delay or otherwise adversely affect
      the development of our existing drug candidates. Alternatively, we may be
      required to hire more employees, further increasing the size of our organization
      and related expenses. If we are unable to manage our growth effectively, we
      may
      not efficiently use our resources, which may delay the development of our drug
      candidates and negatively impact our business, results of operations and
      financial condition.




***We
      may not be able to attract and retain qualified personnel necessary for the
      development and commercialization of our drug candidates. Our success may be
      negatively impacted if key personnel leave.***





Attracting
      and retaining qualified personnel will be critical to our future success. We
      compete for qualified individuals with numerous biopharmaceutical companies,
      universities and other research institutions. Competition for such individuals
      is intense, and we cannot assure you that we will be successful.





The
      loss
      of the technical knowledge and management and industry expertise of any of
      our
      key personnel, especially Dr. Chang H. Ahn, our Chairman and Chief
      Executive Officer and regulatory expert, could result in delays in product
      development and diversion of management resources, which could adversely affect
      our operating results. We do not have "key person" life insurance policies
      for
      any of our officers.




32
 *Index*




***We
        may incur substantial liabilities and may be required to limit commercialization
        of our products in response to product liability lawsuits.***


The
      testing and marketing of medical products entail an inherent risk of product
      liability. If we cannot successfully defend ourselves against product liability
      claims, we may incur substantial liabilities or be required to limit
      commercialization of our products. Our inability to obtain sufficient product
      liability insurance at an acceptable cost to protect against potential product
      liability claims could prevent or inhibit the commercialization of
      pharmaceutical products we develop, alone or with collaborators. Although we
      currently carry clinical trial insurance and product liability insurance, we,
      or
      any collaborators, may not be able to maintain such insurance at a reasonable
      cost. Even if our agreements with any future collaborators entitles us to
      indemnification against losses, such indemnification may not be available or
      adequate should any claim arise.




***An
      investment in shares of our common stock is very speculative and involves a
      very
      high degree of risk.***





To
      date,
      we have generated no revenues from product sales and only minimal revenues
      from
      a research agreement with a minority shareholder, and interest on bank account
      balances and short-term investments. Our accumulated deficit as of
      September 30, 2006 and December 31, 2005 was $20,090,115  and
      $14,204,323, respectively. For the nine months ended September 30, 2006 and
      the year ended December 31, 2005, we had net losses of $5,885,792  and
      $6,349,540, respectively, primarily as a result of expenses incurred through
      a
      combination of research and development activities related to the various
      technologies under our control and expenses supporting those activities. Until
      we receive approval from the FDA and other regulatory authorities for our drug
      candidates, we cannot sell our drugs and will not have product revenues.




***The
      market price of our common stock may fluctuate significantly.***





The
      market price of our common stock may fluctuate significantly in response to
      factors, some of which are beyond our control, such as:




·
            the
                announcement of new products or product enhancements by us or our
                competitors;




·
            developments
                concerning intellectual property rights and regulatory
                approvals;




·
            variations
                in our and our competitors' results of operations;




·
            changes
                in earnings estimates or recommendations by securities
                analysts;and




·
            developments
                in the biotechnology industry.




Further,
      the stock market, in general, and the market for biotechnology companies, in
      particular, have experienced extreme price and volume fluctuations. Continued
      market fluctuations could result in extreme volatility in the price of our
      common stock, which could cause a decline in the value of our common stock.
      You
      should also be aware that price volatility might be worse if the trading volume
      of our common stock is low. We have not paid, and do not expect to pay, any
      cash
      dividends because we anticipate that any earnings generated from future
      operations will be used to finance our operations and as a result, you will
      not
      realize any income from an investment in our common stock until and unless
      you
      sell your shares at a profit.




Some
      or
      all of the "restricted" shares of our common stock issued in the merger of
      CPRD
      and Rexahn, Corp or held by other stockholders may be offered from time to
      time
      in the open market pursuant to Rule 144, and these sales may have a
      depressive effect on the market for our common stock. In general, a person
      who
      has held restricted shares for a period of one year may, upon filing with the
      SEC a notification on Form 144, sell into the market common stock in an amount
      equal to 1 percent of the outstanding shares (approximately 500,000  shares)
      during a three month period. Any of the restricted shares may be freely sold
      by
      a non-affiliate after they have been held two years.





33
 *Index*




***Trading
      of our common stock is limited.***





Trading
      of our common stock is currently conducted on the National Association of
      Securities Dealers' Over-the-Counter Bulletin Board ("OTC-BB"). The liquidity
      of
      our securities has been limited, not only in terms of the number of securities
      that can be bought and sold at a given price, but also through delays in the
      timing of transactions and reduction in security analysts' and the media's
      coverage of us.





These
      factors may result in lower prices for our common stock than might otherwise
      be
      obtained and could also result in a larger spread between the bid and asked
      prices for our common stock. Currently, there are approximately 250 holders
      of
      record of our common stock.




***Because
      our common stock may be a*** ***"penny
      stock," it may be more difficult for you to sell shares of our common stock,
      and
      the market price of our common stock may be adversely
      affected.***





Our
      common stock may be a "penny stock" if, among other things, the stock price
      is
      below $5.00 per share, we are not listed on a national securities exchange
      or
      approved for quotation on the Nasdaq Stock Market, or we have not met certain
      net tangible asset or average revenue requirements. Broker-dealers who sell
      penny stocks must provide purchasers of these stocks with a standardized
      risk-disclosure document prepared by the SEC. This document provides information
      about penny stocks and the nature and level of risks involved in investing
      in
      the penny-stock market. A broker must also give a purchaser, orally or in
      writing, bid and offer quotations and information regarding broker and
      salesperson compensation, make a written determination that the penny stock
      is a
      suitable investment for the purchaser, and obtain the purchaser's written
      agreement to the purchase. Broker-dealers must also provide customers that
      hold
      penny stock in their accounts with such broker-dealer a monthly statement
      containing price and market information relating to the penny stock. If a penny
      stock is sold in violation of the penny stock rules, purchasers may be able to
      cancel their purchase and get their money back. If applicable, the penny stock
      rules may make it difficult for investors to sell their shares of our stock.
      Because of the rules and restrictions applicable to a penny stock, there is
      less
      trading in penny stocks and the market price of our common stock may be
      adversely affected. Also, many brokers choose not to participate in penny stock
      transactions. Accordingly, purchasers may not always be able to resell shares
      of
      our common stock publicly at times and prices that they feel are
      appropriate.





**Item** **3.
      CONTROLS AND PROCEDURES**





**Evaluation
      of Disclosure Controls and Procedures**





As
      of
      September 30, 2006, our management carried out an evaluation, under the
      supervision of our Chief Executive Officer and Chief Financial Officer of the
      effectiveness of the design and operation of our system of disclosure controls
      and procedures pursuant to Rule 13a-15(e) and 15d-15(e) under the
      Securities Exchange Act of 1934, as amended, or the Exchange Act. Based upon
      that evaluation, the Chief Executive Officer and the Chief Financial Officer
      have concluded that our disclosure controls and procedures were effective,
      as of
      the date of this evaluation, for the purposes of recording, processing,
      summarizing and timely reporting material information required to be disclosed
      in reports filed by us under the Exchange Act.





There
      were no changes in our internal control over financial reporting during the
      quarter ended September 30, 2006 that have materially affected, or are
      reasonably likely to affect, our financial reporting.





34
 *Index*





**PART
      II - OTHER INFORMATION**





**Item 1.
      LEGAL PROCEEDINGS**




We
      are
      not subject to any pending legal proceedings, nor are we aware of any threatened
      claim against us.




**Item2.
      UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS**




None.




**Item 3.
      DEFAULTS UPON SENIOR
      SECURITIES**




None.




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




None.




**Item 5.
      OTHER INFORMATION**




On
      September 1, 2006, George Steinfels, a business development executive, resigned
      from his position with the Company.





35
 *Index*





**Item 6.
      EXHIBITS**




Exhibit
              Number
            Description31.1
            Certification
                of Chief Executive Officer of Periodic Report Pursuant to
                Rule 13a-15(e) or Rule 15d-15(e)31.2
            Certification
                of Chief Financial Officer of Periodic Report Pursuant to
                Rule 13a-15(e) or Rule 15d-15(e)32.1
            Certification
                of Chief Executive Officer of Periodic Report Pursuant to 18 U.S.C.
                Section 135032.2
            Certification
                of Chief Financial Officer of Periodic Report Pursuant to 18 U.S.C.
                Section 1350





36
 *Index*




**SIGNATURES**




In
      accordance with the requirements of the Exchange Act, the registrant caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly authorized.




**REXAHN
              PHARMACEUTICALS, INC.**/s/
                Ted T.H. JeongName:
                Ted T. H. JeongTitle:
                Chief FinancialOfficer
                and SecretaryDate:
                November 14, 2006





37
 *Index*





**EXHIBIT
      INDEX**




Exhibit
              Number
            Description31.1
            Certification
                of Chief Executive Officer of Periodic Report Pursuant to
                Rule 13a-15(e) or Rule 15d-15(e)31.2
            Certification
                of Chief Financial Officer of Periodic Report Pursuant to
                Rule 13a-15(e) or Rule 15d-15(e)32.1
            Certification
                of Chief Executive Officer of Periodic Report Pursuant to 18 U.S.C.
                Section 135032.2
            Certification
                of Chief Financial Officer of Periodic Report Pursuant to 18 U.S.C.
                Section 1350